Investors in the booming Swedish wind market could end up as victims of their own success. But why? It’s the country’s Green Electricity Certificates scheme.
Let me explain. Currently, under the Green Electricity Certificates system introduced in Sweden in 2003 and adopted by Norway in 2012, independent power producers are given a certificate by the government for every MWh of renewable energy they produce. They then sell the certificates on the open market to organisations – often utilities – that are required by Swedish law to fulfil a renewable energy quota.
This supports more renewables development and the system has been working well. Annual wind power production in Sweden is forecast to reach 19.8TWh by the end of 2018, up from 17.6TWh in 2017. And the certificate system is almost fully subscribed – as of October 2018, only 2TWh remains available to investors.
Government policy has encouraged this growth and, in October, the Swedish Wind Energy Association said Sweden was on track to reach its 2030 goal by 2021.
However, this rapid market growth has started to pose a problem for policymakers, and it could soon cause major headaches for wind investors too.
Electricity certificates are sold on the open market, and so their value is dictated by supply and demand. As the number of renewables projects across Sweden grows, certificates will flood the market and investors that have benefited from this revenue stream for years could see the value of their certificates nose-dive.
As well as damaging existing investments, this could deter future investors.
In response, Mattias Wondollek of the Swedish Wind Energy Association told us that the organisation plans to propose that the government considers using a ‘stop rule’ to the certificate system before the end of the year.
Under this rule, the system would be balanced so the number of certificates given to new producers would not exceed the number stipulated by the quotas. The rule should align with Norway’s date-based stop rule, set for 31st December 2021. By trying to keep supply and demand in balance, the SWEA is seeking to protect its members from price falls that could damage their investment plans.
We hope the government listens. If independent power producers are no longer able to rely on revenue from the sale of green certificates, they are likely to find that profit margins are squeezed and they need to find the money elsewhere.
One answer could be to push for higher purchase prices from their corporate energy buyers, not that those buyers will likely take notice. They’re businesses too, after all.
Another possibility that could arise from removing this revenue stream is that IPPs might be forced to look to cut costs through the supply chain. But pushing firms in the supply chain to do things cheaper isn’t always the best tactic, or indeed possible.
So, if the Swedish government doesn’t agree to a ‘stop rule’, we are likely so see the IPPs taking the financial hit. Developing in Sweden will suddenly look less attractive.
We’ll try to be optimistic. Introducing a ‘stop rule’ to the green certificate system still looks like the right thing to do, and so we hope the government listens. Investors – both early backers and potential future entrants – must be protected, and rethinking the support systems may be necessary as Sweden’s wind market enters this next phase of its development.
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I’ve been working with my publisher Adam for almost five years, which means that I've heard the following story a few times. He started A Word About Wind in 2012, on a beach in Costa Rica, because he was concerned about the impact climate change would have on the world around him.
He believed that unlocking further investment in the wind sector globally would help curb the worst impacts of climate change. In doing so, he helped kick off the AWAW ethos, and our belief in the power of the wind industry to help to build a cleaner and fairer world – and safeguard people and landscapes around the world. But why am I unloading this AWAW 'mission statement' on you? I imagine you all get plenty of that in your own businesses!
The reason is that we’ve got a big soft spot for writing about emerging markets, and the benefits the wind sector can bring to these nations. It’s why we released our second annualEmerging Markets Attractiveness Index last month, and it’s why we were delighted to host Justin DeAngelis, partner at private equity firm Denham Capital, as our guest speaker at our New York Quarterly Drinks on 13th November.
One of Denham’s key goals is to invest in renewable energy companies in emerging markets, and it was great to find out more about Denham’s approach to doing deals in emerging markets – as well as where the firm is focused today. Geographically, it is investing primarily in countries in Africa, Latin America and Southeast Asia, and its portfolio firms including BioTherm Energy, Jenner Reneables, Nexif and Rio Energy.
These areas are often thought of as being higher-risk markets than larger and more established economies in North America and continental Europe. In part, this is due to the higher political risks in some emerging markets, as we looked at in more detail in our Legal Power List special report that came out in August. You can read it here.
However, DeAngelis told attendees at Quarterly Drinks that investing in wind projects in emerging markets was often lower-risk than doing so in more established nations, because the smaller number of players meant less competition. He also highlighted that governments in these countries wanted to support renewable energy schemes.
He said: “At the end of the day, renewable power is cheap and economic. It’s going to keep the lights on – and there’s not many people doing that so, in new markets, you’re able to get long-term contracts.”
Despite the higher perception of risk in emerging markets, DeAngelis talked about Standard & Poor’s research that showed project finance default rates in Africa were actually around five times lower in Africa than the US. He said that this meant Africa was a safe place to do business, despite popular perceptions of the region. And he added that governments wanted to invest but that projects were in short supply.
“What some capitalists don’t realise is that there’s plenty of capital to invest in high-quality infrastructure projects in those markets,” said DeAngelis. He added that the wind markets in India, Turkey and Latin American nations Argentina and Colombia were all worth looking at for investment opportunities in the coming years.
That said, DeAngelis was not blasé about the risks that exist. He said that Denham went into new markets with an “eyes-wide-open approach”, which means bringing an awareness of the challenges of operating in different markets and with people that may have different customs. It also means being selective to sign deals with reliable counterparties, and working with experienced organisations like the World Bank that can leverage their strong relationships in finance globally if things were to go wrong.
Finally, he said it meant taking out political risk insurance, and maintaining close relationship with the US State Department. Manageable risk doesn’t mean no risk.
Ultimately though, DeAngelis said that a move to renewables, backed by private investment, would help to spark behavioural change in established and emerging markets and, with that, help to tackle climate change – much as we do.
“If you want mass change in people’s activities, you have to give them an economic solution rather than a subsidy-driven solution – and that’s why we moved away from major markets,” he said. On that first point, we can only agree.
Wind Watch
Wake up, SMEs! Energy storage is an income stream
By Richard Heap
This is an analysis piece written by our Editor-in-Chief Richard Heap for Energy Storage Report and published on 31st October.
Two-thirds of energy managers at small- and medium-sized businesses in the UK expect energy costs to rise in the next decade. That is according to a survey of 250 people from YouGov last month. No surprise there.
However, there is a distinct lack of clarity over exactly what that means. Over half of those who answered (58%) were “unsure or unaware” about the impact of rising non-commodity costs, which are charges related to networks and policy changes. Those charges are due to rise 45% over the next decade according to Npower Business Solutions, which commissioned the study, and help push up electricity costs by 55%.
This tells us that there’s a serious lack of understanding among energy managers of how much they’ll have to pay for electricity in the future, and how to manage it. Many are unsure about how energy storage systems can play a role in helping them do so.
That’s no great surprise to me. I started my career at commercial property magazine Property Week and, from 2008 to 2011, often wrote about sustainability and energy efficiency in offices, shops and industrial buildings. And what I learnt is that few tenants paid much attention to how much energy they used because it was a small part of their overall business expenditure. In most cases, they didn’t care.
It was either the landlord’s issue and, if it wasn’t a major part of the tenant’s running costs, it just wasn’t a priority.
In addition, at smaller firms, signing energy deals is likely to fall to someone as part of a far broader role. The Paris climate change deal has been changing corporate attitudes to energy but there is still a long way to go.
Nowadays, some companies can see that storage can not only help them take more control of their bills, but also be a new revenue stream. This is good news, says demand side response firm GridIMP, but it also warned that companies needed to be careful about how they invested in storage or they could risk coming unstuck.
Demand side response
One popular solution is investing in energy storage to provide demand side response services.
DSR gives firms the chance to reduce or shift electricity use at peak times for a financial incentive, to help the grid operator to more effectively balance the grid.
The use of DSR is currently weighted towards larger industrial players that are able to work with the slim margins offered by market aggregators, or with the resources to manage 1MW of demand response themselves. However, GridIMP said this may not be the best solution for smaller businesses taking their first steps in storage.
It told us last week that small- and mid-sized firms should only invest in storage for DSR after assessing and understanding their long-term energy needs. The company said that investing in storage for DSR without doing that work could lead to SMEs being hit with high aggregator costs; high levels of price volatility; and unused equipment if they aren’t able to win the DSR contracts that they thought they would.
Richard Ryan, commercial director at GridIMP, said that firms looking for a revenue stream from their energy use should look at behind the meter solutions first. This would mean first measuring their energy use and needs; looking at ways to use their power more efficiently and cut waste; and only then look at DSR or load shifting.
Behind the meter
In practice, that means firms should consider how to invest in on-site renewables and storage to enable them to create the power needed to run their own operations. Then, if there is an excess, it gives them the option to sell excess power to the grid.
This stops them from relying so heavily on the electricity produced by large utilities, while the investment in storage systems gives them an opportunity to save and sell excess electricity back to the grid without the hassle of DSR-induced load shedding.
“Businesses must ensure that they start by investing ‘behind the meter’ first, hedging their investments against the current volatility for DSR pricing. At present, there are a number of compelling offers for DSR aggregation, but as the sector grows and we see greater impact from technologies such as AI, then that shifts that will take place will likely overtake the current routes to market,” said Ryan.
He added that it was “not very easy” to make a clear business case for companies to invest in storage if potential gains from DSR was the only potential source of income.
And here’s the thing. Electricity costs and contracts aren’t always a priority for these SMEs, but there’ll always be a financial benefit for businesses if they know more about their current energy use and can mitigate their exposure to future price rises. DSR can work for a lot of firms, but shouldn’t come at the cost of ‘behind the meter’. As costs go up, that work could be vital.
