The invitation is out. There are a few celebrities who have come out in recent weeks to rave about wind farms – Dr. Who and Emma Thompson to name just two – but there is one big name we really want at our Quarterly Drinks next year: Red M&M.
Yes, Red M&M. He’s be perfect. He’s chocolatey; he’s been on TV; he’s redder than the button in the White House over which Donald Trump’s tiny hand is constantly hovering; and he likes wind farms. Later this year and in 2018, M&Ms owner Mars is to run a global campaign to raise awareness of a $1bn sustainability drive, which includes buying wind power – and Red M&M is its star.
Mars is also notable in the world of corporate power purchase agreements (PPAs) with wind farms, as it has done deals in the US and Europe. Corporates use these deals because they enable them to hit their green targets while giving certainty over the cost of their electricity. Even so, they are still very much a North American phenomenon and Europe is struggling to catch up. Why so?
That is a question WindEurope, SolarPower Europe and others will discuss at a two-day conference in Brussels next week, Re-Source 2017. It will look at why firms have been slow to sign renewables PPAs in Europe; whether project developers and owners are losing out as a result; and what can be done to address this.
There are a couple of significant reasons for this slow take-up.
One reason we have seen less of these PPAs in Europe than the US is because the incentives for renewables are so different. In Europe, governments have historically backed projects including wind farms with centrally-set feed-in tariffs. This has given owners guaranteed income, and little reason to go to corporate buyers.
The Contracts for Difference regime used for UK offshore wind farms poses a similar challenge. With CfDs, the government pays a subsidy on top of the market price of electricity to ensure that the project owner gets a guaranteed income that can make their scheme viable. Helpful, but also a disincentive to go elsewhere.
In contrast, the US has been more supportive for PPAs. The production tax credit has helped the wind industry to bring the cost of electricity below the project cost of traditional energy in many areas, and made renewables attractive to large firms.
But change is coming. In 2016, renewables PPAs totalling over 1GW were signed in Europe, and governments are ditching centrally-set FITs in favour of auctions where they can pay less in the way of subsidies. We expect more project owners to look at PPAs as a way to mitigate the risks of fluctuating power prices.
A second obstacle to the growth of PPAs in Europe is that there has been no clear framework from the European Union to support corporates that want to sign PPAs – although, with FITs in place, there has been little demand for such a framework. The European Commission’s Clean Energy Package should help remove some barriers for would-be buyers – but this is still a work in progress.
These two factors have enabled US companies to make more progress on signing PPAs than European counterparts, and we have seen a mix of technology giants (Amazon, Google, Microsoft) and others (Ikea, Mars, Wal-Mart) entering the fray.
And a third reason for the slow take-up in Europe is, arguably, cultural. Over many decades we have seen a tension in countries like Germany over whether the growth of renewables should be led by top-down government targets or the bottom-up work of activists. Corporates would inevitably get some people's backs up.
Even so, we expect PPA activity in Europe to pick up with the move away from FITs and changes in the Clean Energy Package. And this should help investors in wind. These PPAs give developers and their financial backers the security of income they need to start work on new schemes; and that certainty is also attractive for investors that might buy the development post-completion.
But we’ll let Red M&M go into more detail on that.
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We all know that wind energy is getting cheaper.
In the latest round of the UK’s Contracts for Difference auction this month, Dong Energy’s 1.4GW Hornsea 2 and EDPR and Engie’s 950MW Moray East offshore wind farms secured contracts at strike prices of £57.50/MWh. This is down from £119/MWh in 2015.
This follows Germany’s first offshore wind auction in April, in which EnBW won the rights to build its 900MW He Dreiht with no subsidy, as did Dong for two schemes totalling 480MW.
And the same is happening onshore. In May and July, Spain gave backing for around 4GW of wind capacity subsidy-free; and, in August, Germany held its second onshore wind auction, where it awarded support for 67 projects totalling 1GW at strike prices averaging €42.80/MWh.
We have seen these remarkable results all within six months, but what do these numbers really mean? Sure, that developers say they can build with little or no government support, but this makes them and their investors more reliant on market prices to get their returns. Will the removal of subsidies affect investors’ appetites to take on these projects now?
Removing subsidies is an crucial step in the industry’s maturation. While this support has historically provided guaranteed long-term revenues that made investors feel comfortable, they could not last forever. However, the main consequence of a greater reliance on market prices is that investors have to deal with long-term returns becoming less predictable.
In practice, this means investors will have to look far harder at long-term predictions of open market prices to estimate how long would take them to recover the cost of capital and make some revenues. This is a new source of uncertainty when deciding how to invest.
These predictions will not be easy. Power prices are affected by many variables, including changes in government and regulations, and a wind farm is a long-term investment. To predict how market prices would change over a long timeframe is near impossible, but it is a skill with which project owners must become acquainted.
Moreover, as a greater market exposure makes the investment potentially riskier, investors would need to price in that extra risk, increasing the cost of capital and the interest rates that developers need to pay. There will be a knock-on impact on developers.
But this additional risk should open new opportunities for the wind sector in Europe: power purchase agreements (PPAs) with large corporates, which have been a feature of the wind market in North America for the last five years but haven’t taken off in the same way in Europe. We will cover this more in Wind Watch on Monday.
These PPAs represent a long-term hedge against the risk of fluctuating energy prices, and a long-term PPA could be a win-win solution for both developers and investors. The developer would sell the power generated directly to a firm, protecting it from the volatility of selling its power on the merchant market, where it would be more exposed to prices fluctuations. For the investor this would mean being able to get long-term stability over his revenues, at least for a part of the lifespan of the investment.
PPAs would provide developers with the certainty they need in terms of the revenues they receive from projects, helping them to attract backers and financial investors.
Of course, that relies on the corporate having a strong covenant that gives the investor certainty that the energy user will be around for the duration of that PPA – and able to pay their electricity bills. That can be as tough as predicting long-term power prices.
Wind Watch
By Ilaria Valtimora
We all know that wind energy is getting cheaper.
In the latest round of the UK’s Contracts for Difference auction this month, Dong Energy’s 1.4GW Hornsea 2 and EDPR and Engie’s 950MW Moray East offshore wind farms secured contracts at strike prices of £57.50/MWh. This is down from £119/MWh in 2015.
This follows Germany’s first offshore wind auction in April, in which EnBW won the rights to build its 900MW He Dreiht with no subsidy, as did Dong for two schemes totalling 480MW.
And the same is happening onshore. In May and July, Spain gave backing for around 4GW of wind capacity subsidy-free; and, in August, Germany held its second onshore wind auction, where it awarded support for 67 projects totalling 1GW at strike prices averaging €42.80/MWh.
We have seen these remarkable results all within six months, but what do these numbers really mean? Sure, that developers say they can build with little or no government support, but this makes them and their investors more reliant on market prices to get their returns. Will the removal of subsidies affect investors’ appetites to take on these projects now?
Removing subsidies is an crucial step in the industry’s maturation. While this support has historically provided guaranteed long-term revenues that made investors feel comfortable, they could not last forever. However, the main consequence of a greater reliance on market prices is that investors have to deal with long-term returns becoming less predictable.
In practice, this means investors will have to look far harder at long-term predictions of open market prices to estimate how long would take them to recover the cost of capital and make some revenues. This is a new source of uncertainty when deciding how to invest.
These predictions will not be easy. Power prices are affected by many variables, including changes in government and regulations, and a wind farm is a long-term investment. To predict how market prices would change over a long timeframe is near impossible, but it is a skill with which project owners must become acquainted.
Moreover, as a greater market exposure makes the investment potentially riskier, investors would need to price in that extra risk, increasing the cost of capital and the interest rates that developers need to pay. There will be a knock-on impact on developers.
But this additional risk should open new opportunities for the wind sector in Europe: power purchase agreements (PPAs) with large corporates, which have been a feature of the wind market in North America for the last five years but haven’t taken off in the same way in Europe. We will cover this more in Wind Watch on Monday.
