Straining the wind supply chain

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… Sperans quis vult audire

Renewable energy and wind is not an exception is a competitive market. Projects are assessed on LCOE (Lowest Cost of Energy) and the go-to-market strategies are more and more often in project discussions. The off-taking of the (produced) electricity is not granted anymore or highly exposed to the merchant market.

The supply chain (SC) management (SCM) is not a stranger to this, exposing its vulnerabilities and risks.

Aside from the increasing industry’s level of competition, we will show a few of them in this post.

Strain 1: The rare-earth elements …

It is well known that wind turbines are classified into two types: fixed speed and variable speed wind turbine.  A variable speed wind turbine provides more energy than the fixed speed wind turbines, reduce power fluctuations and improve reactive power supply. 

In variable speed wind turbine generators, two main technologies are used: i) PMSG (Permanent Magnet Synchronous Generator) and ii) DFIG (Double Fed Induction Generator). 

Many modern turbines use PMSG wind turbines which use few called rare-earth elements and particularly neodymium (Nd), praseodymium (Pr), dysprosium (Dy) and terbium (Tb). These elements are key in the composition of the NdFeB permanent magnets.

These rare-earth elements are found across the globe but concentrated deposits are rare and expensive to separate.  Following price spikes in 2011, there have been few boom, bust and boom again cycles.

While the future demand for high-performing NdFeB magnet and its constituent elements is likely to increase, the future deployment of wind power generation may be affected by potential disruptions in the supply and price rises of critical rare earth elements. However, OEMs are putting already strategies in place to reduce this risk.

The development of new high-efficiency magnets using a limited amount of critical rare earth elements (or none at all) is not only a risk for the wind SC but crucial for the large-scale deployment of wind turbines and also electric vehicles (EVs).

Strain 2: Country strains and the local content …

In order to protect and/or developing country’s industry or simply warrant further supply chain investments, governments are increasingly setting rules to comply with local content requirements (LCRs), meaning that they have to award a proportion of the main contracts to that particular country based companies. This is not limited to emerging markets but also to the more mature (e.g. the UK and offshore) and also for onshore and offshore projects.

Whilst companies are moving their supply chain into more cost-effective countries (as global competitiveness of wind is increasing, and price pressure is mounting on the industry), this removes some degree/s of freedom for the SC management.

On the contrary, it can become an opportunity as well (e.g find & develop new suppliers, cost opportunities due to less transport, avoid import duties or avoid currency fluctuations).

Strain 3: A very-UK strain, the B word…

The UK will leave the European Union on March 29 and so far there is no agreement to replace the rules and regulations that govern vital trade between Britain and the rest of the world.

The potential chances of a hard Brexit have boosted the risk mitigation plans in several wind industry players at different levels and not only the supply chain itself.

For the supply chain, few wind players have reviewed and increased their levels of stocks fearing higher lead times or increased taxes. Another lead has been the peak of demand for warehouse space.

…Finale

When thinking about SCM, we need to think about the whole asset life and therefore in all five major supply chain segments: Development and Consent, Wind Turbine, Balance of plant, Installation & Commissioning and Operations & Maintenance. 

These strains might lead to vulnerabilities and risks that will have an impact across the asset life.

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UK Capacity market on stand still

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Last week, the General Court of the Court of Justice of the European Union (ECJ) found, in favour of Tempus Energy, against the European Commission, annulling the European Commission’s decision not to object to the UK Capacity Market on state aid grounds.

As a consequence, the UK Government has suspended the operation of the Capacity Market. The Government declared that they will be working closely with the Commission so that the Capacity Market can be reinstated as soon as possible. 

However,  the suspension seems more based on a procedural matter (the commission’s process for granting state aid approval) rather than on the capacity markets policy itself.

What is the Capacity Market? …

The Capacity Market is a mechanism introduced by the UK Government to ensure that electricity supply continues to meet demand ensuring there is sufficient generation or load-management capacity in the system to cope with times of stress on the network or there is a surge in demand. 