While UK Prime Minister Theresa May has been battling to finalise and win support for her Brexit deal, the past few weeks have also been busy for UK renewables.
Two weeks ago, the European Court of Justice suspended the UK’s capacity market for back-up power after annulling the European Commission’s decision to not object to the scheme. Essentially, the ECJ has ruled the capacity market is too weighted in favour of fossil fuels.Check out what this means for renewables and storage here.
Following this, the UK Government last week published the draft budget notice for its £557m Contracts for Difference auction in May, where only £60m has been allocated to support offshore wind projects totalling up to 6GW.
Both could be important for how renewables shape up in the UK in the next decade, and particularly in how much green energy and flexibility is in the energy system.
This was also the topic of a report published by power management company Eaton, Norwegian utility Statkraft and Bloomberg New Energy Finance last week. In it, the three firms said that organisations in the UK needed to address a system flexibility challenge if they wanted renewables including wind to play a central role.
The report analyses seven scenarios that all show how adding more energy storage, electric vehicles and interconnectors would be key in a renewables-led system.
It forecast the share of renewables in the UK energy mix would exceed 70% by 2030 in all scenarios, up from 27% in 2017, as wind and solar become dominant as costs fall. However, without flexibility, the system would be “oversized and wasteful”.
Here are the report’s main conclusions.
First, investment in energy storage and the displacement of fossil fuels as backup capacity would be key for a cost-effective integration of renewables including wind farms into the energy system.
Second, electrification of transport, and particularly a larger fleet of electric vehicles, would benefit integration by helping to manage electricity demand more efficiently.
Finally, the report highlights the importance of interconnectors, with Scandinavia in particular, as “a powerful source of flexibility for decades”.
The report raises very valid and relevant points, but it still leaves us a bit sceptical.
Our first question is whether the UK will reach 70% of its energy from renewables, mainly wind and solar, by 2030? Really?! We’re not that bullish.
For example, government support for wind is far from encouraging. Political support for onshore wind has stalled, with the only exception of wind farms in remote islands, which alone won’t be enough to drive growth in the sector. Offshore wind is set to get just £60m of backing for projects to be commissioned between 2023 and 2025. This could go a long way given that costs are falling – but not that far.
Of course, we might be wrong. MHI Vestas CEO Philippe Kavafyan told attendees at our Financing Wind Europe conference this month that, “We don’t care about Brexit.” That remains one of my highlights of the year.
The role of interconnectors is interesting too.
It’s ironic that the UK is leaving Europe but will need to be more interconnected with European countries to make its power system more efficient. Currently, there are 12 interconnectors at various stages of development and construction, which would be able to transport over 16GW of power from and to the UK. The most advanced ones might well be completed, but their cousins at a an early stage of development could need a higher level of political certainty and clarity to proceed.
Finally, will the UK be able to stop using fossil fuels as back-up power source, and move towards energy storage? In the short term, we doubt it. As soon as the ECJ announced its decision, business secretary Greg Clark said the government was in talks with the European Commission to have the capacity market reinstated. We can understand that the priority of the government is to keep the lights on, but it hasn’t jumped on the opportunity to invest more in grid flexibility to support renewables.
The UK government has a lot on its plate right now, but the energy sector is set to remain a key focal point.
The energy sector still has a way to go in addressing gender imbalance – and renewable energy is no exception. Rebecka Klintström, who leads Clir Renewables’ inclusion and diversity initiative, shares her thoughts on what companies can do to benefit from increased workplace diversity.
As we’ve written about previously on this blog, the energy sector has some way to go in addressing gender imbalance – and renewable energy is no exception. Rebecka Klintström, who leads Clir Renewables’ inclusion and diversity initiative, shares her thoughts on what companies can do to benefit from increased workplace diversity.
How do businesses benefit from workplace diversity?
Inclusion and diversity in the workplace have become a focus during recent years, after numerous studies have cited that diversity in the workplace leads to increased profitability.
Creating an inclusive and diverse workplace is an ongoing process and not simply a box-ticking exercise. It should form part of the daily work environment and be present in everyone’s mind regardless of their role within in the company.
At Clir Renewables, that’s something we’re proud to be working towards. Aside from being a renewable energy company and as such wanting to make the world a more sustainable place, the fact that companies with better diversity figures and focus on inclusion are more profitable is a big plus. Having different backgrounds, experiences and cultures in a team will bring more views to the table and will, in turn, help our organization to be more creative.
So how do we get there?
Gender and recruitment
Initially, we decided to tackle this in recruiting, working out more inclusive processes for hiring, from interviews and salaries to onboarding. What gets measured gets done - so one part of the inclusion work should always be to create tools that enable companies to understand how to continuously improve.
A great place to start is job postings as bias easily play a role in how the job description is worded, thereby influencing the pool of applicants from which we ultimately hire. To avoid this as much as possible, it's important to make sure to eliminate unnecessary specifics or redundant skills as this may discourage certain groups to apply - research shows that women tend to apply to jobs only when they satisfy 100% of the requirements.
Gender and language
It's also important to use neutral language, avoiding gendered pronouns or descriptors that unconsciously appeal to certain groups while discouraging others. To start the process, we have used Kat Matfield's gender decoder tool as a first check, and we have also found that having review routines for postings and other material has been very efficient. We have also created a number of key performance indicators for inclusion and diversity, which we measure on a regular basis and communicate to staff through an internal newsletter.
It's important to make sure the entire company is aware of the inclusion and diversity initiative, from the CEO to junior hires. One way is to organize workshops to brainstorm new focus areas and deepen the knowledge and understanding of the inclusion challenges within the company and in the industry in general.
To this end, we’ve just launched a bi-weekly survey to get a broader understanding of how everyone in the team experiences our work environment and company culture. This will enable us to identify the core areas where we need to focus going forward.
Since we're also in the process of hiring new talent in our tech, sales, and operations teams, we have an excellent opportunity to test our new recruiting and interviewing tools we've developed as a part of the project together with key personnel from each team.
Results
We’ve known from an early stage that the company would be quick to expand, so having a strategy was important to us. Gradually, this strategy is taking us from 12% female staff when I started in February 2017, to 28% at the beginning of 2018 to where we are today with 45% (figure from September 2018). For technical staff, we're currently at 57%1 women, including some of the most recent hires on our software team.
Obviously, gender is only one of many measures of diversity but it’s a good place to start from. We’re striving to build an inclusive and diverse company culture that people want to join. To achieve this, we will continue to work on and implement our inclusion and diversity strategy.
Last week, we analysed the top 30 emerging wind energy markets in our Emerging Markets Attractiveness Index. Ukraine made the cut, but only just. It came in last place as economic and political uncertainty weighed on its prospects.
In fact, 2018 has been fairly good for Ukraine’s diminutive wind market. In the first half of the year, 50.35MW of wind farms were completed, bringing total capacity to 515.5MW.
This is partly driven by the ambitions of the Ukrainian government, as it aims for renewables to make up 11% of the country’s energy mix by 2020 – up from 1.5% now. Ukrainian energy conglomerate DTEK, owned by oligarch Rinat Akhmetov, is also a big driving force. With atarget of 1GW of solar and wind projects to be installed by 2020, DTEK currently generates 65% of Ukraine’s wind energy.
And yet political and financial uncertainty continue to be issues.
In political terms, hostilities with Russia pose threats. With pockets of Ukraine ‘temporarily occupied’ by Russia, fighting between Ukrainian nationalists and separatists – often backed by the Russian military – has created a permanent state of political limbo. The upheaval has directly affected investors in the past: the 2013 ‘Ukrainian crisis’ prompted the government to introduce a ‘state of emergency’ in the electricity sector, during which energy payments were delayed. Some investors later launched lawsuits against the government.
More recently, the oligarch Akhmetov has been targeted. In March 2017, DTEK’s offices in the separatist Donbas region of Ukraine were seized by protestors.
Ukraine also lacks a stable financial environment, with shaky market conditions and loan interest rates three or four percentage points higher than elsewhere in Europe. However, developers can get around this by securing international finance instead. In August, it was announced that €90m for DTEK’s 100MW Primorskaya wind farm would be provided by a consortium of German banks.
Finally, there is Ukraine’s regulatory environment. The generous feed-in tariff regime, which was introduced in 2009, is due to end in July 2019. After this, new wind projects over 20MW face having to compete via an auction process. This has attracted some criticism: Valentyna Beliakova, director at TIU Canada, has said the government was ‘changing the rules of the game’ for investors.
But we think this shows a sensible attitude to ensuring the long-term sustainability of the market. Investors have been given due warning: projects commissioned by July 2019 will have access to the FIT until the end of 2029. And while nascent wind markets do require government support, at some point they must enable developers to stand on their own.
Ukraine’s wind market certainly has promise. In 2017, IRENA estimated Ukraine’s wind power potential to be 320GW. We think the government is making a good start in trying to establish a stable, self-sufficient market while contending with wider political and economic issues. Hostilities with Russia are unlikely to cease any time soon, and so balancing these concerns will be key.
We also think that while Ukraine just scraped into our list of the top 30 emerging markets this year, it will be climbing the ranks over the coming years.
But – if you’re thinking of investing – get some political risk insurance.
Wind Watch
C&D forms global storage player with Trojan takeover
By Richard Heap
In September, our parent company the Tamarindo Group took over sister title Energy Storage Report. Please check it out and let us know if you like it. This is an analysis piece written by our Editor-in-Chief Richard Heap for last week's edition.