These PPAs represent a long-term hedge against the risk of fluctuating energy prices, and a long-term PPA could be a win-win solution for both developers and investors. The developer would sell the power generated directly to a firm, protecting it from the volatility of selling its power on the merchant market, where it would be more exposed to prices fluctuations. For the investor this would mean being able to get long-term stability over his revenues, at least for a part of the lifespan of the investment.
PPAs would provide developers with the certainty they need in terms of the revenues they receive from projects, helping them to attract backers and financial investors.
Of course, that relies on the corporate having a strong covenant that gives the investor certainty that the energy user will be around for the duration of that PPA – and able to pay their electricity bills. That can be as tough as predicting long-term power prices.
Wind Watch
Wind Watch is published every Monday and Friday.
And in less than two weeks, on Tuesday 10th October, we are due to publish our Q4 Finance Quarterly report, in association with our headline sponsor and leading energy advisor DNV GL.
These reports are published every three months to give a quick and focused overview of what's happening in wind globally.
This second edition will include:
- Data on project M&A, PPAs and offshore market activity from July to September.
- Analysis of Spain's attempts to rebuild investor confidence with wind auctions.
- Interview with Laura Beane, CEO of Avangrid Renewables, which is the US arm of Spanish giant Iberdrola.
- DNV GL's insights into floating wind.
- Q&A with Alla Weinstein from floating offshore developer Trident Winds.
- Quarterly databank on corporate M&A.
People in the wind sector will rightly get excited about electric vehicles, and how they could significantly raise demand for electricity. Phwoar! Look at the charging points on those!
But let’s not let this overshadow another sector that is a big user of electricity and where demand is growing. Yes, data centres. Okay, this may not be as sexy as a load of shiny new cars – unless you have a fetish for rooms full of computers – but it is still a power-hungry sector that could help re-shape the electricity sector.
In the ‘Global Cloud Index’ report from IT giant Cisco that was published last November, but which I only stumbled across this week, it forecast that internet traffic going through data centres could rise from 4.7ZB at the end of 2015 to 15.2ZB at the end of 2020, or a threefold increase.
Installed capacity in data centres is set to grow fivefold over the same period to around 1.8ZB in 2020. That is serious growth.
The ZB there is a ‘zettabyte’, which is a unit of digital information that is equivalent to about 1trillion gigabytes, and the additional demand for this data is coming from two trends with which I am sure you are familiar. First, increased demand from consumers for services like video streaming and social media on their phones and computers; and second, more businesses deciding to host their data remotely 'in the cloud' rather than locally.
Cisco says this means that the number of ‘hyperscale’ data centres globally needs to grow from 259 at the end of 2015 to 385 at the end of 2020; and an estimated 53% of all internet traffic in 2020 would go through those data centres, up from 42% now.
And what is ‘hyperscale’? Well, this refers to the company that is operating or owning the data centre, not the data centre itself.
Cisco says it refers to a company that raises either $8bn a year from e-commerce; $4bn from internet, social networking and search engine services; $2bn from providing software-as-a-service; or $1bn from infrastructure-as-a-service. That includes giants like Amazon, Alibaba, Apple, eBay, Facebook, Google, Rackspace, Salesforce and Yahoo. The usual suspects.
Now, these companies may not own the data centre themselves. They might simply lease it from an independent developer. But many have green dreams and will power it with wind energy.
Amazon, Apple, Facebook and Google are among the corporate energy buyers who have committed to source 100% of their electricity need from renewables and signed power purchase agreements (PPAs) with wind farm operators. And so, if they need to build more data centres to cope with the growing demand for data the firms such as Cisco have identified, then that should mean more PPAs for the wind sector and more certainty for the investors in the schemes that will be providing the electricity.
I also wonder if there is another potential knock-on effect. Will we see more of these firms develop wind farms by themselves? At present, PPAs are a well-used model, particularly in the US, and we have seen these firms get involved as a co-developer on wind projects. It seems likely that one or more of these firms could easily find a piece of land and then develop the project themselves.
This would give those businesses the security of supply they demand, and with the potential to sell any power that they do not use. Let’s not forget that just 18 months ago Apple set up an arm so it could sell excess power produced by its solar panels.
In the meantime, this is an opportunity for wind developers to get the certainty for their projects by signing more PPAs. In the last week, we have seen large PPAs signed by manufacturers including Anheuser-Busch, General Motors and Kimberly-Clark, and it is great to see that diversity of firm in the market for wind power.
But let’s not forget the large tech companies who have been among the pioneers in the PPAs market and, thanks to the growth of data centres, should be in the market to sign more of them.
After four years of market standstill, the Spanish Government held two renewables auctions, in May and in July, to attract new investors and bring Spain’s wind sector back to its former glory. It is too early to say whether that has been a success.
But what about those who invested in Spanish renewables before that standstill?
Remember, these were the investors hit by a series of retroactive cuts to feed-in tariffs for renewable energy projects, including wind farms, as part of package of austerity measures aimed at helping Spain out of the economic crisis. The first cuts were implemented in 2010 under the Socialist Workers’ Party’s government, and the last in 2013, when the People’s Party’s package of electricity market reforms was approved.
London-based asset management firm Hg Capital was among those investors that bought renewable energy assets, including wind projects, in Spain between 2008 and 2011. We spoke to Luis Quiroga, director of the renewable power team, about what has happened since those cuts were introduced and whether there is any way out for investors.
The prognosis is not good. He says: “Spain is an unusual market as it is the only large market for renewables in Europe that has done drastic retroactive cuts. These retroactive cuts have implied for who invested before them, a loss of equity. Your equity is gone. This means that your assets are now essentially worthless."
He adds that wind investors face a further challenge. In many cases, projects that were built in the first wave of renewables investments in the countries now only receive market power prices.
“This poses a problem because the assets were designed under completely different circumstances, when the revenues were higher, but also more stable and not exposed to market volatility, but that’s no longer the case,” he says. “This means that for example in some cases you can’t even cover your operational costs or required repairs in the wind farms."
Faced with this situation, the only option for investors to recover their costs is by pursuing cases against the Spanish government in international courts.
Spain has faced 30 claims over its renewable energy reforms, with just two been resolved so far and little consistency. Last January, the Arbitration Institute of the Stockholm Chamber of Commerce found in favour of the Spanish government, but this was reversed this May.
Specifically, London-based asset manager Eiser Infrastructure and its Luxembourg-based subsidiary Energia Solar Luxembourg SARLwon €128m compensation as the International Centre for Settlement of Investment Disputes determined that Spain had violated its international obligations to them by overhauling the subsidies. The case concerned a €935m investment committed to three thermo-solar power plants in Spain in 2007.
However, this does not help Spanish companies. Only overseas investors can file a claim with an international court, and they are a small part of the market.
According to the Spanish investments registry, foreign investments in the energy sector in the country represent around 11% of total foreign investments, with the remaining 89% made up of Spanish investors. This means that for domestic investors, possibilities of costs recovery are small. Spanish companies have no form of appeal in international courts, so their only hope lies in the Spanish court. But this would mean facing long trials and, in some cases, judges chosen because they share views similar to the government's, making the possibility of success even smaller.
With these background, who will be so brave to invest in Spanish renewables now? Indeed, developers are currently finding it difficult to find new investors, and this is not just because of what happened in the past. The current energy regulation, introduced in 2013, has given to the government the power to decide the return that power plants can get and change it.
This has generated uncertainty for investors as well as unattractive returns. As Quiroga says: “Higher risk and lower return… I would be interested in seeing who will be investing in”.
We are too, as Spain is still a long way from its glory days.
Wind Watch
Wind Watch is published every Monday and Friday.
In the meantime, have you checked out the latest posts on our blog? If not, you should. This is where we put the analysis that we can't fit in our newsletters and special reports, as well as articles from industry thought leaders.
If you have an idea for a piece about the business side of the wind industry that you would like us to feature, please get in touch.
Here is a taste of a new post from Dominic Szanto, director and head of offshore wind at JLL Energy & Infrastructure...