Back to the energy trilemma, the objective of the Capacity Market is to achieve long-term security of supply.  The Capacity Market was proposed following the UK Government’s comprehensive review of the electricity market.  This is a tool, along with Contracts for Difference, Carbon Price Floor and Electricity Demand Reduction, to reform the UK electricity market to deliver low-carbon energy and reliable supply, while minimising the cost to consumers. 

Moreover,  the Capacity Market operates alongside the current Energy Market. On one hand,  participants are (or were) paid per MW rate for the capacity they offer to the market while on the other hand,  the capacity needs to be available when providers are called upon by National Grid at any time during the contracted period.

Background to the Court’s decision …

In July 2014, the Commission decided not to raise objections to the UK Capacity Market on the ground that that scheme was compatible with the EU rules on state aid.  Tempus Energy brought a case against the Commission in December 2014 and the Court heard the case in July 2017.  On the 15th of November´s judgement, the Court has found that the Commission should have initiated a formal investigation procedure in order better to assess its compatibility.  While the Court’s decision today does not mean that the Capacity Market contravenes EU state aid rules, it will require the Commission to carry out further work to establish whether the scheme is compatible with state aid rules.

Consequences …

Although, market participants will be at a very early stage in assessing the impacts, the consequences will be highly dependent on the length of a final agreement.  A short term will have a much less impact onto market, players and potentially consumers but leaves in a serous uncertainty in if it takes longer term.

The immediate one is the suspension of the Capacity Market. The UK Government has concluded that it no longer has the legal power to operate the capacity market and has suspended it with immediate effect.  The Government has said that it will not hold any capacity auctions, make any payment. Nevertheless,  they will complete the current pre-qualification process for the auctions planned for early 2019 in case it is required for future auctions.

After the Immediate cessation of payments, around a billion pounds of capacity market payments for 2018/19 is in jeopardy.  Therefore, it is going to have financial consequences for capacity providers that were relying on them.  Although this may vary per company, it is expected to have a negative hit in earnings.

Further to that (capacity providers would not receive future capacity payments) if the scheme does not receive state aid clearance, then there could be a requirement for the Government to recover capacity payments already made.

Another potential (short-term) consequence is the security of supply for the winter of 2018/19. UK does not believe that the suspension will have any effect on security of supply for the winter.

While electricity supplies were unlikely to be at risk, it is unclear the impact in wholesale power prices instead as the the market price might go up.

Long-term consequences are far more difficult to establish. However the capacity market has been one area of relative stability for investors. So, this ruling will add to the challenges and uncertainty faced by investors in new capacity.

… Next steps. Action/s to reinstate the Capacity Market

The Government has said that it is doing everything possible to re-obtain state aid approval from the European Commission as soon as possible and is expressing confidence that they will be able to do this.  They believe that the Commission will need to undertake a formal stage 2 investigation.  

UK gov has other potential courses of action, such as asking for suspension of the enforcement of the court’s decision or appealing against the decision or back to the drawing board in tems of capacity markets regulation.

… Finale

Last week, the UK’s scheme for back-up electricity generation was suspended after the European General Court found that the payments system should be subject to a state aid investigation. 

The surprise judgment imposed a “standstill period” on the UK’s capacity market, which guaranteed power companies extra payments for generating electricity when supplies are tight. Therefore, the UK Government is now barred from holding auctions scheduled for early next year and from making payments under the mechanism pending an investigation by the European Commission. It is still early to evaluate consequences but clearly it is casting doubt over companies’ plans to invest in increased back-up generation for the grid.

Power grid: long overdue attention

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Context …

The electrical power grid has now long overdue attention. This is mainly due to the new challenges that are confronted: security, renewables integration and distributed energy systems to name few.

Historically the model was clear few large generation units strategically situated and delivering power to centres of consumption. Then being on the main challenges the level of capacity or the location. However in a world of energy transitionand decabornization, the famous energy trilemma (energy security, energy equity, and environmental sustainability.) has become even more complex.

Under attack …

The energy sector is becoming more connected and hence exposed to failure and security breaches. This issue has begun to get more attention at all levels.