Beware of Greeks bearing gifts! In Virgil’s Aeneid, the Greeks famously ended a ten-year war with the Trojans by gifting their foes a huge wooden horse that was stuffed with elite soldiers. Then, at night, the Greeks popped out and destroyed Troy.
What can we learn from this? Well first, don’t accept big wooden horses as presents. You don’t have anywhere to put them, and they may contain military. And second, I’d like to know if the word ‘destroy’ is related to the fate that befell the Trojans. If you know better than Google’s, let me know: richard@energystoragereport.info
Thankfully, not all takeovers are this hostile. Last week, US storage company Trojan Battery Company said that its majority owner, an affiliate of Charlesbank Capital Partners, had reached a deal to sell Trojan to KPS Capital Partners portfolio firm C&D Technologies.
The transaction is set to combine to two large battery makers into a business with more than $1bn revenue, eight factories and a global presence. The combined group’s factories will be spread between the US, Mexico and China; two advanced R&D centres; and offices in Europe, Asia and the Middle East.
But why – other than my self-indulgent intro – do I think this is a deal worth covering?
Trojan track record
The first thing is the age of the acquired firm. Trojan may not be as old as the tale of the horse with which it shares its name, but it was set up in 1925 by George Godber and Carl Speer; and has been owned by the Godber family. That ownership will come to an end with this deal, which is due to conclude by the end of 2018.
It also has a long track record in battery storage. The firm brands itself as the ‘world’s leading manufacturer of deep-cycle energy solutions’, and it pioneered the development of batteries in gold carts in 1952. Golfers, now you know who to thank!
The business also manufactures a range of deep-cycle batteries for vehicles and other uses, in sectors including renewable energy. Trojan operates from US states California and Georgia. David Shapiro, managing partner at C&D owner KPS, said that he looked forward to merging C&D with Trojan to form “the global leader in the energy storage industry”.
Armand Lauzon, chief executive of C&D, called the deal a “historic moment”, where C&D and Trojan could match their “complementary portfolios of global manufacturing plants, markets and products”. He said: “This is a highly compelling combination with tremendous strategic value and an exciting multi-segment growth opportunity.”
He would say that, of course. But this opportunity to match complementary portfolios is the second reason we think this deal is of interest.
Merged product portfolios
Pennsylvania-headquartered C&D highlights its expertise in sectors including utilities, telecoms, uninterruptible power – and, like Trojan, renewables. The fact both companies see the renewables sector as priority means that the enlarged C&D is one to look out for.
This is a goal reiterated by Trojan chief executive Neil Thomas, who says the larger company would seek to “take a leading role as the energy storage industry rapidly evolves and grows in scale and sophistication”.
We all know the important role that storage is likely to have in the growth of the wind and solar industries globally, and so it is little surprise that C&D is looking to grow and position itself for that.
Likewise, we expect to see other companies go down a similar route as they look to position themselves for the forthcoming boom. There is a dauntingly large number of companies testing types of storage technologies, and the industry is still waiting for a shakedown once investors and developers pick their preferred solutions. As a result, it makes sense for firms to use buyouts and establish them as undisputed leaders.
And, for the firms that choose to go down that route, this diversification of technology in their portfolios is a good insurance policy too. The energy storage world may be firmly wedded to lithium-ion batteries now, but for now long? Technology changes quickly, and we expect to see firms using takeovers as a way to diversify their risks.
The enlarged C&D Technologies certainly appears to have a wide range of products and strong experience to draw from. That doesn’t guarantee success of course – like empires, businesses can grow and decline – but it looks like a solid base on which to build.
German developer BayWa and Re-Source have reported that European businesses feel responsible for helping the continent to move towards a greener economy – but politicians are holding them back. Frances Salter reports.
German developer BayWa and Re-Source have reported that European businesses feel responsible for helping the continent to move towards a greener economy – but politicians are holding them back. Frances Salter reports.
European corporations are keen to take a lead in the renewable energy transition. However, they are being prevented from doing so because politicians are failing to change policies fast enough to meet corporate demand.
That is a key finding of a report published by BayWa r.e. today, in partnership with the Re-Source alliance of clean energy buyers, that analysed views of corporations in six European countries.
The report found that businesses are keen to invest in renewable energy, primarily because of financial benefits of long-term lower energy costs and financial certainty they can get from locking in energy costs for the long-term.
But nonetheless 75% feel that, even in countries where political policy is broadly in favour of renewables, bureaucracy is a barrier to further investments – meaning that companies are unable to use renewables to their full capacity.
As we’ve previously written about on this blog, falling levels of government subsidies in Europe mean that the transition to a greener economy is now being driven by the private investment rather than public money. But, as this new report shows, it would be wrong to assume that the wind industry no longer need supportive politicians.
Rather, the nature of necessary government support has changed – the industry may not need financial backing any longer, but policy support is still essential.
What has the report found?
- Businesses believe that renewables make economic sense.
92% of respondents said that low energy costs were the main reason behind their decision to invest in renewables. It is encouraging to see a solid majority of businesses confirm that investing in renewables makes financial sense, and that they’re confident of the long-term security of renewable energy supply.
2. But politicians aren’t helping: companies felt that bureaucracy was hindering additional investment.
Frustration was particularly high in Spain and Poland, where 40% of those surveyed said the government was not providing a favourable framework for corporations who want to use renewables. The figure was 39% in Italy.
3. And economic barriers are still a concern too.
Even though companies understand the long-term benefits of using renewable energy, respondents cited long payback times (44% on average) and overly-high investment costs (38% on average) as barriers to further investment. This was especially true in the UK and Poland, where high investment costs were identified as a problem by 46% and 47% of respondents respectively.
What does this mean for companies in the wind industry?
There is clearly still a strong desire from corporates to invest in renewables – but the high up-front costs and long payback times are still barriers to future deals. However, we still see that there are opportunities here for companies in the wind sector.
For wind farm owners, this means that there should be options here that enable firms to buy renewable power but without the long payback times – in other words, power purchase agreements. If businesses are unwilling to own their own projects due to the length of time it takes to see a return on investment, then buying renewable power through a power purchase agreement could be a useful middle ground.
And therein lies another challenge. There are still barriers to companies being able to sign these PPAs in various countries, including France, Germany, Spain and Ireland. The European Union is going to try and fix this with changes to its Renewable Energy Directive, which were released in June including a commitment to encourage countries to remove these barriers. It is still very early days for that.
These changes were the result of industry lobbying, including by organisations such as WindEurope. Indeed, RE-Source has being making policy recommendations to the EU and national parliaments about how to unlock investment, and has published guidance for businesses and other stakeholders in how to do the same.
That’s good. However, in our view, we think businesses should be communicating this to their customers and the public too. The more the public understands about renewables, and how corporates are willing to support them, the more pressure governments will feel to co-operate. There is great support for renewable energy in the wider population, and it’s a power that this industry is yet to harness.
Ørsted last month exited an agreement with Canadian developer Naikun to jointly develop and build the 396MW Haida Energy Field project off the coast of British Columbia in Canada. It did so to pursue more mature markets, including the US.
This should be a wake-up call for Prime Minister Justin Trudeau as Canada’s 2019 federal election approaches: the offshore wind industry needs more attention.
Ørsted and Naikun set up their joint venture in September 2017 but, after a year, there hasn’t been much progress. The involvement of Ørsted seemed to take the project, which has been under development since 2009, a bit closer to reality. But the fact is that, after nine years, Haida Energy Field hasn’t moved on much at all.
And, in truth, not much has been happening for offshore wind in Canada either, even though the market has attracted some of the sector’s biggest global offshore players, including Ørsted and Copenhagen Infrastructure Partners. In 2016, CIP agreed to develop the 180MW St George’s Bay with Beothuk Energy off the Canadian western coast, but we haven’t heard much about this project since then either.
By contrast, the US offshore wind industry is getting into gear with a handful of states awarding support for projects, and interest from a crop of serious players.
There is some good news in Canada. The government took baby steps this year to encourage the development of offshore wind projects.
Canada’s Minister of Natural Resources Jim Carr announced in January the launch of a C$200m ($151m) expression of interest process for the Emerging Renewable Power Programme, which would aim to expand renewables, including offshore wind. The government is set to reveal six winning projects by spring 2019 and has gained applications so far for offshore wind, tidal and geothermal developments.
This initiative is part of a far bigger C$21.9bn ($16.5bn) programme to support new infrastructure projects. It goes without saying that C$200m is not much for innovative renewables sources out of a total budget of C$22bn. Hardly a show of support.
And let’s be honest, over the last three years the government led by Trudeau hasn’t done much to back renewables in general, despite being very vocal about doing so.
During his campaign in 2015, the charismatic Trudeau promised to shift the country to a greener future. After three years of his government, we can safely say that he is not that climate crusader he wants to appear as his government has so far approved a couple of oil pipelines and a liquefied natural gas plant.
However, there could be an opportunity for offshore wind now, as the 2019 elections approach. Trudeau knows that green is good for his campaign and with 11 months to go, he has already started campaigning for a carbon tax, for example.
Is offshore wind likely to feature in his campaign too? Maybe. If offshore projects win support in this Emerging Renewable Power Programme, there might be scope for central government to look seriously at ways to support investment in offshore wind.
We expect to see interest from established offshore firms too. Ørsted and CIP have been active in Canada, despite its very early stage, and we could see more players moving from neighbouring US further north to Canada. But that relies on the support of national or state governments too – or ideally both.