What trilemma? Offshore auction answers UK energy questions
By Dominc Szanto
The UK government has published the results of the second Contracts for Difference auction, for which only offshore wind, dedicated biomass and advanced conversion technologies were eligible to enter, and the results for offshore wind are astonishing, with 3 gigawatts - enough to power over 3million homes - securing contracts.
Two of the winning projects, Hornsea 2 and Moray Firth, will be delivered at a price of £57.50/MWh, which is far below even the most bullish of industry predictions. A project where the first phase completes earlier, Triton Knoll, will cost £74.75/ MWh. Most industry observers had been expecting pricing in the range £65-£70/MWh, a price that would only recently have been considered impossible to achieve.
Indeed, these prices are half of those in the previous CfD auction in 2015 and far below the ‘FID [financial investment decision]enabling' CfDs negotiated bilaterally...
Is Angela Merkel the “forever chancellor”? Elections are imminent in Germany and Merkel looks set to win her place as Germany’s leader for the fourth time, with her Christian Democratic Union the largest party in the Bundestag. Latest polls say this should not result in a big electoral shock – but we’ve heard that one before!
For example, research from Infratest Dimap last week showed Merkel polling around 15% ahead of her main challenger, former president of the European Parliament and leader of the centre-left Social Democrats, Martin Schulz.
However, there could still be change for wind.
In terms of the overall support for renewables, Merkel’s credentials are sound. Per Hornung Pedersen, chairman at German developer PNE Wind, told us that a fourth mandate for Merkel should give confidence to renewables because of her track record of support: “In terms of renewables Merkel is certainly not deaf”, he said.
She was elected Chancellor for the first time in 2005 and in her first term earned the nickname of “klimakanzlerin” – climate chancellor – for her fight to establish binding emission reduction targets. She has also played a central role in ‘energiewende’, the transformation of Germany toward green energy.
This has been good for wind. In her three terms, totalling 12 years, Germany has installed over 29GW of new wind capacity, ending 2016 with 50GW of wind installed capacity. Pedersen is confident that “Germany is going to need more electricity going forward” and this would give more scope to support renewables, including wind.
However, Merkel is not set to win a majority of votes and a coalition is set to be the most likely option again. The current government is made up of Merkel's CDU and the Social Democrats and, in this form, the government approved a number of acts in July 2016 to change the system of promoting the generation of electricity from renewable energy sources.
This included the introduction of competitive auctions for wind projects, to drive down the cost of wind farms and cap annual onshore wind installations at 2.8GW annually from this year, and 2.9GW from 2020 onwards.
These acts have drawn criticism from the German wind industry.
The first two onshore wind auctions showed the dominance of community-based groups, which the government aims to support in this year’s auctions, including the one scheduled for November. The government has applied special rules for these groups and their so-called “citizens’ parks”. For example, they don’t need a construction permit when they bid, unlike other developers.
But this has been undermining confidence of wind companies and posing issues on projecting how the wind sector would grow in the next few years. At the Husum wind conference, which took place in Northern Germany last week, the German wind association BWE blamed the government as these laws could curtail the growth of the wind sector. BWE refused to comment for this article.
So will the new government change tack on wind? Possibly.
At present, one of the most likely outcomes from the vote on 24 September is that Germany will have the same coalition. This would mean maintaining the situation in place since 2013, extending the past four years of government’s policies.
But it is not the only option. For example, Pedersen argues that a ‘black-yellow’ coalition between Merkel’s CDU (the black) and the Free Democratic Party (the yellow) is a possibility. This would be significant as the FDP’s manifesto calls for an end to all subsidies for renewables and green energy targets in general, and the abolition of the Renewable Energy Act. That would be bad news.
Whatever the outcome of the election, Pedersen argues that 2018 is going to be a challenging transitional year for wind energy. He is however confident that the sector will catch up again in 2019, as community-based groups are set to start delivering the facilities from this year’s onshore auctions.
From our side, we see reasons to be positive. Yes, Germany is adapting to lower installation levels as the government reins in subsides, which will mean some short-term pain. However, it will remain a huge market with a population that is committed to green energy – often moreso than their leaders.
The UK government has published the results of the second Contracts for Difference auction.
The UK government has published the results of the second Contracts for Difference auction, for which only offshore wind, dedicated biomass and advanced conversion technologies were eligible to enter, and the results for offshore wind are astonishing, with 3 gigawatts - enough to power over 3million homes - securing contracts.
Two of the winning projects, Hornsea 2 and Moray Firth, will be delivered at a price of £57.50/MWh, which is far below even the most bullish of industry predictions. A project where the first phase completes earlier, Triton Knoll, will cost £74.75/ MWh. Most industry observers had been expecting pricing in the range £65-£70/MWh, a price that would only recently have been considered impossible to achieve.
Indeed, these prices are half of those in the previous CfD auction in 2015 and far below the ‘FID [financial investment decision] enabling' CfDs negotiated bilaterally with a number of offshore wind projects.
For many years, the energy market has wrestled with the ‘trilemma’: security of supply, decarbonisation, and affordability. Offshore wind is currently delivering all three.
We have the following observations about these results:
Correctly-focused government policy works
The UK can be rightly proud of its track record in offshore wind, having delivered over 5GW of operational capacity, and is a world leader. The industry has secured millions in investment into ports and operational facilities, usually in places much in need of regeneration. Whilst Brexit will create many challenges for all industries, offshore wind is likely to be considered a ‘flagship’ activity for the country.
The Government, as well as key stakeholders such as The Crown Estate, has nurtured the industry well: providing sufficient subsidy to allow its development and given it a clear challenge to reduce costs with the promise of further support as those costs reduce. It is clear that this strategy has worked.
Financing will get ever more challenging
Offshore wind has become one of the most financeable infrastructure classes in the world. Recent project financings in the UK, such as Beatrice, Galloper and Race Bank, have all been highly-subscribed at low interest rates.
Equity returns have also been driven well into single figures, driven by the attractive ticket sizes, volume and visibility of deal flow, investment grade counterparties constructing and operating the assets, revenue stabilisation through the CfD mechanism and the emergence of direct investment from institutional investors
However, these projects all had much higher revenues from their support mechanisms. Reduced CfD strike prices mean lower cash to service debt and a greater impact of cost overruns. Many of the projects will have assumed the availability of larger, cheaper turbines, lower operations and maintenance costs and greater levels of generation. This may mean that banks looks to increase margins if they perceive these as over-optimistic cost reductions.
Onshore wind could deliver even cheaper prices
The strike prices of Moray Firth and Hornsea 2 reflect a number of factors: lower financing costs, greater scale, more mature supply chain and a strategic desire from the developers. Offshore wind is cheaper than any other form of energy available now, even accounting for additional reserve power or energy storage for when the wind is low.
Since 2015 when the UK Government announced its plan to change planning policy to deter development of onshore wind in England and remove all subsidy via the closure of the Renewables Obligation, we have seen nearly 4GW of projects enter into planning in either Scotland, Wales or Northern Ireland. At present the build out of these projects is being hampered by the organic and unstructured development of corporate power purchase agreements (PPAs) and lack of policy support from government.
The onshore wind industry provides the UK government with a unique opportunity, unlike conventional technologies or nuclear to also deliver significant generation capacity, quickly on to the grid whilst also meeting the three principles of the energy trilemma set out above; decarbonisation, security of supply and low cost power.
To exploit this opportunity and encourage the onshore wind industry alongside its offshore sibling to help address the increasing concerns around UK generation capacity the UK government should also provide a CfD to onshore.
As my colleague Dane Wilkins, head of energy and infrastructure at JLL, put it: “Onshore wind at a strike price of £50/MWh or potentially even lower could be the silver bullet government is desperately seeking as UK capacity margins fall further, policy makers should seriously consider this alongside the attraction of lower prices for consumer and UK industry rather than protecting Nimbyism.”
We will keep a close eye on the Conservative Party conference next month (1-4 October) for any indication that it is changing policy.