Some examples have tested the vulnerability of the energy infrastructures and exposed single points of failure.

Last July, Bloomberg News reported that hackers working for a foreign government had breached at least a dozen U.S. power plants, including a nuclear reactor in Kansas, and few weeks ago it was reported that a suspected state actor had penetrated the defences of a plant in the Middle East, causing it to shut down. Although, the geopolitics plays a role in the dynamism of threats, the spectrum of attackers seems to be wide.

The power network not only will have a ripple effect after any of these disruptions but it is also a target by itself.

Resource mix …

In the last few years few countries have seen or will see significant changes in its resource mix. On one side new generation coming in (wind, solar, PV but also storage) and on the other decommissioning of old plants. Although, the grid operators anticipate it, still poses challenges in terms of investment and operation.

Renewables integration changes the model but opens new opportunities …

While this is a lengthily discussed issue with very different views, grid operators are developing new market designs to accommodate rising renewable energy capacity, storage and demand management technology.

Albeit, traditional utility-scale plants are already capable of providing reactive power, voltage support and frequency support, the rising levels of more sophisticated power electronics in PV plants present new opportunities.

Therefore, many of Europe’s markets are thinking about ancillary market reformsso that incentives drive the right behaviour.

Consumers are changing …

We have noted changes affecting the power sector and on the generation side but there are changes on the demand side too.

These changes are not only in large (or industrial) consumers but also at private level. For the latter, residential solar-power and storage systems, electric vehicles and smart meters are changing how much electricity people draw from the grid, when they draw it and what they add back to the grid

More and more, the trend seems to be towards a hybrid grid where electricity needs are met with (few) large power generation units and consumers connected to the regional (or national) transmission, in combination with thousands of small (distributed generation) resources connected behind the meter.

Additionally to distributed generation, electricity users are shaping the mix of power resources and demand dynamics through their adoption of energy efficiency measures.

… Reforms on the way, watch the space

Historically, market rules on lead times and imbalance penalties have presented a barrier to many PV operators.

While new regulations can have a positive strong impact on competition increase (to serve the electricity needs of retail customers) and driving greater innovation, other important and related themes emerge as regulators and policymakers reforms may reduce the financial benefits of a customer’s investment.

In Europe and following negotiations between EU member states, the new market regulation expects to be implemented by 2020, although the roll out of certain measures may be staggered by several years.

In US, the Federal Energy Regulatory Commission (FERC) is planning to implement frequency response requirementsand the Department of Energy (DOE) has recommended the use of pricing mechanisms which value Essential Reliability Services (ERS) and Bulk Power System resilience (BSR).

On its side, the UK is moving forward with new grid designs, which are set to impact the economics of energy storage. Additionally, the UK’s National Grid has already issued tenders for fast frequency response services from energy storage applications and the operator is currently consolidating and simplifying numerous ancillary services contract tenders. Further announcements on the reforms are expected this spring.

… Grid in Transition: Opportunities and Challenges

The on-going industry transformation is redefining the power system and competitive wholesale electricity marketplace. Reforms to ancillary market contracts will help new operators position themselves in grid balancing markets and capitalize on technology gains, potentially eroding some utilities business model.

From a power network point of view, the long forgotten attention has tuned in a high dynamic where these changes bring opportunities, but also poses challenges to grid operations, market rules, and system planning.

Digital data fragmentation in renewable assets

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Different sources of data …

Wind & solar operators start to have access to few historical operational data. These data can be SCADA data (e.g. temperatures, wind speeds & directions, production, etc.), CMS systems data, CMMS, oil analysis, particle counters analysis, LIDAR data as well as different reports like statutory or blade and gearbox inspections.

However, each of this comes from different sources. What is more, it is a challenge for operators to archive it, retrieve it and at the end of the day manage it to make useful to improve the operation.

This instance, where data elements are separate, coming from different sources in different formats and collected and archived by different players is what we can call as digital data fragmentation

Ideally, all these operational data should be available, unified in one or very few (interconnected) systems source that allow to provide a clear view of the different information to different users and players.