Ultimately, as we’ve seen in the US, the onus will fall on state governments to show their support. That could make a big difference.
For example, a report published in 2010 analysed the potential for offshore wind in Ontario and said, if the region could add 2GW of offshore wind capacity by 2026, it would create 4,000 construction jobs annually and add C$5.5bn to its GDP by 2026.
If Canadian provinces see the economic benefits of offshore wind then, with support from central government, the sector might well take off. For now, it’s a mixed outlook. Offshore wind has an opportunity to play a role in Trudeau’s campaign, and the talk sounds good – but we’re not sure he’ll actually deliver on that if re-elected.
In March, Turkey announced its first offshore wind tender, to give support for projects totalling 1.2GW. This process was set to close on 23rd October, just over a fortnight ago – but it didn’t. With no official explanation, the government postponed the tender.
The only explanation we can gain is from the Turkish media, which reported that the government had not received the expected level of interest from companies willing to bid in the tender. This sounds plausible. We haven’t heard of a rush of offshore wind players entering the Turkish market – utilities, manufacturers or financiers.
This failure to attract interest is in contrast with Turkey’s success in onshore wind, where it is one of the most exciting emerging markets. We heard of the country’s potential from many of our members at Financing Wind Europe on 1st November, and again in our Emerging Markets Attractiveness Index report earlier this week.
Turkey also announced a tender for 1GW of new onshore wind just this month, to build on its already-solid onshore base: the nation had 6.9GW of installed onshore wind capacity at the end of 2017. Its government has been keen to support offshore wind to meet its 2023 wind power target of 20GW.
And the potential is certainly there. A 2015 study by Totaro & Associates estimated Turkey’s capacity for offshore wind to be in the region of 32GW.
But while onshore wind steams ahead, offshore wind is stalling – and we think that government policy itself is partly to blame for investors’ reticence.
One issue is Turkey’s high local content requirements. Onshore wind and solar projects awarded under Turkey’s ‘Yeka’ wind tenders require around 60% of local content, and officials have said that the Turkish ministry of energy and natural resources would ensure the local manufacturing of offshore turbine parts too.
But here’s the problem. The early success of pioneering offshore wind regions, such as countries around the North Sea, was aided by skills and infrastructure borrowed from domestic oil and gas operations. Turkey has no such advantage, although initial exploration of oil and gas resources is currently underway. Building a successful Turkish offshore market will require importing expertise – but government policy discourages this.
It could be argued that experts in offshore wind – Siemens Gamesa, MHI Vestas et al – should set up facilities in Turkey, as they have in other countries like the UK, to fulfil local content requirements. But the Turkish government has not made its long-term plans for offshore wind clear. Without a clear pipeline of projects, companies will not be persuaded to invest on this scale.
Other factors may be putting investors off, too. The government has stipulated that offshore turbines must be of at least 6MW in capacity. And developers of offshore wind in the Mediterranean and the Aegean face challenges because of the distance, by sea, from established manufacturing and service hubs in northern Europe. Both of these considerations will raise costs.
Finally, the cancelled offshore wind tender had a ceiling price of $80/MWh. Given the challenges that Turkey faces, this is stretching the bounds of feasibility. It is possible – the first large-scale wind farm in the US, Vineyard Wind, will cost $74/MWh for the first phase of 400MW – but that doesn’t mean it’s easy, especially in a new market.
The lack of interest from investors in Turkey’s first offshore wind tender has sent a message to the government that its offer is not attractive enough. Turkey needs to take note and change its policies to encourage the international expertise that is needed to build its offshore market.
Wind Watch
The 30 key emerging markets that you need to know
By Ilaria Valtimora
Where should you invest next? Yesterday, we released our Emerging Markets Attractiveness Index, where we analyse 30 key emerging markets to help investors in the wind sector.
The Emerging Markets Attractiveness Index is our ranking of 30 key emerging markets for wind investors, based on factors including their economic performance, political prospects and wind growth. This looks at the wind industry in range of developing nations in Africa, Asia, eastern Europe, and south and central America.
In addition, this report includes key data on deals agreed and concluded in the global wind industry in Q3 2018. These include project M&A, project finance, power purchase agreements, and corporate M&A deals.
Download your copy here.
Dan Chorost, principal at environmental law firm Sive, Paget & Riesel, and member of A Word About Wind, has been supporting on the early growth of the US offshore wind sector. He discusses progress so far and New York's recent masterplan.
Dan Chorost, principal at environmental law firm Sive, Paget & Riesel, and member of A Word About Wind, has been supporting on the early growth of the US offshore wind sector. He discusses progress so far and New York's recent masterplan.
How do you see the American offshore wind market progressing?
Rapidly! The northeastern part of the United States is one of the hottest areas in the world right now for offshore wind development.
The country’s first offshore wind farm [the 30MW Block Island] is off the coast of Rhode Island, and that project demonstrated that offshore wind could be a reality here. New York, Massachusetts, and New Jersey now all have aggressive offshore wind energy goals and are leading the way, so there’s a lot of activity here.
In early November 2018, we saw two major developments affecting the market, particularly for the northeast. New York State released the first of several anticipated RFPs [requests for proposals] for the procurement of 800MW or more of offshore wind energy, which the industry has been waiting for.
Plus, the federal government has recently approved Ørsted’s acquisition of Deepwater Wind, which is going to change the landscape here quite a bit. Deepwater established itself as a leader in the northeast, and I expect we will see some more consolidation of the industry as the market here begins to mature.
You were involved in the New York State Master Plan – could you tell us more about that?
That’s right. My firm has been serving as environmental counsel to NYSERDA [New York State Energy Research & Development Authority] and we were thrilled to assist with the New York State Offshore Wind Master Plan and its twenty attached studies.
We also worked on the environmental impact statement for the procurement that has just been released. These plans, procurements, and studies lay out the state’s path for reaching its offshore wind energy goals, which include the development of 2.4GW for New York by 2030.
Just before the master plan was released to the public, New York formally requested that the federal government identify and lease additional offshore areas off of Long Island. It appears that those new lease areas will be identified and leased sometime next year. Having new lease opportunities will help the state to achieve its offshore wind development goals.
What are the main legal challenges you’ve encountered in the American market?
Permitting and litigation risk. Offshore wind farms are extremely complicated projects to have permitted in the US – particularly because we have multiple jurisdictions which overlap at times, and permitting a project might require approvals from as many as twenty federal, state and local agencies.
As a developer, you need to be able to navigate not only each agency approval process, but also each corresponding public comment or stakeholder process. Each of these brings value, but also challenges.
We also have a much more litigious environment than what is typically found in Europe. Permitting and developing major infrastructure projects in and around New York State is my firm’s bread and butter work, and almost all of those projects have threatened or actual litigation. So those are facts that need to be considered and anticipated from the first day of any major project here.
Why do you think it’s a more litigious market?
There are a lot of reasons, from having a system based on common law, to how losses are allocated, to how enforcement and balances of power are viewed. For better or for worse, it’s the reality in which we operate.
Which trends do you think will affect the sector most in the next few years?
Primarily technological trends. Turbine manufacturers continues to innovate and improve technology. We expect floating turbines to reach market within a few years; and standard fixed turbines generally are getting larger, more powerful, and more cost effective.
From an environmental law perspective, those changes will influence how you site a project, and what the visual and other impacts might be.
Also, we will need all manner of new infrastructure, which will be a challenge for the northeastern US. Our waterfront areas, particularly around New York City, are highly developed, so it’s not easy to find hundred-acre sites where you can drop down, for example, a portside turbine pre-assembly facility like the ones that exist in Europe. We’ll be breaking up some of those necessary facilities into smaller pieces so they can be shoehorned into our map, which will be a challenge for European developers and manufacturers to adapt to.
In your own career, which have been the most important lessons?
What I have learned from working on major projects is that you have to go through the process the right way and make sure that no corners are cut, that analyses are not missed, and that impacts are disclosed.
You should plan on someone suing to stop your project, so you must be prepared to defend the technical analyses that underlie environmental permitting. Every large developer around New York knows that if you go through the process the correct way, your project will end up moving more quickly, not only through the regulatory process, but also through any litigation that may come.
Want to learn more about US offshore? Our annual conference, Financing Wind North America, is happening on 24th-25th April 2019.
“Sometimes you have to be willing to weigh into difficult markets, in order to produce those higher returns”, Dana Younger, chief renewable energy specialist at World Bank’s private sector lending arm International Finance Corporation, told attendees at our Financing Wind Europe conference in London this month.
It’s no secret why wind investors look at emerging markets. Riskier, higher growth markets provide them with higher returns compare with those in more established markets.
Over the past few years accelerated economic and population growth; growing energy demand; insufficient supply of energy; and an increased commitment by local governments to support renewable energy have made African countries an attractive target for wind investors.
Younger has named the most attractive markets for wind investments in Africa for 2019 and beyond.
A country which is set to experience a thriving wind market in the next five years is Ethiopia. Younger said one reason is that the IFC is set to expand its ‘Scaling Solar’ framework to wind projects from next year and Ethiopia would be the first country to benefit from it. IFC’s ‘Scaling Solar’ is a programme set to help African governments – excluding South Africa - support privately funded solar projects. The IFC has so far used it to help the governments of Ethiopia, Madagascar, Senegal and Zambia to support the developments of 1GW of solar power plants.