What a whirlwind week. From the moment the results of the UK’s second Contracts for Difference auction came in out 7am on Monday, it looked set to be a big one, and so it has proved.
These results showed that the next generation of wind farms in UK waters could be built at strike prices as low as £57.50/MWh. From the Financial Times to Sky News, offshore wind has been everywhere – as has RenewableUK’s Emma Pinchbeck!
Now The Telegraph is also saying that offshore wind must be“assiduously nurtured, and expanded where compatible with marine ecosystems”. This is the closest I have been to my student days writing for the university music ‘paper, when a band I liked for ages suddenly became huge: “Well, of course, I was a fan of offshore wind farms before it went mainstream. Horns Rev 2, Thanet… yeah, the early stuff.” Hell, even the Daily Mail’s headline ‘More monster wind farms are set to set to loom over Britain’s coast but power will cost 40% less than Hinkley’ sounds a bit positive.
Now we must look at the questions that arise from these results, and what they mean for the UK Government’s attitude to offshore wind, onshore wind and nuclear.
First, offshore wind. It is well-known that these strike prices for offshore wind are half the level as in the first CfD auction two years ago (£119/MWh). If UK politicians want to capitalise on this success then they must heed the call of WindEurope to give the sector more certainty over the level of installations that can be expected after 2020. It must do this now if businesses are to plan and make this a Brexit success story.
This need for certainty is not just just a UK issue, of course. Other European nations need to provide it too, if the offshore wind sector is to make good on global ambitions in Europe, the US and Asia.
But we do have some concern about the auction result. Specifically, we are concerned that developers and other firms are expecting manufacturers including MHI Vestas, Siemens Gamesa and Geneal Electric to make most of the running on offshore cost reductions by continually building bigger and more efficient machines. That is vital, but firms must find savings through the project life cycle.
Second, onshore wind. The fact offshore wind now looks cheap should force the UK Government to ask serious questions about whether it should back wind farms on land that are even cheaper. We forecast at the start of the year that the UK would “soften its anti-wind stance” in 2017, and this could be a catalyst for that.
But others aren’t so convinced. I started a discussion on LinkedIn on Monday – if you are on there, get in touch – and the feeling from respondents including Vattenfall’s David Flood, Inflection Point’s Gordon Edge and Mott MacDonald’s Gary Bills is that UK leaders might be reticent about picking a fight with those in the English shires by promoting onshore wind farms. It has a lot of battles underway with Brexit talks, and so might prefer to ‘do’ renewables offshore without incurring the wrath of Nimbys.
And third, nuclear. These auction results have highlighted the folly of Prime Minister Theresa May’s decision last year to approve the Hinkley Point C project, which was always set to produce electricity far more expensively than renewables could.
We forecast a couple of weeks ago that the CfD results would “hammer a nail in the coffin” of this development.
Does that mean a change is imminent? Probably not. As with our argument about onshore wind, we do not think the government will scrap Hinkley right now as it would be one more fight to pick. It would also put the idea in the minds of overseas investors that the UK Government could not be trusted to honour its commitment, which is not the message it wants to promote post-Brexit.
This is all up for debate, though. What is certain is that this week offshore wind has made a strong case that wind, and renewables more widely, can play an important part in the energy mix of the UK and other nations too. There are still questions in areas like storage, but the sector has proved its doubters wrong before.
Our hearty congratulations to everyone, both in the UK and outside it, who has got the sector this far. It is nothing short of inspirational.
Monday the 11th of September 2017 is set to go down as one of the key dates in the development of renewables in Great Britain.
Monday the 11th of September 2017 is set to go down as one of the key dates in the development of renewables in Great Britain. The results of the auction round announced shortly after 7am led to a collective dropping of jaws onto the floor that could probably be heard in Antarctica.
I can take some pride in the fact that I called the result in terms of all three bidding offshore projects getting contracts, and the collective capacity of those, but I was way off on the strike prices set for Hornsea 2 and Moray. Here are some reflections on the results, having had a few days to meditate on them.
Full Steam Ahead
Clearly the big winner out of the round is offshore wind in general. It can now claim not only to be (massively) cheaper than Hinkley Point C, but it is now competitive with new gas plant, not something I thought I would be saying for a good few years yet.
With strike prices of £57.50/MWh, the levelised cost of energy (LCOE) is down to about £50/MWh, which is comparable with current forecasts of wholesale power price (though I am personally thoroughly suspicious of such forecasts).
This seals offshore’s place in UK energy policy. It already had political backing due to its scale and economic development potential, but now it must surely be untouchable. Ministers will be happy that they have an unarguable success story to point to, and they will not be minded to kill this particular goose as soon as it starts laying golden eggs. One can expect a certain amount of doubling-down on the technology, with Amber Rudd’s cautious ’10 GW in the 2020s’ line when she was Secretary of State for the now-disbanded Department of Energy & Climate Change very probably up for a rewrite. At these prices, why would Government limit the technology like that?
Mind The Gap
There are a number of features of the results which are artefacts of the design of the auction. It’s interesting to look at these and learn lessons for future rounds.
The staff at Innogy and Statkraft must be in line for a large bonus as they played a blinder with their bidding strategy for Triton Knoll. They must have bid lower (probably much lower) than the £74.75/MWh that they received, but benefitted from the pay-as-clear nature of the auction, with the successful fuelled technology projects pulling them up into the £70s. In a similar vein, it’s worth noting that one of the two projects receiving £57.50/MWh must have bid an even lower price. Which project that was is probably indicated by the immediate final investment decision for Hornsea 2. No problem for Dong to meet its milestone delivery date there.
The aspect of the results that really caught my eye was the overall budget usage. At the maximum, the 3.35GW of projects took only £176m of budget – only 60% of what was available. The low bids by offshore wind left plenty of room for the fuelled tech to get in up to the 150MW maximum they were allowed – though if they had bid too high then the act of pulling up the much larger offshore capacity to their clearing price could have broken the budget.
Conversely, since the fuelled projects were not allowed to be pulled up to the clearing price of offshore, spare a thought for the people behind the Redruth energy-from-waste project, who bid £40/MWh in 2022/23, the sole fuelled project to clear in that year. I expect that this is an instance of Brearley’s Law, which states that in every auction there is at least one stupid bid. Like the solar projects that bid £50/MWh in CfD auction round one, the likelihood is that this contract will not be signed.
The question then remains as to why there was that £120m left on the table. With fuelled technologies limited to only 150MW of capacity, and the three offshore projects bidding low, that only left marine and geothermal as bidders. The latter isn’t yet credible, which leaves marine, and in particular Atlantis with their Meygen Ic project. A statement from the company indicates that they bid a price of about £100/MWh. There was enough budget to support a 74MW tidal project at a strike price of £100/MWh – this is only about £10m of budget draw on its own. However, there clearly wasn’t budget to pay everyone in that year £100/MWh, and therefore Atlantis lost out due to the pay-as-clear nature of the auction.
The low budget usage also highlights the impact of the exponential affordability of capacity as strike prices approach reference prices – as the difference tends towards zero, the affordable capacity tends towards infinity. In particular, for the £57.50/MWh projects, in 2024/25 they would have been drawing just over £5/MWh, allowing huge capacity for very little budget draw, and in that year the total draw was only £150m.
At A Junction
Having had this success for offshore wind, the question arises as to what it does to the calculus around future policy. The £730m budget pledged for auctions by Government in late 2015 will now stretch further than originally envisaged. A lot further.
Far from the 4GW that was expected from this budget, one is looking at perhaps 15GW being affordable, with the remaining budget £570m (in 2012£) stretching to at least 10GW of additional capacity and probably more. This gives rise to my feeling that Government will go further than the ‘10GW in the 2020s’ line: by just spreading the already committed budget more thinly over more years, then objectives for the next decade can be met and exceeded. There is a residual risk that Government takes some of the budget back, saying it is now not necessary to meet its objectives for offshore wind. But why hit investor confidence in this way when, for no additional budget negotiation with Treasury, you can over-achieve on your ambition? I think the industry can rest easy that the business will flow for the next decade at least.