Different players, different needs …

This digital data fragmentation affects not only the operational and engineering teams but also the asset managers not being able to have a clear view of the health of their asset. And therefore, having to spend a lot of time to have it and ultimately, the management team of the company.

All these stakeholders have different needs in terms of data, frequency, access and integration level.

Operational teams might use more data like error and alarm codes to troubleshoot and return to service, engineering teams might look for instance to particular failures frequency, while asset managers might look to production data to be able to report or forecast better.

Size and type of operators, matters …

Depending on the size and type of operator, it might be difficult to have one single solution (“fits all”), requiring different systems and platforms. Nevertheless, key elements are the interconnectivity and scalability of each of these solutions.

One example are the tablets for field teams. The target for this solution is to facilitate access to procedures and fill Computer Maintenance Management systems (CMMS).

Some operators have developed specific solutions where certain amounts of data are converging.

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However even for large operators, the challenge is there, being difficult to integrate not all but several data sources. Therefore, making more difficult the operational improvement.

This is only beaten with additional engineering and operational headcount. These resources manage the different bits of the data, often ending in different spreadsheets across company servers.

…Going forward

The solution is a tool that collects and compiles the different sources and types of data matching the different stakeholders’ needs. It needs to be a data repository, collecting and sorting the data permanently and able to retrieve and present it in an easy and friendly way to each of the teams.

… Conclusion

Operational asset data is fragmented across different supports and systems. This increases the challenge for the asset management and operational teams, in terms of having a good overall picture of the asset status and therefore good decision-making.

Infrastructure projects… A moment in the sun

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End of last February, a major new project to install an interconnector linking the electricity markets of Britain and France via the Channel Tunnel has just put down its foundations. ElecLink will provide cost effective new interconnector capacity with minimal environmental impact through the interoperability of the Channel Tunnel.

In the face of super-low interest rates, many countries are talking and planning to increase spending on infrastructure. Bridges, ports and airports, dams, roads and highways, along with telecoms´ investments are having a moment in the sun.

… Everywhere

In the US, President Donald Trump’s pledged to close the $1 trillion infrastructure gap was one of his few clearly articulated plans.

In the UK, infrastructure investment is being championed as a way to offset the economic uncertainty caused by Brexit.

Europe is already ahead of the curve: in 2014, the European Commission launched a €315 billion three-year program, dubbed the Juncker plan after its president.

In China, President Xi Jinping’s new Silk Road plan to connect China with Central Asia, the Middle East and Europe through road, rail and port construction is underway.

In Mexico, President Enrique Peña Nieto recently raised his 2018 infrastructure spending target to $587 billion: “With bigger and better infrastructure, there are more opportunities to attract productive investment, generate jobs and improve families’ income.”

In Canada, it was announced in November as part of the 2017 budget, the proposal to establish a Canada Infrastructure Bank (CIB) to spur projects seeks to use as little tax money as possible. The CIB is set to finance projects worth more than C$200 billion (US$148 billion) over the next 10 years and seeks an initial capitalization of C$35 billion—C$15 billion in direct spending and $C20 billion in equity or debt.

…. Is Maynard back?

The failure of years of monetary stimulus and public spending to spark strong rates of growth, particularly in Western economies, has led to a greater focus on the supply side of the economy—including the state of infrastructure. In addition, the infrastructure idea is appealing because it is a very direct way that governments can generate jobs.

Infrastructure boosts demand in the short term. This immediate lift to GDP is caused by the increase of spending and the boost to the construction sector.

The International Monetary Fund in October 2014 showed that in advanced economies infrastructure spending of 1 percentage point of GDP increases output by 0.4% in the year it occurs—the demand boost—and 1.5% four years later as a result of increased supply.

Nevertheless, some EU countries are constrained by the Maastricht criteria [which limit Eurozone members’ budget deficits to not more than 3% of GDP]; while those countries with the most fiscal space, such as Germany, have the least need for stimulus,

… It is not “just do it”

it is not just about more spending; it’s about smart spending. This is something that the IMF has urged countries to consider for several years, starting with the Fall 2014 World Economic Outlook.