Lack of scale, lack of competition, high perceived risk and limited institutional capacity to manage, structure and negotiate private power concessions represent some of the major barriers to the growth of the wind and solar sector in Africa. The IFC would help governments mitigate those risks in order to attract private investments to the wind sector.
And the choice of Ethiopia is not casual. As we will show in our Emerging Markets report due to be published tomorrow, Ethiopia has one of the most ambitious wind energy targets in Africa, with a goal of 5.2GW of wind capacity by 2020 from the only 324MW currently installed. Achieving this impressive target would require private investments of up to $6bn and the IFC is set to help with that.
Morocco, Egypt and Turkey have been also named by Younger as attractive markets for wind investments in the next four- to- five years.
Despite new wind installations have stalled in Morocco over the past four years, the interest shown by investors in the last 12 months is set to give a new kick-start to the wind market.
Blockchain firm Soluna’s plans to build a 900MW wind farm in the western Sahara region; the €230m financial close on the 180MW Midelt wind farm that Enel Green Power and Nareva were awarded in an auction in 2016; and completion of the 120MW Khalladi project from a consortium led by ACWA Power are all encouraging signs that the market is finally awakening. In addition, the Moroccan government announced last month that foreign investments of MAD8bn (€739m) are set to flow to Morocco from Qatari and Middle East companies starting from next year to sustain the growth of the country’s wind and solar market. This would help the country to install 2GW of wind by 2020, from the current 787MW.
Likewise, Younger has identified Egypt and Turkey as attractive markets for wind in the near future, despite high political uncertainty. In fact, recent wind developments in both countries have showed that investors are willing to bet on those markets.
These include the financial close on a 250MW wind farm by an Engie-led consortium in the Gulf of Suez as well as plans by foreign companies including ACWA Power, Marubeni and Masdar to build 1.2GW of wind capacity in Egypt. Also, following the launch of a competitive tender to build 1.2GW of offshore wind farms in Turkey, turbine manufacturers including Siemens Gamesa, Vestas, and General Electric are looking into the possibility of domestic production and supply of offshore turbines.
As profit margins in established market get squeezed, the competition among emerging markets in Africa, Asia, Latin America and eastern Europe to attract foreign investments will get fiercer. Interest from foreign investors and support from local government is set to put African countries in a privileged position.
Power purchase agreements have increased in popularity over recent years, with big corporations accounting for over 14GW of renewable energy deals agreed in the US between 2013 and 2018. Tech giants including Google, Amazon and Microsoft have been happy to sign them because they make business sense. We know that by now.
However, these PPAs are still seen as too risky by many small- and medium-sized companies. The intermittent nature of wind and solar supply and the financial impact of these agreements are just too much for smaller companies.
This is why we’re intrigued by a new solution proposed by a group led by Microsoft.
Microsoft has teamed up with risk management company Resurety, weather risk insurance firm Nephila Climate and the alternative risk transfer unit of Allianz, to create a new contract called Volume Firming Agreement (VFA).
This new mechanism can be used to mitigate price risk to the buyer, and Microsoft, which has a portfolio of 1.2GW of renewables PPAs worldwide, said it anticipated ‘utilizing VFAs to firm the energy and match our consumption on an hourly basis.’ In fact, the tech giant has already signed three of these contracts, in partnership with Allianz and Nephila, at wind farms in Texas, Illinois and Kansas totalling 500MW.
This is how this new structure works.
The first thing to say is VFAs don’t replace traditional power purchase agreements but can be used in conjunction with them, to mitigate price fluctuations for buyers. Traditional PPAs establish a fixed-price over the long term for renewable energy, but the reality is that actual market prices fluctuate hourly, depending on production.
For example, when winds blow strongly and electricity is abundant, the market price of wind energy will fall – and so will the price that the buyer receives from the grid for its power. This means the buyer will be obliged to ‘top up’ this deficit.
Of course, the same works in reverse – in times of low resource, market prices are high and the IPP, which now commands a high price for its power, will share these profits with the buyer. However, this uncertainty is a deterrent to smaller companies.
This is where the VFA comes in. The idea revolves around taking risk from buyers and reallocating it to businesses that want the risk – namely, insurers. The growing interest in using hedging products in the wind sector shows that there’s demand.
The idea is that, as the market for VFAs and similar products grows, insurance firms would be encouraged to invest in storage and other solutions capable of balancing renewables supply and demand. This would support the rollout of storage systems and improve the stability of renewable energy. We have all heard the accusations of unreliability that are levelled at renewables – so this is an important step.
The VFA could make a big difference to small- and medium-sized businesses, which are considering signing a PPA but struggle with the inherent risks. Large companies and conglomerates have the financial heft and experience to deal fluctuating prices, but these are often bigger risks for smaller companies, where the people signing the PPA may not be energy experts or have even signed a PPA before.
Of course, that raises another question. If the people in charge of signing the energy deals at these small- and medium-sized businesses aren’t experienced with PPAs, then how will they react if they’re forced to understand a VFA as well? It could be a useful solution, but one that further confuses those that that it seeks to help.
So in theory, it’s a yes from us. Helping small businesses to understand the process of signing PPAs, and mitigate their risks, will be crucial if PPAs are to move beyond their current status as deals that are predominantly signed by multinationals. A VFA could be a first step to provide the security they need to sign on the dotted line – but it’s up to the industry to explain what one actually is first.
Wind Watch
Have you booked for Quarterly Drinks in New York yet?
By Frances Salter
Have you booked your ticket for our last Quarterly Drinks evening in New York? If not, don't miss out - there's only a week left.
We will be holding our final US Quarterly Drinks event in New York on Tuesday 13th November with our venue sponsor Reed Smith LLP; and our gold sponsor Totaro & Associates. The evening will start at 5.30pm.
We will be joined by Denham Capital's Justin DeAngelis for our 20-minute Q&A session. We look to start this by 7.30pm.
Justin is a partner in private equity firm Denham Capital, which specialises on emerging markets for renewable energy, and in the International Power Fund. He has over 20 years' experience in origination, analysis, structuring, valuation and execution of investments.
If you'd like to join us, please click here. And remember, if you can't be there, we'd love to host a colleague in your place. Let us know who you'd like to pass your ticket on to.
See you there!
In this guest blog, Prajeev Rasiah, Executive Vice President and Regional Manager, Northern Europe, Middle East & Africa, DNV GL, explains how understanding the risks of the market can help investors make wise choices.
In this guest blog, Prajeev Rasiah, Executive Vice President and Regional Manager, Northern Europe, Middle East & Africa, DNV GL, explains how understanding the risks of the market can help investors make wise choices.
For more on the risks of new markets, download our new Emerging Markets Attractiveness Index.
You can find out more about DNV-GL on their website.
Why the loss of subsidies changes the nature of merchant risk
Environmental concerns and falling costs of renewable technology have made renewable energy projects a much bigger part of the energy market, as countries strive to reduce emissions in line with the Paris Agreement.
Driven by the increased popularity of renewables, the landscape for investing in wind projects has changed radically in recent years. The players, the technologies, the market forces have all evolved considerably. As the adoption of renewables has grown, maturing technologies and increasing economies of scale have dramatically cut the cost of installing renewable energy projects.
Consequently, governments are now looking to reduce or even eliminate renewable energy subsidies. We’re already seeing several subsidy-free bids for developing renewable energy projects in northwest Europe.
This fundamentally changes the nature of the risks such projects face.
Previously, subsidies offered a guaranteed level of income, but today, projects and their investors are fully exposed to the dynamics of the energy market, including competition and consequent price pressure.
As a result, energy projects now face a much higher level of merchant risk due to uncertainties about price developments and pay-back periods. This means that accurately determining the risk associated with investing in an energy project, through trustworthy long-term power price projections, is essential.
Of course, investors can mitigate some or all the risk by sharing it with utilities through power purchase agreements (PPAs). However, the risk still needs to be considered, and a consensus on future power price evolution is required to set the level of the PPA in the first place. What’s more, current low wholesale prices and the long-term impact of low marginal cost renewables will increase pressure on PPA pricing levels.
Price forecasting or crystal ball gazing?
We can all agree that forecasting wholesale power price development is extremely complicated and must take into consideration a huge number of influencing factors – technical, economic, environmental, political, legal and social.
Typically, power price forecasters today handle that complexity by developing multiple scenarios and producing power price curves for each one. This usually means each forecast includes a low, central (or ‘business as usual’) and high forward price curve.
However, this multiple-scenario approach can lead to wildly differing valuations of the same project as each stakeholder uses the curve that best suits their own interest.
Specifically, investors who are trying to identify their maximum exposure to risk will use the lowest curve (worst-case scenario), while project developers who want to present their project in the best possible light will naturally base their valuation on the highest price curve. This can lead to significant delays in negotiations and the realization of the project.
What’s worse, the approach gives users of the curves very little insight into the assumptions behind those curves or the factors that could influence actual power prices within a given scenario. This makes it very difficult for potential investors to really understand the risks they are taking on and thus assess whether they are comfortable with the project’s risk profile.
A single specific forecast, regularly updated
Rather than follow the standard multi-scenario forecasting methodology, predictions should be based on a single forecast that provides complete transparency on the assumptions that underpin any resulting power price curves.
At DNV GL we take a different approach, which is why we’ve developed our Energy Transition Outlook, a high-level, global forecast. Our ETO does not present different scenarios, unlike for example the IEA’s World Energy Outlook. Instead it presents one “most likely” energy future, based largely on cost comparisons and the assumption that over time prices will follow the same trend as costs.