Where the news is bad is for virtually all the other renewable technologies. For onshore wind and ground-mounted solar, the risk is increased that Pot 1 auctions will be kicked further down the road.
Given the low prices for offshore wind, the financial cost of excluding these cheaper technologies is relatively small, and certainly will look small in comparison to the high political cost of supporting them. Why do a politically difficult thing, when you can do a politically easy thing instead at not much extra cost? Given the current parliamentary arithmetic and the all-consuming political morass that is Brexit, the notion of a Conservative minister standing up and intensely annoying 50-100 of his or her own backbenchers seems somewhat fanciful.I believe the power industry overall has to come up with its own solution that allows customers to get access to the cheapest renewables – and which is larger than the niches of corporate PPAs or merchant development – because it seems unlikely that Government will do it for us.
For the higher cost, newer technologies, there are also dangers, but possibly the success of offshore wind might open some political space for them. There have already been calls to forget new nuclear or tidal lagoons because of the cheapness of offshore. Given the political environment of Brexit and ongoing austerity, these calls might be heeded, and it will certainly need the expenditure of political capital to get support for the next-generation of low-carbon technology. With vocal support in Scotland for tidal stream and wave, and Wales for tidal lagoon, this is not impossible, and the success of offshore wind might tempt Government ministers to try and repeat the trick with technologies where the UK can corner the industrial opportunity.
In my view, these technologies should highlight the system benefits of having a diversified portfolio of variable renewables. While storage is a great match for wind and solar, it does have round trip losses and costs money – it is generally better to use electricity when it is generated, and having a diverse renewable portfolio increases the chances of this as it smoothes out the power production from the fleet overall.
Journey’s End
Clearly the result of the second CfD auction round is an important milestone in the decarbonisation journey, but it by no means the end. This is a marathon and not a sprint, and perseverance is necessary. This has paid off for offshore wind, but there is more to do for the other technologies that we are also going to need.
As the saying goes, it is better to travel hopefully than arrive. Here’s to the next stop on the ride.
Wind Watch
By Richard Heap
What a whirlwind week. From the moment the results of the UK’s second Contracts for Difference auction came in out 7am on Monday, it looked set to be a big one, and so it has proved.
These results showed that the next generation of wind farms in UK waters could be built at strike prices as low as £57.50/MWh. From the Financial Times to Sky News, offshore wind has been everywhere – as has RenewableUK’s Emma Pinchbeck!
Now The Telegraph is also saying that offshore wind must be “assiduously nurtured, and expanded where compatible with marine ecosystems”. This is the closest I have been to my student days writing for the university music ‘paper, when a band I liked for ages suddenly became huge: “Well, of course, I was a fan of offshore wind farms before it went mainstream. Horns Rev 2, Thanet… yeah, the early stuff.” Hell, even the Daily Mail’s headline ‘More monster wind farms are set to set to loom over Britain’s coast but power will cost 40% less than Hinkley’ sounds a bit positive.
Now we must look at the questions that arise from these results, and what they mean for the UK Government’s attitude to offshore wind, onshore wind and nuclear.
First, offshore wind. It is well-known that these strike prices for offshore wind are half the level as in the first CfD auction two years ago (£119/MWh). If UK politicians want to capitalise on this success then they must heed the call of WindEurope to give the sector more certainty over the level of installations that can be expected after 2020. It must do this now if businesses are to plan and make this a Brexit success story.
This need for certainty is not just just a UK issue, of course. Other European nations need to provide it too, if the offshore wind sector is to make good on global ambitions in Europe, the US and Asia.
But we do have some concern about the auction result. Specifically, we are concerned that developers and other firms are expecting manufacturers including MHI Vestas, Siemens Gamesa and Geneal Electric to make most of the running on offshore cost reductions by continually building bigger and more efficient machines. That is vital, but firms must find savings through the project life cycle.
Second, onshore wind. The fact offshore wind now looks cheap should force the UK Government to ask serious questions about whether it should back wind farms on land that are even cheaper. We forecast at the start of the year that the UK would “soften its anti-wind stance” in 2017, and this could be a catalyst for that.
But others aren’t so convinced. I started a discussion on LinkedIn on Monday – if you are on there, get in touch – and the feeling from respondents including Vattenfall’s David Flood, Inflection Point’s Gordon Edge and Mott MacDonald’s Gary Bills is that UK leaders might be reticent about picking a fight with those in the English shires by promoting onshore wind farms. It has a lot of battles underway with Brexit talks, and so might prefer to ‘do’ renewables offshore without incurring the wrath of Nimbys.
And third, nuclear. These auction results have highlighted the folly of Prime Minister Theresa May’s decision last year to approve the Hinkley Point C project, which was always set to produce electricity far more expensively than renewables could.
We forecast a couple of weeks ago that the CfD results would “hammer a nail in the coffin” of this development.
Does that mean a change is imminent? Probably not. As with our argument about onshore wind, we do not think the government will scrap Hinkley right now as it would be one more fight to pick. It would also put the idea in the minds of overseas investors that the UK Government could not be trusted to honour its commitment, which is not the message it wants to promote post-Brexit.
This is all up for debate, though. What is certain is that this week offshore wind has made a strong case that wind, and renewables more widely, can play an important part in the energy mix of the UK and other nations too. There are still questions in areas like storage, but the sector has proved its doubters wrong before.
Our hearty congratulations to everyone, both in the UK and outside it, who has got the sector this far. It is nothing short of inspirational.
Wind Watch
Wind Watch is published every Monday and Friday.
In the meantime, have you checked out the latest posts on our blog? If not, you should. This is where we put the analysis that we can't fit in our newsletters and special reports.
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Wind firms commit to $180bn Hurricane Harvey rebuild
By Ilaria Valtimora
North America has been hit by three hurricanes in recent weeks: Harvey, Irma and Jose. Our thoughts are with the people affected by these disasters.
Irma and Jose still represent threats to the east coast of the US, while the state of Texas, which was hit by Hurricane Harvey at the end of August, is now starting to deal with the aftermath. The cost of repairing homes, roads and businesses has been estimated by the Texas government to be up to $180bn.
And the wind industry is not immune from the effects. With over 21GW of installed wind capacity and a pipeline of 7GW of wind projects in advanced development or being built, Texas is the largest state in the US in terms of installed capacity. Wind in Texas has attracted over $38bn in capital investments and there are more than 40 wind manufacturing facilities are located within its state...
Wind firms commit to $180bn Hurricane Harvey rebuild
North America has been hit by three hurricanes in recent weeks: Harvey, Irma and Jose. Our thoughts are with the people affected by these disasters.
Irma and Jose still represent threats to the east coast of the US, while the state of Texas, which was hit by Hurricane Harvey at the end of August, is now starting to deal with the aftermath. The cost of repairing homes, roads and businesses has been estimated by the Texas government to be up to $180bn.
And the wind industry is not immune from the effects. With over 21GW of installed wind capacity and a pipeline of 7GW of wind projects in advanced development or being built, Texas is the largest state in the US in terms of installed capacity. Wind in Texas has attracted over $38bn in capital investments and there are more than 40 wind manufacturing facilities are located within its state borders.
This means several wind farms were caught in the trajectory of the hurricane, though have come through without reporting severe damage. Among these, Avangrid’s 404MW Penascal wind farm, Duke Energy’s Los Vientos 1 & 2 schemes totalling 400MW, and E.ON’s 380MW Papalote Creek wind farm were among the biggest schemes affected.
Even so, this shows how wind is deeply embedded in these communities, from helping homeowners and businesses to keep the lights on to supporting thousands of jobs.
It is, therefore, only natural that the wind industry is now set to rally round to help the country in its rebuilding effort.
This week, the American Wind Association and a host of major wind companies have joined charity Habitat for Humanity and its initiative to rebuild the state, with a donation of $1m. The funds will be used to support repairs and rebuilding efforts in the areas affected by the storm.