With interest rates still low, the IMF research suggests that debt-financed investment could virtually pay for itself by boosting demand in the short run and productivity in the long run. But that comes with a caveat: the quality of investment matters. Hence, countries should invest well, where there is a clear need, and invest efficiently.

… Operation, operations, operations

While politics are often attracted to headlines, focus on the operation and micro-level improvements enhance the project economics. In particular, the maintenance and incremental improvements on existing infrastructure can have a good benefit-to-cost ratio.

Moreover, a design or construction interface with the O&M contractor should be planned and managed early on and the long-term implications of today’s design choices evaluated.

The risk of not developing a holistic and long-term strategy for operating and maintaining may represent a considerable financial burden for the future.

Conclusion …

Ten years after the global financial crisis, the global recovery continues but remains weak. Robust demand momentum has not yet taken hold.

Therefore, many countries are talking and planning to increase spending on infrastructure as Eleclink, creating good prospects for this type of projects.

However, it is not just about more spending; at least it is about smart spending, focus on the operation improvement.

 

Negotiating limitations of liability

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In contracts, agree on risk and reward is a fine art. A typical contract negotiation starts agreeing rewards (delivery scope and price) leaving risk for a second stage. Liabilities definition and their limits is one of the main instruments when limiting risk. But parties have often conflicting motives when negotiating limitations of liability.

We have already given an overview of limits of liability in previous posts: decoding-limits-of-liability– and Maintenance Agreements. Value creation) to show how crucial are in contract negotiations. As per a request, the focus in this post, will be one the key elements when discussing limits of liability (in the wind O&M contracts).

Let´s see some of the main elements…

.. Intro

Contracts are about exchanging value between the parties and which, how and where risks are allocated. Any of the parties (either client or contractor) will be willing to take more risk as per the amount of perceived value from the other party. Wind O&M contracts are not an exception.

Naturally, the parties have conflicting motives when negotiating limitations of liability. The contractor wants to limit its liability as much as possible, whereas the client wants to maximise its protection through the ability to recover damages from the contractor. It can be difficult to reconcile these motives.

In practice, the parties tend to reach a commercial compromise, so that the client can still recover sums from the contractor, but the liability is kept in proportion to the scope of its services. Therefore, its risk of insolvency is minimised.

… Client’s considerations

The client must balance several considerations when negotiating a limitation of liability:

  • In what situations, will the limitation of liability prevent the client from making full recovery?
  • Will a cap on liability prevent recovery for most losses or is it only in the worst-case scenario?
  • Could a loss be recovered from a third party?
  • Which is the amount of insurance (e.g. professional indemnity insurance)?
  • Has the contractor a guarantor backing?

Even when the client is able to claim all of its loss, does the contractor have the resources to make payment? Therefore, which is the financial strength of the contractor?

… Contractor´s considerations

The contractor must balance to following considerations when negotiating a limitation of liability:

  • Is the contractor ‘s potential liability in proportion to the fee it is receiving?
  • It is not commercially sensible to accept high levels of risk in return for a small reward?
  • Is the contractor itself protected from insolvency by the limitation of liability?
  • Which types of insurance can help to protect?

… Types of limitation

The contractor ‘s liability may be limited in several ways and the contract can include more than one type of limitation. The most common limitations of liability are: limitations implied by law, limitations of the time for bringing a claim, caps on the amount (of liability) and exclusions (of certain types and or situations). The most common type and easy to apply are the liability cap/s.

… Caps on liability

A cap on liability limits the amount of the contractors’ liability to the client. There are several types of cap on liability as the amount of the cap may be expressed as a percentage of the fee or as a fixed amount.

… Exclusions by type of liability

The parties to a contract can sometimes exclude or cap the professional contractor’s liability for a specific type of loss. In UK, the law automatically excludes some types of loss. Nevertheless, there are some types of loss that cannot be excluded (or limited), e.g. liability for death or personal injury arising from negligence.