The forecast is unique because we predict that energy demand will peak in the mid-2030s, despite continued growth of the global economy and population. This is a very distinct characteristic we have not seen since the dawn of the industrial revolution and presents quite a different picture from most of the projections coming out of the energy industry, where many popular scenarios project higher growth in energy use.
In contrast, we believe that with constrained demand, there will be an abundance of energy supply. This means the energy sector will become much more competitive and cost-driven.
We use our forecast to create a quantitative, European market model, by adding detail about the various generation and storage technologies installed in each country within the region being modelled, as well as parameters such as fuel and CO2 prices and other factors that could influence the actual power price evolution in that market.
Having a single curve per country or price region helps to standardise investment bidding, giving all stakeholders the same base point for negotiations to ensure that investors have the information and insight necessary to fully understand the risk landscape they are operating in.
Brexit, political turmoil in Italy, the rise of far-right parties in eastern Europe: Europe had quite enough on its plate already.
The decision of German chancellor Angela Merkel last week to step down as leader of the Christian Democratic Union party has added more uncertainty to the European economic and political landscape, as well as to the German wind energy market.
Merkel announced last week she wouldn’t seek re-election as either leader of the CDU or as chancellor at Germany’s next federal elections, due in 2021. She is set to step down as head of the party in December. Given that she has now put an end date on her premiership, plenty will ask if she’ll get to 2021.
She also said she wouldn’t seek any other office either. Her position was already weakened after last year’s federal elections, but disastrous regional elections in Hesse and Bavaria for her CDU brought about her final decision last week.
This truly marks the end of an era. Merkel has not only led the CDU party for 18 years and served as chancellor for 13 years, but she has also played a key role in the growth of the German wind energy sector. She earned the nickname of “klimakanzlerin” – climate chancellor – for her fight to establish binding emission reduction targets and she has also been a key figure for Germany’s ‘energiewende’, the country’s transition toward green energy.
However, her government has drawn criticism too.
For example, the introduction of competitive onshore wind auctions in July 2016, and new project permitting hurdles, are set to stifle new onshore wind farms in 2019 and 2020. In fact, recent onshore wind auctions have been undersubscribed and prices are rising. German consultancy Deutsche WindGuard forecasts 9GW of wind to be added in the next five years, compared to the 22GW added from 2014 to 2018.
This situation has taken its toll on turbine makers including Senvion and Nordex: a drop in turbine orders have caused their profits to slump, forcing them to cut jobs in the country and focus their attention on other markets.
In addition, the German government has been criticised for delaying plans for 4GW of additional support for onshore wind to be auctioned in next two years, as well as for a yet unspecified volume of offshore wind.
And the country is also set to miss its 2020 greenhouse gas emissions targets, after it ramped up coal production following Japan’s 2011 Fukushima nuclear disaster.
Merkel’s decision comes at a time when the German wind industry is in desperate need of political stability and support.
As her tenure is set to come to an end in three years’ time, the stability of the wind market in the short- to- medium term is likely to be affected as well as developers’ and investors’ decision-making processes. They are set to keep a close eye on any further political development over by 2021.
On the other hand, three years could be enough for Merkel to sort out some of the issues facing the German wind sector right now – if she has the will.
Improvements of the national grid should be a priority, for example. Wind power is mainly generated in the north part of the country, while energy demand is higher in the south where the industries are based. Over 7,500km of transmission lines need to be built or upgraded to promote the further development of both onshore and offshore wind, but Merkel’s government has been slow to make progress.
Also, the permitting process is making harder for developers to participate in onshore wind auctions.WindEurope has said that two years ago it took 300 days to get a permit for new wind farms in Germany, but now takes around 700 days. Even when developers are able to get a permit, they are exposed to legal challenges because regional siting plans to determine the location of wind farms aren’t robust enough.
And finally, plans to define auction volumes in the coming years are key, if Germany wants to keep its leading spot in the European renewable energy market.
Merkel’s departure could kickstart a transitional phase for the German wind market. A fresh start under a new leader could help the sector regain some of its momentum.
There’s no denying that Brazil’s new far-right president, Jair Bolsonaro of the Social Liberal Party, is a controversial figure. A vocal opponent of environmental protection, same-sex marriage, and immigration, Bolsonaro is also an advocate of guns and has defended the use of torture and the death penalty. Not so social or liberal.
But here at A Word About Wind, we’re going to focus more on his environmental and energy policy – although Bolsonaro and his team have been tight-lipped on details.
We know that, during campaigning, Bolsonaro pledged to pull Brazil out of the Paris Agreement on climate change, but made an abrupt volte-face just days before the second round of voting. This implies his other pledges may also be subject to short-term changes. This brings uncertainty, and we’re sure investors will be taking note.
And, as an opponent of environmental protection, it is little surprise that wind farms get much of a look-in in his manifesto. Bolsonaro has said that he would support the transition to renewable energies but, in his manifesto, wind power is mentioned only twice and solar once. Renewable energy is clearly not a priority.
It’s not hard to see why. Bolsonaro’s rise to power came against a backdrop of economic crisis, rising unemployment, increasing violence and murders, and a deepening distrust of politicians due to corruption scandals.
With Brazil suffering 13% of all global homicides, the most urgent matter at hand is combating the rise of violence. Bolsonaro, who was himself the victim of a stabbing in September, knows this all too well.
Perversely, though, that lack of attention could be good news for renewable energy. The new administration has bigger priorities, which means that it may avoid tinkering with the country’s existing renewable energy tenders and policies.
Just think Trump. Our observations of the US market over the past two years have taught us that, with the right investment conditions and expertise, wind markets can be successful under ambivalent, or even hostile, leadership.
And Brazil’s wind market is still a promising one. Over 2GW of capacity was installed in 2017, taking the country’s total to 12.8GW. This is around the same as European markets such as France and Italy, and way ahead of Brazil’s immediate neighbours. Chile and Uruguay are the next-biggest Latin American markets with 1.5GW each.
With Brazil boasting some of the best wind resources on the planet, leading players in the global wind markets have been keen to invest. Vestas has made nacelles for the V110-2.0MW platform in the state of Ceará since 2016 and will soon expand this capability to its V150-4.MW turbines.
Vestas and others will now be hoping that there is no change to Brazil’s renewable energy auctions under Bolsonaro’s leadership. The latest auction, held in April of this year, awarded support for 114MW of wind projects, with average prices reaching an all-time low of £0.014/kWh. This was only a small tender and prices this low are a cause for concern for some firms, but they also show Brazil is highly competitive.
We don’t expect Bolsonaro to become a champion of Brazil’s wind market – but that is no big problem as long as he isn’t trying to actively damage it. Hydro accounts for 80% of the country’s electricity needs: renewables are a way of life for the Brazilians.
But the market will have to contend with political upheaval. Bolsonaro thinks that his plans to relax gun laws will curb violence in the country. We are inclined to disagree.
And with Brazil facing uncertain times, flexibility from foreign investors and local businesses alike will remain crucial. That’s one thing that won’t change.
Wind Watch
International Finance Corporation’s Sean Whittaker on the risks of emerging markets
By Frances Salter
What has been IFC’s involvement with wind projects?IFC has been involved in wind for over ten years now, and during that time we’ve invested in many of the first wind farms to be built in emerging markets all over the world.
By the end of the fiscal year in 2018, we had invested just over $1.6bn in over 40 projects around the world, with a total capacity of around 4GW in 19 countries. Wind is something we’re very familiar with, and we’re very optimistic about the sector.Are there particular investments which stand out to you as causes for optimism?
The majority of the investments we’ve made to date have been in countries where previously there were no wind projects. Largely, these projects had to set the stage for further development. There’s been lots of private capital that’s come in afterwards as we’ve helped to de-risk the market, so you get a flourishing wind industry.
Those have been some of our greatest areas of success – we like to create markets using our local knowledge and networks, alongside our knowledge of global trends. That’s true of other sectors as well, like solar.
Where do you see the most exciting emerging markets?
You probably saw the UN’s recent report, which calls for a massively increased use of renewable energy. So, frankly all markets have to move because in order to meet the targets, it can’t just be a handful of countries that increase their use of renewables – it must be all of them.
With the falling cost of wind and solar, you can have your cake and eat it too – you can have low-cost, reliable power which reduces greenhouse gas emissions. Wind has changed a lot even in the last three to four years: now we have wind turbines with huge rotors and very tall towers. As a result, there are a lot more places in the world where you can get cheap power from wind than we previously thought – ten years ago, it was more limited.
We’re particularly interested in bringing wind to sub-Saharan Africa, which currently has less than 1% of the world’s wind capacity. We’re looking to explore those countries in particular and we’re quite optimistic – but all these markets where wind hasn’t traditionally got a foothold present tremendous opportunities.
One example of a project we’re working on there is with the Moroccan renewable energy developer Gaia Energy, developing wind power and other renewable energy projects in Africa – it’s got a pipeline of more than 3GW. It’s an example of how IFC is working to roll out wind power solutions at scale, and could make a big difference in sub-Saharan Africa where wind power resources are under-developed at present.
In new, underdeveloped markets like sub-Saharan Africa, there must be different risks to investors – can you tell us about the key risks they should be aware of?
Project developers and investors are specialists in analysing risks. Whether you’re investing in the UK, US, Zambia or Senegal, you sit down and you assess all the risks you’re trying to mitigate.
There are some risks that are particularly relevant to emerging markets – like in sub-Saharan Africa, the issue can be the creditworthiness of the off-taker. Plus, there’s currency risk, in terms of the currency your PPA is paid in. There’s political risks too, issues where political uncertainty represents a risk to investors – this is really where we have a big role to play.