The companies also plan to send volunteers who will help the rebuilding effort where needed. Wind companies participating to the initiative include EDF Renewable Energy, EDP Renewables, Enel Green Power, E.On, Goldwind Americas, Invenergy, Lincoln Clean Energy and Pattern Energy.
It should go without saying that we think this is a great initiative.
Working in wind should not just be about using land within a state to build green projects, but being an active part of the community. It is not just about helping communities to avoid the worst impacts of climate change, but helping them cope with the natural disasters that are already being worsened by climate change.
We look forward to hearing more about the results in due course.
North America has been hit by three hurricanes in recent weeks: Harvey, Irma and Jose. Our thoughts are with the people affected by these disasters.
North America has been hit by three hurricanes in recent weeks: Harvey, Irma and Jose. Our thoughts are with the people affected by these disasters.
Irma and Jose still represent threats to the east coast of the US, while the state of Texas, which was hit by Hurricane Harvey at the end of August, is now starting to deal with the aftermath. The cost of repairing homes, roads and businesses has been estimated by the Texas government to be up to $180bn.
And the wind industry is not immune from the effects. With over 21GW of installed wind capacity and a pipeline of 7GW of wind projects in advanced development or being built, Texas is the largest state in the US in terms of installed capacity. Wind in Texas has attracted over $38bn in capital investments and there are more than 40 wind manufacturing facilities are located within its state borders.
This means several wind farms were caught in the trajectory of the hurricane, though have come through without reporting severe damage. Among these, Avangrid’s 404MW Penascal wind farm, Duke Energy’s Los Vientos 1 & 2 schemes totalling 400MW, and E.ON’s 380MW Papalote Creek wind farm were among the biggest schemes affected.
Even so, this shows how wind is deeply embedded in these communities, from helping homeowners and businesses to keep the lights on to supporting thousands of jobs.
It is, therefore, only natural that the wind industry is now set to rally round to help the country in its rebuilding effort.
This week, the American Wind Association and a host of major wind companies have joined charity Habitat for Humanity and its initiative to rebuild the state, with a donation of $1m. The funds will be used to support repairs and rebuilding efforts in the areas affected by the storm.
The companies also plan to send volunteers who will help the rebuilding effort where needed. Wind companies participating to the initiative include EDF Renewable Energy, EDP Renewables, Enel Green Power, E.On, Goldwind Americas, Invenergy, Lincoln Clean Energy and Pattern Energy.
It should go without saying that we think this is a great initiative.
Working in wind should not just be about using land within a state to build green projects, but being an active part of the community. It is not just about helping communities to avoid the worst impacts of climate change, but helping them cope with the natural disasters that are already being worsened by climate change.
We look forward to hearing more about the results in due course.
Do you want the good news or the bad news first? Well, on the basis of this study, 75% of people would prefer to get the bad news out of the way, so let’s do that.
Energy advisory DNV GL last week published its ‘Energy Transition Outlook’ report for 2017, with predictions about how the global energy market could develop in the years up to 2050. It said that even with major growth in renewables, the world would fail to keep global warming well below 2 degrees Celsius by the end of this century, as compared to temperatures before the industrial revolution. That is the bad news.
We have seen again in the last two weeks what this means in practice, from havoc wrought by hurricanes in North America to the devastating floods in South Asia. Our thoughts are with readers – and others – who have been affected by those disasters.
That said, the wind sector is full of people working hard to try to limit those rises and, for them, there is a lot of good news in the DNV GL report too. By 2050, it said there would be far more demand for electricity than there is currently, and that wind would be able to provide a far greater proportion of that electricity than now. Essentially, it means that the wind sector would take a larger slice of what would be a larger pie.
But that’s pretty vague, so let’s pin it down to some dates and figures. DNV GL has forecast that global energy demand will plateau after 2030 even though the world’s population keeps growing. This is because people can use energy more efficiently.
Despite this, it also forecast that electricity consumption would increase 140% over the next 33 years to become the single biggest energy source, followed by gas. This means that electricity would produce nearly half (48%) of total global energy requirements by 2050, which is two-and-a-half times higher than its current 19%.
So why would electricity demand grow as overall energy demand plateaus? Simply, as a response to political targets to cut emissions as set out in the Paris agreement, and emerging trends including growing demand for electricity vehicles. DNV GL said that rapid take-up of electric vehicles from 2033 would increase electricity demand at the expense of conventional fossil fuels. And renewables will benefit from that shift.
In this model, wind would produce 36% of the world’s total electricity need by 2050 – split roughly 2:1 between onshore and offshore – and solar would also produce 36%. It also means that wind farms would produce around 13% of the world’s energy need even when factoring in fossil fuels, including coal and gas. It is 0.45% now. So bigger pie, bigger slice – and a lot more wind farms to be financed, built and operated.
This is just one piece of research, of course – albeit a large one at 230 pages. If you wanted to then you could no doubt find a host of reports with different conclusions.
After all, DNV GL has had to make a host of big assumptions to support its findings. These include the falling cost of wind technology; continued political support, even if not via subsidies; the development of storage as an answer to grid instability; rising public appetite for electric vehicles; a quintupling of power investments from current levels; and the fact that it cannot know what other new energy innovations may come along in the next 33 years. Real life will no doubt play out differently from this model.
But we like the fact that, amid all the bad news in the world, we can find studies that make a strong case that wind could become a dominant player in the global energy mix. Deadly storms may scare and depress us, but goals like this can keep us going.
Next month, Argentina is to hold an auction for support for 2.2GW of renewables projects. Is it time for wind firms to capitalise on the potential of the South American nation?
The nation has plenty of catching up to do. Argentina is only the fifth-largest country in the region by installed wind capacity, with 279MW, though developers could complete an extra 1.4GW by the end of 2019. And its wind potential is even greater than that.
Currently, the Argentinian power landscape is dominated by fossil fuels, which represent 87% of the total energy mix.
However, according to estimates by the Global Wind Energy Council, around 70% of the country is suitable for wind farms. The best wind sites are in the south, in central and southern Patagonia, and have not been exploited due to the high-risk economic and political environment, which has deterred investors.
Three years ago Argentina, under the leadership of then-president Cristina Fernandez, was hit by the default of its sovereign bonds for the second time in 13 years. This brought weak growth in 2015 and recession in 2016, with the economy contracting by 2.3% and inflation reaching 40%. She was replaced as president in late 2015 by Mauricio Macri, who has settled legal disputes with creditors and opened the country again to global debt markets.
In Macri’s plan to spark economic growth and attract investments, renewable energy plays an important role. His government wants the country to produce 8% of its electricity from renewables by the end of 2017, with this percentage rising to 20% by 2025.
The country though, is far away from its 2017 target, with just 2% of its electricity produced by renewables to date. And this despite government's support.
Indeed, Macri’s government has brought in laws to support renewables, including RenovAr renewable energy tendering programme, which kicked off last year. Argentina held its first RenovAr tender last October 2016 and a further tender, RenovAr 1.5, last November. The two auctions awarded financial support for 59 renewables projects totalling 2.4GW. Of this, 1.4GW is represented by wind, distributed among 22 projects.
The country is now looking to do more, with a RenovAr 2 auction announced last month and will be held in October, with a further 2.1GW of capacity to be auctioned, of which 550MW is set to be represented by wind.
The government is also looking to issue guidelines to enable renewable energy producers to reach private power purchase agreements with consumers. Currently, state-controlled electricity company Cammesa is the only customer of the wholesale electricity market in the country, but the new guidelines are set to allow large power users to negotiate PPAs directly with renewable energy generators.
According to energy minister Juan José Aranguren, this would enable up to $6bn of investments to flow in the country by 2020 and lead to the installation of renewables projects with total headline capacity of 4GW.
Finally, the government is also looking to extend an import tax exemption on all renewable generation equipment beyond the end of this year, to enable projects that are currently being built to reach their conclusion. This will give confidence to existing investors, and is a sign that Argentina is looking to gain the confidence of investors after its chequered past.
But is it enough? The country still faces some key challenges.