… Market practice on wind O&M contracts

The most frequent type is the cap or caps on liabilities. There could be easily one or two different limits. Typically, in an overall and one more specific (e.g. related to specific penalties (e.g. due to lack of performance). The overall cap is -as discussed- usually, a percentage of the fee. When the market is immature percentage values are higher (it could be above 100%) decreasing with the experience of the parties.

Nonetheless, the real limit is the imagination of the contract managers and the negotiation itself.

… Finale

Liabilities are an essential part of contracts and their limitation key on the [parties] risk management. Naturally, the parties have conflicting motives when negotiating limitations of liability. The contractor wants to limit its liability as much as possible, whereas the client wants to maximise its protection through the ability to recover damages from the contractor. Knowing the different types and options as well as market practice can help to reconcile these motives.

EU energy sector: 10 Investment trends for 2016

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The 2016 energy sector investment agenda seems to be driven at the moment by a number of factors that we are going to draw here. COP 21 summit has made very visible the targets for global warming. A limit temperature change of 2ºC and the current position for many countries (with still long way to meet its 20-20 targets) create a great opportunity for renewable investment. Therefore, many investments will be needed.

Let´s review some of the elements…

Trend #1: Upstream oil companies invest in clean technologies

Oil and gas companies seem appear keen to diversify revenue streams through the addition of renewable energy into their portfolios. Statoil’s new US$200m venture capital fund will invest in growth companies in the renewable energy segment, while French energy group Total bought stakes in two solar power start-ups via its US$150m Total Energy Ventures capital fund.

Total has unveiled its new climate strategy for the next 20 years, focusing on improving the carbon intensity of its production mix, developing renewable energies and improving energy efficiency. aims to increase the share of renewables in its portfolio to 20% by 2036: Total aims to become one of the top three solar player.

On the other hand and according Reuters, Shell is setting up a dedicated ‘new energies’ unit that will incorporate its wind and solar as well as hydrogen and biofuel investments.

Trend #2: Power utilities turning tight angle to green as well

Amid continued low wholesale prices in a number of regions and impairments of assets in Europe, more companies and funds are keen to deploy capital and diversify operations.

As example, SSE leads flagship Beatrice project to GBP 2.6 billion financial close. The 588 MW Beatrice offshore wind farm off the coast of Scotland reached financial close in a deal worth £2.6 billion.

Fortum Oyj announced a new vision focused on clean energy, customers and shareholder value creation, including the establishment of two new business units relating to M&A and renewables development, and technology and new ventures. While Wartsila, the Helsinki-based power plant manufacturer has announced its entry into the solar power industry.

Trend #3: Power utilities sell equity stakes in assets to raise capital

Enel is hoping to sell $1bn worth of power assets this year, as part of a four year disposal target. That means EUR1bn out of EUR6bn by 2019 according to CFO Alberto De Paoli.

E.ON’s (EONGn.DE) conventional power generation subsidiary Uniper plans to reduce debt by cutting costs and by selling at least €2bn of assets by 2018.

… Trend #4: Assets writes off

Financial Times reports that EU utilities wrote off a record amount of value from their assets in 2015, the total cost of impairments amounting to more than €100bn in the past six years.

Since the beginning of the decade, more than 50 GW of gas-fired capacity in Europe.

RWE (RWEG.DE) and E.ON posted significant losses following their coal and gas plant write-downs in 2015.

… Trend #5: Divestments fund expansion into new markets

Utilities are continuing to divest non-core assets to fund expansions into overseas and adjacent markets. Italian gas company Snam announced plans to spin off domestic distribution operations to fund expansion of its core transmission business across Europe. Spain-based integrated oil and gas company Repsol sold its piped gas business to EDP as part of its divestment strategy.

…Trend #6: Investors targeting renewable

There is a continued strong activity in the renewable energy markets, particularly wind. In line with the previous trend, some utilities recycle cash selling stakes in wind energy generation assets. Financial investors are predominantly the new owners. As example, the previous of SSE with Copenhagen Infrastructure Partners and Chinese firm SDIC Power.