We know these places as we have staff in every region, and we know all these countries very well as we’ve been investing since 1956. IFC’s role is to help investors understand risks and manage them. It goes back to our primary mandate of creating markets.
Most of the attention in emerging markets has been on onshore wind, but we think there are exciting prospects for offshore wind as well. Particularly in countries with good offshore resource, this is something we’re looking to explore. We’ve yet to finance any offshore wind projects, but we’re very interested in doing so in the future.
Want to hear more from IFC? Chief Renewable Energy Specialist Dana Younger will be speaking at our Financing Wind Europe conference tomorrow at the Crystal, London. Click here for more information and tickets.
Sean Whittaker, Senior Renewable Energy Specialist at International Finance Corporation, spoke to A Word About Wind about the risks investors should be aware of when entering new markets, and the role of IFC in de-risking them.
Sean Whittaker is a Senior Renewable Energy specialist at International Finance Corporation, with over 18 years’ experience working in renewable energy, project finance, climate policy and international development.
To understand more about the risks of investing in new markets, download our Emerging Markets Attractiveness Index.
What has been IFC’s involvement with wind projects?
IFC has been involved in wind for over ten years now, and during that time we’ve invested in many of the first wind farms to be built in emerging markets all over the world. By the end of the fiscal year in 2018, we had invested just over $1.6 billion in over 40 projects around the world, with a total capacity of around 4GW in 19 countries. Wind is something we’re very familiar with, and we’re very optimistic about the sector.
Are there particular investments which stand out to you as causes for optimism?
The majority of the investments we’ve made to date have been in countries where previously there were no wind projects. Largely, these projects had to set the stage for further development. There’s been lots of private capital that’s come in afterwards as we’ve helped to de-risk the market, so you get a flourishing wind industry. Those have been some of our greatest areas of success – we like to create markets using our local knowledge and networks, alongside our knowledge of global trends. That’s true of other sectors as well, like solar.
Where do you see the most exciting emerging markets?
You probably saw the UN’s recent report, which calls for a massively increased use of renewable energy. So, frankly all markets have to move because in order to meet the targets, it can’t just be a handful of countries that increase their use of renewables – it must be all of them.
With the falling cost of wind and solar, you can have your cake and eat it too – you can have low-cost, reliable power which reduces greenhouse gas emissions. Wind has changed a lot even in the last three to four years: now we have wind turbines with huge rotors and very tall towers. As a result, there are a lot more places in the world where you can get cheap power from wind than we previously thought – ten years ago, it was more limited.
We’re particularly interested in bringing wind to sub-Saharan Africa, which currently has less than 1% of the world’s wind capacity. We’re looking to explore those countries in particular and we’re quite optimistic – but all these markets where wind hasn’t traditionally got a foothold present tremendous opportunities.
One example of a project we’re working on there is with the Moroccan renewable energy developer Gaia Energy, developing wind power and other renewable energy projects in Africa – it’s got a pipeline of more than 3GW. It’s an example of how IFC is working to roll out wind power solutions at scale, and could make a big difference in sub-Saharan Africa where wind power resources are under-developed at present.
In new, underdeveloped markets like sub-Saharan Africa, there must be different risks to investors – can you tell us about the key risks they should be aware of?
Project developers and investors are specialists in analysing risks. Whether you’re investing in the UK, US, Zambia or Senegal, you sit down and you assess all the risks you’re trying to mitigate.
There are some risks that are particularly relevant to emerging markets – like in sub-Saharan Africa, the issue can be the creditworthiness of the off-taker. Plus, there’s currency risk, in terms of the currency your PPA is paid in. There’s political risks too, issues where political uncertainty represents a risk to investors – this is really where we have a big role to play.
We know these places as we have staff in every region, and we know all these countries very well as we’ve been investing since 1956. IFC’s role is to help investors understand risks and manage them. It goes back to our primary mandate of creating markets.
Most of the attention in emerging markets has been on onshore wind, but we think there are exciting prospects for offshore wind as well. Particularly in countries with good offshore resource, this is something we’re looking to explore. We’ve yet to finance any offshore wind projects, but we’re very interested in doing so in the future.
Climate change and global warming are often used interchangeably, but in fact they have very distinct meanings.
Climate change describes a set of changes to the climate that can happen at either a local or a global level, while global warming refers to the rise of temperature in the Earth’s climate system. However, climate change is one cause of global warming.
These definitions are going to be handy as we look at the results of a recent study by University of Harvard researchers David Keith and Lee Miller, which was published in energy-focused journal Joule.
The study has caused very strong reactions in the wind community as it has shown that, if all electricity demand in the US was supplied only by wind farms, the turbines would contribute to increase US surface temperature by 0.24°C. This has prompted some to criticise the study for giving the impression that building more wind farms leads to global warming. But is this right? We spoke to Lee Miller to find out more.
He explained to us that wind farms affect climate change in two opposing ways.
First – and this is the effect that we all know and love – wind reduces future global climate change by reducing greenhouse gas emissions compared to a fossil-fuel based energy mix. But second, wind farms also cause climatic impacts on a local scale – and this is the effect the Harvard researchers analysed in their study.
The researchers have analysed data from 28 operational wind farms in the US and assumed they all use 3MW wind turbines, which are evenly spaced over the wind farm region. They found that wind turbines contribute to redistributing heat, meaning that some areas get warmer and some cooler after the deployment of wind turbines.
Miller said locally-warmer surface temperatures was one key effect of wind power.
He said: “Wind beats fossil fuels under any reasonable measure of long-term environmental impacts per unit of energy generated. However, assessing the environmental impacts of wind power is relevant because, like all energy sources, wind power causes climatic impacts.”
This is not the first study to show that wind turbines affect local climate. For example, a study published in 2014 by a group led by Robert Vautard, a senior scientist at France’s National Centre for Scientific Research, showed that wind power influenced temperatures and chances of rain, depending on where it was located in Europe.
This is where the definitions of climate change and global warming are important. Climatic impacts of wind farms are local and immediate, while climate benefits given by accumulated emission reductions are long-lasting. The longer the time horizon, the less important wind power’s impacts are compared with its benefits in terms of global warming, the study has shown. That is good news for the wind industry.
However, it is also an easy point to misinterpret or misrepresent. There is a risk that these studies can have consequences on how wind power is perceived – in other words, people can claim wind farms cause global warming – even when that isn’t the point at all. Indeed, we’ve already had wind sceptics sharing it with us on Twitter.
Now consider this. Arguably, the main reason for the success of wind power over the last decade is that governments and companies around the world have decided to invest in it because it contributes to fight global warming. This means that corporates have used wind power purchase agreements as a way to lower their emissions, and for that same reason governments have sustained the deployment of wind power.
But if the message that comes out from these studies gets misinterpreted, and seen instead as a demonstration that wind turbines negatively affect global warming rather than contribute to fight it, it could have a negative impact on the industry.
This doesn’t mean that we can ignore or discard these studies. Rather, we should be aware of them and promote a proper understanding of them.
If we want wind to play a key role in the future of the global energy mix, it is essential to understand its limits, including its potential environmental and climatic impact, so that we can address them. Well-informed decisions are the only way to achieve this.
Vestas Asia Pacific made headlines last week with a deal to construct a 100MW wind farm in Sri Lanka. The project, which is due to come online by the end of 2021, is on Mannar Island to the northwest of Sri Lanka, just across the water from India.
The scheme will be supported by a $200m loan from the Asian Development Bank, while the owner Ceylon Electricity Board will provide $56.7m towards project costs. This is indicative of a wider move by those in the southeast Asian country to embrace the wind sector.
Sri Lanka’s deputy power minister, Ajith Perera, said last year that a further 275MW of wind capacity in the region would be awarded by competitive tender and developed by private companies. This is big for Sri Lanka – given the small size of its market. At the end of 2016, Sri Lanka, Bangladesh, and Azerbaijan had a combined installed capacity of only 70MW.
And the government has long-term plans too. With energy demand in Sri Lanka expected to rise 4.9% per year from 2018-2037, the government sees the potential of renewable energy to provide for the country’s needs. It intends to install 1.2GW of new wind capacity during the same time period.
For the first time, it seems as if Sri Lanka’s wind energy ambitions might get off the ground.
The government ran its first studies for a pilot project in 1988, but it took over a decade until Sri Lanka’s first wind farm – the 3MW Hambantota project on the southeast coast – was commissioned in 1999. Since then, growth has been agonisingly slow, with intermittent periods of stagnation.
Political instability and violence in the country have not helped. The Sri Lankan civil war, which broke out between the government and insurgent group the Tamil Tigers in 1983, continued until the Tamil Tigers were finally quashed by the Sri Lankan military in 2009.
Now, as Sri Lanka approaches a decade of peace, the 100MW Mannar project could herald the entrance of a new era for Sri Lankan wind energy – and a promising new market for international investors.
The country’s wind resources are encouraging. A National Renewable Energy Laboratory satellite mapping study estimated Sri Lanka’s wind energy capacity potential at 20.7GW.
And it could also prove a promising market for offshore wind. Its close neighbour India is working to create its own offshore market, with the FOWIND project completing resource assessment and feasibility studies in the Gulf of Mannar, the stretch of water between southern India and the northern part of Sri Lanka. If India can do it, why not Sri Lanka?