First, investments in transmission lines are needed to support the expansion of generation capacity. The existent transmission capacity is just enough to support the projects awarded in the two tenders last year, but will struggle with future rounds. In particular, grid links in areas with good wind resources are limited or – in some cases – inexistent.
Second, the high cost of debt in Argentina, as well as the low availability of foreign capital, make it difficult for project developers to secure the financial backing they need.
On the latter point, Macri’s policies are helping. Growth is projected to rebound this year and next: the OECD expects GDP to reach 2.5% this year and 3% in 2018 after these reforms, and inflation has fallen to around 20%, from last year’s 40%.
Finally, the government has initiated negotiations to improve the country’s credit rating and Argentina is for the first time really out of danger of default. It will be a long road to build the country’s international standing with investors, but the process is underway.
Wind Watch
Wind Watch is published every Monday and Friday.
In the meantime, let's look ahead to some key dates for the rest of this year. It is going to be a busy one.
Tomorrow, we are set to host our Q3 Quarterly Drinks at The Anthologist and will be in conversation with Olivia Breese, Head of Business Development at DONG Energy Wind Power.
And that is not all! Before the year ends, we have other two events for you. On 9th November, we are set to hold our sixth Financing Wind conference in London; and on 16th November we will be back with our Q4 Quarterly Drinks at Swiss Re's City HQ.
That is in addition to two special reports. On 10th October, we are due to publish our Finance Quarterly Q4, the second edition of our new series of data-packed reports; and on 14th November we will publish our sixth annual Top 100 Power People report, a definitive guide to the people that matter in wind.
So get ready for a busy four months. We are!
Is there change in the air? Since the mid-1970s, a group of dedicated pioneers have been working on plans for airborne wind turbines. This has accelerated in the last ten years as companies have looked at how they can use it to take wind into new areas.
Even so, we are still a long way from a flying turbine project getting off the ground.
One of the first companies to bet on the success of airborne turbines was Makani. Corwin Hardham, Don Montagu and Saul Griffith founded the business in 2006 to develop robot kites, which can harness wind power through turbines mounted on an airborne drone flying in circles and transmitting electricity to the ground via a tether.
The idea is that the kite would generate electricity by reaching higher altitudes than conventional wind turbines, while eliminating 90% of the materials used to build one. This would simplify transportation and system start-up time, and cut material costs.
The project caught the attention of Google, which invested $10m in the company in 2006 and another $5m in 2008, before acquiring it in 2013. It wanted to make the project commercially viable through the collaboration with Google’s research-and-development lab X. In 2014, the project made up 10% of the X budget.
Another flying turbines pioneer is Altaeros, which was founded in 2010 and launched its Buoyant Airborne Turbine system in 2014. The BAT is a doughnut-shaped helium balloon with a wind turbine in it. The project received support from Japan’s SoftBank for $7m for the development and commercialisation of the machine in 2014, and in 2015 secured further backing from Japan’s Mitsubishi Heavy Industries and Oman’s Suhail Bahwan Group. However, the latest we heard is that Altaeros is looking to use its airborne technology to support a rural broadband project called SuperTower.
And utilities E.On and Shell have also been actively investing in airborne turbines. At the end of 2016 they, along with oilfield services company Schlumberger, invested €6m, to support the commercial development of its technology. This April, E.On also signed an agreement Dutch company Ampyx Power to collaborate on a project to use its fixed-wing airborne wind systems for deployment in utility-scale wind farms.
But, at present, we see little indication of the turbines reaching commercial maturity.
In the conventional turbine sector, costs keep falling quickly as manufacturers fight to make their machines cheaper and more efficient. This is competition for the airborne turbine makers as developers and investors play it safe with conventional systems.
Likewise, these manufacturers are innovating so their clients can build wind farms in new areas, which makes it hard for new tech to break through.
Let’s look at Makani. Its robot kite is reportedly making progress: it made its first test flight last year, and more flights have followed. However, after over ten years from the launch of the company, the kite has not supplied a single kilowatt to a utility.
This is taking its toll. Bloomberg has reported that support from Google has recently diminished and Makani staff numbers have fallen from over 100 to below 50 in the past two years.
Airborne wind technologies do have some potential advantages, which include lower costs for materials and reaching high altitudes, where wind is more stable. But they also involve new challenges that developers and investors need to face, like getting site approval for schemes that are more likely to interfere with planes. That is tough.
Wind farms are increasingly attractive for investors because they represent low risk, high profit investments. The use of new technologies would influence either risk or profitability, or both, at least at the beginning.
Companies should still try. New systems could allow wind power to reach new areas and use winds more efficiently. At very least, the turbines could be beneficial in ways we have not yet imagined. That requires imagination and confidence – from both the pioneering manufacturers and their financial backers.
Germany’s wind turbine makers were already braced for a tough few years.
In 2016, the German government brought in rules to cap annual onshore installations at 2.8GW a year from this year. That would be way down on the 4.2GW installed each year on average in the last five years and, in real terms, that means less turbine orders.
At the same time, the government has moved to a system of competitive auctions to drive down the cost of wind farms. That means manufacturers also face lower profit margins on the orders they do win. This exposure to Germany is a key reason firms like Siemens, Nordex and Senvion are cutting jobs and restructuring. Businesses have braced themselves, but the reality may be worse than they expect.
Last month, Germany held its second onshore wind auction. Its federal grid agency, Bundesnetzagentur, received bids for support from developers of 281 projects with total capacity of 2.9GW, and awarded support for 67 of them, totalling 1GW, at strike prices averaging €42.80/MWh. This is lower than the €57.10/MWh average strike for 70 projects totalling 807MW awarded in May. In total, 1.8GW has been tendered so far, with a third onshore wind auction for projects totalling 1GW due in November.
The government is making good on its 2.8GW promise. The problem is the results of the first auctions will not give Germany’s turbine makers much confidence that this 2.8GW awarded will lead to that many turbine orders. There are still projects due to be installed that were approved in previous years, which may keep installed capacity higher than the capped level for the next two years, but they will only go so far.
The reason for this concern is the dominance in these auctions of community-based groups, which picked up 96% of the planned capacity in the first auction – or 65 out of 70 projects – and 95% in the second auction. This is a result of the way the system has been designed to offer favourable terms to community-based groups.
For example, these rules do not require these groups to have a development permit in place for a scheme before they submit it into the auction, unlike other developers. These groups are able to win support and then have 54 months – or four-and-a-half years – to secure that permit. Many will not need turbines for some time.
The German government is set to change the rule for two auctions planned in 2018, so that bidders must have a construction permit before they bid, and future auctions will be shaped by whichever government is in place after the elections on 24th September. But this does not fix the decline currently facing turbine makers.
This is not the fault of the community-owned bidders. They are key players in Germany and are simply working with the system that exists. One bidder, Umweltgerechte Buergerenergie, won 42 of the 67 projects in the most recent auction, and 37 of its projects are community-owned.
We can also see the logic of trying to get local communities more involved in sharing the financial benefits of wind farms. It has been shown that this makes it more likely that they will support the project – no surprise there – and the wind sector generally.
However, turbine makers need confidence that government policies will do what they promise: bring competition and certainty to the wind sector. If community groups are unable to take their ideas for schemes through to completion, then rival developers and turbine makers will be right to ask serious questions about this policy failure. We are all for competition, but 96% and 95% show a system that is one-sided.
The troubled introduction of auctions in the German solar sector in 2015 showed that rolling out a similar system for wind would not be easy, but it may be even tougher than those in wind expected. This is another headache for the turbine makers that are already dealing with job cuts and restructuring after their M&A deals.
We knew the construction party from the last few years was coming to an end. Now we need to find out about the hangover.
Wind Watch
Wind Watch is published every Monday and Friday.
In the meantime, have you checked out the latest posts on our blog? If not, you should. This is where we put the analysis that we can't fit in our newsletters and special reports, as well as articles from industry thought leaders.
If you have an idea for a piece about the business side of the wind industry that you would like us to feature, please get in touch.