There are risks, though. Building an offshore wind market in Sri Lanka would need tailored solutions to technical problems, including the monsoon seasons, which have implications for decisions including site choices and turbine design. It also doesn’t even have an onshore wind sector to provide support, meaning any offshore development will be some time away. That said, both are issues in Taiwan too and, so far, there is progress in that market.
In addition, the fact that a leader such as Vestas has committed to the Sri Lankan market is a significant milestone. If successful, the 100MW Mannar project should act as a signal to other international players that Sri Lanka must be taken seriously as an emerging market.
Ahead of Financing Wind Europe on 1st November, we spoke to the Carbon Trust about the benefits and drawbacks of competitive auctions in European wind.
The Carbon Trust is an independent, expert partner of leading organisations around the world, helping them contribute to and benefit from a more sustainable future through carbon reduction, resource efficiency strategies and commercialising low carbon technologies. Meet the Carbon Trust’s experts, Rhodri James and Megan Smith, at A Word About Wind’s Financing Wind Europe conference on 1st November.
Europe has been the trailblazer for offshore wind for many years; the UK and Germany lead the global ranks for deployment of projects, whilst Netherlands and Denmark have hit the headlines around the world with the strike prices achieved in recent auctions.
With costs falling, other European countries are waking up to the potential benefits of offshore wind in helping to decarbonise and secure their electricity supplies. This wave of increased interest has seen the likes of Belgium, Poland and Turkey setting their sights on the enormous potential of this technology.
So how should new renewable energy projects be financed?
These relative newcomers now face an important decision – what is the right level of support to provide new offshore wind projects? How do you balance the low costs achieved in other countries with the reality of a less mature supply chain and infrastructure? Should these nascent markets adopt the auction mechanisms driving these low cost results, or adapt the approach as the market matures?
The Carbon Trust has carried out analysis to show that fixed off-take mechanisms were very successful in establishing a market, but came at the cost of a much higher level of subsidy per MW.
Once a market is established and the necessary infrastructure and supply chain have been secured, a move to a competitive auction approach can deliver real value for governments and maintain a healthy pipeline of projects. Both the UK and Germany were successful in making sure any changes to policies were introduced gradually, ensuring a smooth transition (notwithstanding some initial apprehension).
In addition to intelligent support mechanism design, both countries also ensured a consistent flow of sites were made available to developers and were initially more lenient on local content requirements to accelerate the industry in the preliminary phases.
How competitive auctions benefit the UK wind market
The UK’s Renewables Obligation Certificate (ROC) mechanism (fixed off-take[1]) saw 6.6 GW of offshore wind projects supported over a 16-year period (the final ROC supported project, Galloper was commissioned in September 2018).
This solid grounding enabled a move to the Contracts for Difference (CfD), a market premium mechanism[2]. Whilst initially developers were competing for a fixed price set by the government (CfD FIDeR), it provided greater potential to reduce the UK Government’s overall spend on support through an eventual transition to a competitive auction mechanism after a couple of years.
The Carbon Trust’s analysis shows that since the first round of CfDs in 2016, an additional 7.5 GW of projects have secured contracts. It also shows that the subsidy per MW has been steadily reducing. The early ROC offshore wind projects were delivered at a calculated value of around £6 million per MW from the UK Government, which has tumbled to around £0.5 million per MW for the most recent winners of the CfD auction in 2017 (Hornsea Two and Moray East).
Figure 1 - Subsidy per MW for offshore wind in the UK since 2000. Source: Carbon Trust Analysis
Auctions in German wind: a success story
In Germany, the story differs but results in a very similar conclusion. The first few offshore wind projects in Germany were built under fixed Feed-in-Tariffs paid on-top of the market price, but the real increase in deployment came through the introduction of a market premium mechanism (non-competitive) in 2014 under which nearly 7 GW of projects have been or will be built.
The success of this mechanism in invigorating the market has led Germany to adapt its approach to a competitive auction mechanism, which has already awarded contracts to 3.1 GW of offshore wind projects from 2021 onwards.
A similar pattern emerges when the Carbon Trust analysed the relative subsidy per MW being, or expected to be, paid by the German government. The nearly 7 GW under the non-competitive market premium is predicted to be delivered for just over €5 million per MW, whilst the auction results indicate the latest round of projects should see this slide to just €1 million per MW.
Figure 2 - Subsidy per MW for offshore wind in Germany since 2004. Source - Carbon Trust Analysis
What does this mean for the future of wind energy projects?
The offshore wind industry is very different now to when these mechanisms were first introduced. European supply chains are more mature and developers are now highly experienced in the construction and operation of offshore wind farms. Nevertheless, there are some key lessons to be learned and the Carbon Trust’s analysis clearly demonstrates the benefits of a grounded fixed revenue support mechanism at an early stage, with competitive auctions offering benefits once a market is established.
It may be that this shift to competitive auctions can be accelerated in the new wave of emerging offshore wind markets, but these countries should proceed with caution before seeing the headlines and jumping straight into a mechanism that may not be fit for purpose.
Meet the Carbon Trust’s experts, Rhodri James and Megan Smith, at A Word About Wind’s Financing Wind Conference on 1st November. To find out more about the conference, click below...
[1] Fixed off-take mechanisms are non-competitive. They provide the generator with a fixed subsidy on top of the wholesale price of electricity. This subsidy can take the form of either a cash payment per MWh generated (e.g Fixed Feed-In-Tariff) or something else of value such as a certificate that can be traded to electricity suppliers on a market in return for cash (e.g. Renewables Obligation Certificates).
[2] A market premium mechanism provides offshore wind farm owners with a fixed price per MWh of electricity generated (a strike price) inclusive of the wholesale electricity price – the total level of subsidy is then calculated by subtracting the wholesale cost of the electricity exported from the strike price. If the wholesale cost of electricity is greater than the strike price then the wind farm owner pays back the difference. Variations on this basic principle exist, including a cap to the floor and ceiling of subsidy paid out, the timeframe subsidy is available etc.
Wind Watch
Chatham Partners' Felix Fischer on the future of German offshore and the step away from subsidies
By Frances Salter
Which wind projects are Chatham Partners currently involved with?
As you may have seen in the press, we are on Ørsted’s panel of legal advisors in Germany. And we are supporting another large developer in his project execution, in particular with contracts and claims management.
We advise some larger-scale onshore wind project developments and a few commissioned projects, both on- and offshore across Germany on legal matters of operations. And what I am particularly happy about is that we recently contributed our first advice to one of the projects in Taiwan.
That’s quite a diverse spread in terms of geographical location. Where do you see the most interesting marketing opportunities for wind?
It depends whether we are talking about onshore or offshore. In terms of offshore, my perception is that the US is a very interesting market at the moment – you can tell from Ørsted’s acquisition of Deepwater Wind that they are increasing their footprint in that market. A number of projects are making large progress and have been awarded power purchase agreements [PPAs] by state governments, like the 800MW Vineyard project.
I think that market is very interesting because, though you can say what you want about the current government, it is still an established industrial market where it is possible to comfortably set up the logistics of a project. This means that, although it is geographically further away, it is still a quite familiar environment for European developers.
There are also opportunities in markets further afield. Look at Taiwan, India and Korea – to name a few. What you see on the ground is that the complexities are obviously slightly bigger than in more established markets. This concerns political processes, supply-chains and simply culture.
For onshore wind, it is my perception that the market has become truly global. We see clients invest in most fairly stable economies across Asia, North and South America and Europe. After all, investors have to consider how large your appetite is for return expectations, and that decides to what extent your interest lies in more established or emerging markets. On the other hand, some players simply have a global strategy.
What do you see as being the biggest legal challenges for European wind?
To be honest, I must say that we’ve overcome a lot of the challenges. Now the main regulatory issues are problems of grid congestion and environmental permitting.
In my view, few countries so far provide a viable regulatory framework to finally break-through on storage technologies or power-to-X solutions. To improve this would be important in order to allow for a faster and efficient build-out.
The step from subsidised to purely marketed electricity production is large from a financing perspective. We are still experimenting with that. It is more common in Scandinavia and the UK than it is in Germany, so PPAs with volatile electricity are still something we are learning how to address properly, both economically and contractually.
On the other hand, everybody always talks about the PPA market as though it was a new thing – but we have known and worked with PPAs for decades. There still are many parallels to the days of nuclear and fossil power plants. So that is no revolution from my perspective – at least in the legal sense, it is not as complicated as many people claim. Economically, one may take a different view, in particular considering the range of electricity price forecasts.
What do you think the next ten years will look like for wind in Germany?
The government is planning to auction an additional 4GW of onshore wind capacity so that is good news. Also, the prices have increased in the last auction. Overall, I think onshore wind might over this period become the cheapest electricity we have, especially with further scaling.
Right now, offshore wind is a bit problematic because our grid enhancements and expansions have not kept pace. But I think with more technology coming to the market, that helps to balance the grids and some infrastructure measures – this natural boundary to offshore wind – will fall. We will see more capacity being realised than most people expect at this point.
And finally, what do you think the impact of Brexit will be for wind in the UK?
The fundamental logic of power production will stay the same. But I do not know what the impact might be on the political agenda of the UK.
It is possible there will be less foreign investors willing or able to invest in the UK. But that will not be a problem as long as there is so much capital in the market. If at any point in time we see a general downturn with less money in the market, then it could hit the UK harder as investors would have to diversify their portfolios.
Want to hear more from Felix? He'll speaking at Financing Wind Europe conference on 1st November, where Chatham Partners is an official supporting organisation. Book your place.