Here is a taste of the post written by Watson Farley & Williams partner Rebecca Williams.
Legal case news: Take care when allocating design risk
By Rebecca Williams, partner, Watson Farley & Williams
This month, the UK’s Supreme Court has given its verdict in the construction dispute involving MT Højgaard and E.On Climate & Renewables regarding the 174MW offshore wind farm Robin Rigg. This case shows why firms should take care when allocating design risk under construction contracts.
The Case
E.On employed Danish engineering group MT Højgaard to design and build foundations for the Robin Rigg offshore wind farm, agreeing to base the design upon international design standard J101. However, an error within J101 resulted in a design that substantially overestimated the foundations’ strength. The foundations began to fail shortly after completion, and a dispute arose as to who was liable for the cost of remedying the defect.
The Court addressed whether MTH had breached a contractual provision of...
Justin Trudeau is Canada’s pop star prime minister. Journalists have spent two years fawning over him since he was elected in November 2015. Last month, he was even on the cover of US music magazine Rolling Stone.
But now it’s time to judge him on his results and, when it comes to renewables, this pop star's performance so far has been off-key.
Canada is the world’s second largest nation but, with most of the country unsuitable for habitation, it averages only four people per square kilometre. The low population density and abundance of resources have put it in the top 25 of the world's greenest nations: 59% of Canadian electricity comes from hydro, 5% from other renewables, and 16% from nuclear.
Canada ended 2016 with 12GW of installed wind farms, adding just 702MW in the year. This continued the slowdown from the 2GW of wind farms installed in 2014 and 1.5GW in 2015.
New investments in renewables were not impressive either. Investments in Canadian clean energy tumbled by 46% for a second consecutive year in 2016 to $2.4bn. This is the lowest level since 2005 – which includes the period from 2006 to 2015 when its prime minister was Stephen Harper, a climate change denier.
So what has Trudeau done? His election was welcomed by green bodies for his renewables-focused power strategy and his aim to mitigate climate change. The Canadian Wind Energy Association said at the time that he would help make Canada a leader in the global shift to a clean energy economy.
After two years, this early enthusiasm is cooling.
For one thing, Trudeau last December approved the expansion of the Kinder Morgan Trans Mountain oil pipeline, linking the oil sands in Alberta to a tanker port in British Columbia. His decision was condemned by environmental groups, but he said that it was a sensible move to boost the economy, which didn’t go against his pledge to encourage renewables.
The government has taken a few steps to fight climate change in the last couple of years. These include the commitment that every province will start pricing carbon emissions in 2018, with the aim to phase out coal power by 2030; as well as the target of generating 90% of Canada’s electricity from “non-emitting sources” by 2030.
That latter figure currently stands at around 80% if you class nuclear as “non-emitting”, and 64% if you don’t. Either way, perhaps there is complacence from government that it would be easy to hit its 2030 target, and so has not pushed support for wind.
The performance of the economy is also a factor. GDP growth of 0.9% and 1.5% in 2015 and 2016 have contributed to a progressive fall in electricity demand, which has made projects look less attractive in the last year. Canada’s Department of Natural Resources only expects electricity demand in Canada to grow at an annual rate of 1% until 2040.
The mix of unambitious commitments and low energy demand have forced Canadian wind developers and investors to seek opportunities outside their national borders.
For example, Canadian renewables group Boralex, in partnership with Gaz Metro, plans to build a 300MW project, called SBx, in Canada's Quebec province, to supply power to the US state of Massachusetts. And Canada's Emera has recently proposed the construction of a 1GW subsea transmission line to link Canada’s Atlantic coast to Massachusetts, so developers of seven wind farms in New Brunswick and Nova Scotia can sell power to the US.
Canadian investors have turned their attention elsewhere too. Pension fund manager PSP Investments last month bought a 10% stake in clean energy firm Pattern Energy, committing to invest a further $500m in projects the company will acquire from its development arm. And earlier this year, Canadian giant Brookfield Asset Management agreed to buy SunEdsion’s yieldcos TerraForm Power and TerraForm Global, in a deal worth $2.5bn.
Until it is more attractive to build in Canada, more of the country’s wind firms will need to look overseas. Trudeau may have star power, but that's not the same as power.
Hidden costs. It sounds so seedy, doesn’t it? Sure, you booked that nice holiday, but what about all those extras? The airport transfers and the tanking exchange rate and the cost of parking at the bloody airport for 11 days… sorry, I think this is getting a little too personal.
But it is safe to say that nobody likes hidden costs, including the politicians making decisions about their countries’ energy policies and consumers who must live with the impacts of those policies. And the ‘hidden costs’ of renewables have come up in a couple of articles I have read this week, and these pieces got me thinking.
The first was an article in the Financial Times that argued that wind farms and other renewables were not as cheap as they claim, due to the hidden cost of balancing the grid to cope with intermittent production. The author argued wind only looked cheap because renewables are given preferential access to sell power to the grid.
His idea is that renewables should be subject to the same rules as those in the fossil fuels sector. Renewables companies should be forced to transmit power to the grid when they are told to, in the quantities they are told to, or should face fines. He said that this would give a better idea of the true cost of renewables.
It is not a bad idea – which is why the wind sector is grappling with how to make it happen, by investing in storage. This would enable wind farm owners to store electricity and deploy it when needed.
He also said that, if that did not happen, the cost of grid balancing should be taken into account when stating the cost of wind energy for consumers. There's no indication of how that could be done accurately – the article highlighted some estimates for the cost that varied wildly – but let’s go along with the idea for the moment.
Fine, make the ‘hidden costs’ of renewables freely available, but only if we do the same for other sectors. Sure, wind farms might add costs for consumers due to grid balancing, but let’s also factor in the hidden cost of cleaning up nuclear waste when determining the price of nuclear; and the cost of the environmental impacts of burning coal. Why not? It would be tough to get accurate figures for any of these, but let’s not pretend that wind is alone in its hidden costs. It is most definitely not.
The second article I thought was relevant was in Forbes, about the ‘hidden environmental costs’ of battery storage that would be needed for wind and solar projects, and electric vehicles. The author argued that environmental harm from batteries with wind farms “may overwhelm any environmental benefits” of wind.
There are two big points. The first is the presence of ‘may’. The environmental cost of batteries may outweigh the benefits of wind farms, but they also may not. It's still speculation.
And the second is that this criticism of the hidden environmental cost of storage is a new front in the battle between those in the wind sector and wind’s critics. Criticisms used to be that wind was too inefficient to make a big contribution to the energy mix, was too expensive, and could only exist with subsidies. Each of these has now been addressed, to some extent at least.
It now seems clear to us that intermittency, ‘hidden costs’ of grid balancing, and damage caused to the environment by batteries are some of the next major arguments to be knocked down. Again, that’s fine. This sector should be as open to scrutiny as any other, but we cannot let critics pretend that the potential environmental damage of batteries means that wind farms pose a unique risk to the environment compared to other power sources. They don’t.
Finally, batteries are only one type of storage, and others are being tested. We need to challenge any idea that harm from batteries is an argument against all storage.
So yes, wind has hidden costs, as do so many things in life – my holiday included. We need to accept them, deal with them, and robustly argue back against the misconceptions that will arise.
Wind Watch
Wind Watch is published every Monday and Friday.
In the meantime, I hope you saw our important announcement last week about our next Quarterly Drinks evening on 7th September. Our friends at Swiss Re are in the midst of creating an exciting new events space and so, for one night only, we will be heading back to our old haunt at The Anthologist on Gresham Street.
If you have already booked your ticket then you don't need to do anything other than make sure you turn up at the correct venue.
We will be down in the basement area.
If you’ve yet to book, please do quickly as we have limited capacity. As well as an evening of networking – including with our headline sponsor Swiss Re Corporate Solutions and supporting partner Papertrail – you will get to hear from Olivia Breese, Head of Business Development at DONG Energy Wind Power.
We look forward to seeing you there. And, if you have questions about this or anything else, please get in touch.
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