Also French energy group EDF Energies Nouvelles has signed a strategic partnership with Canadian pipeline operator Enbridge, to sell a 50% in Eolien Maritime France (controlling the three future offshore wind parks in France with a cumulate capacity of 1,400 MW). Or Greencoat UK Wind Plc and GMPF and LPFA Infrastructure LLP acquired a 49.9% stake in Clyde Windfarm Limited from SSE.

… Trend #7: Renewables dominate deals

In line with trend#5 and #6, many of energy deals involved wind generation, with utilities across the UK, Spain and Norway selling around 1GW of these assets to capitalize on strong investor interest. We also saw deals involving around 1GW of solar energy assets.

Wind energy, particularly UK offshore wind, was the favoured segment due to stable long-term cash flows.

… Trend #8: High interest in regulated assets

Valuations of transmission and distribution assets is high. As more utilities invest in this segment to achieve stable, regulated revenues, even further increases in these valuations are expected.

E.ON focus is on renewables, networks and services.

… Trend #9: Investment in energy services, digital and disruptive technology assets

Declining revenue from electricity sales is also driving utilities to explore cross-sector investment at an increased rate, particularly as a way to acquire new energy technology and offer the different products and services customers are demanding.

Power utilities companies either buying, partnering or acquiring stakes in the energy services, connected homes, distributed energy and battery storage space, in a trend that is driving increased M&A activity.

As example, E.ON partner with SOLARWATT GmbH to develop an electricity storage system and Statkraft has launched operations of its first multi-megawatt-battery in TenneT’s German grid area.

… Trend #10: Utilities partner with financial investors

There is a growing trend of power utilities and investors partnering to accomplish projects. For instance, Enel and Marubeni have signed a Memorandum of Understanding to evaluate potential opportunities for joint development in the gas generation sector in the Asia-Pacific region; this agreement follows the renewable energy partnership agreement signed in 2015.

… Finale

The energy sector is under a structural shift. Low power prices, high exposure to volatile generation assets and writes off estimates earnings growth for European utilities to exceed 1% through 2016.

Focus on traditional segments of the value chain is challenging its traditional way of operating and have proven to be built for failure, therefore power utilities are restructuring to focus on different parts (being a notable example Uniper and E.ON).

Thermal power, once central to the energy portfolio, is being divested or closed and there is a new focus on renewable and an increasing role in the power sector of investors.

UK energy investment: Mind the gap too!

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In the last post I have been talking about the investment gap for renewable investment and more generally about energy. Also potential Brexit impact has been covered. In this one we will join and close both of them, reviewing the investment gap in UK in general infrastructure and energy and how the gap can be filled in…

Is underinvestment a British disease too? …

The UK is behind all other G7 members on built asset wealth per capita, and has had a trajectory on investment share of GDP for several years since the financial crisis of 2008. However, UK built assets are very productive, and given the correlation of built assets to GDP, this suggests there is opportunity for further GDP growth from investment in built assets.

Some analysis suggests, based on gross fixed capital formation (GFCF), that had the economy (and investment) developed as intended, it would now represent almost 18% of GDP as opposed to less than 15%.

Focusing only in green investment, already in 2012, an audit made clear that the levels of green investment in the UK are sorely lacking. As example there was more spend on furniture annually than to green investment. The UK sat behind many countries – still nominally a developing country – in the proportion of GDP it sets aside for clean technologies.

2050 UK energy pathways

Post_2016UK Mindthe gapFrom the evidence on policy and the current electricity generation above, we can establish a number of different scenarios that might reflect how the UK electricity supply system could look in 2025 and further in 2050 (DECC has an online 2050 Pathways energy calculator).

These scenarios all look at filling the coal gap in the context of the number of nuclear reactors scheduled for closure over the next 10 years. Combined with this is a significant shortfall in capacity.

UK as infrastructure investment market …

UK is becoming an increasingly attractive market for infrastructure investment. This is thanks to its mature, stable, low risk business environment. One cloud on the horizon for the UK is the vote on membership of the European Union. Investors are already carrying out pre and post vote analysis to examine the implications of an exit, and the deal flow has slowed as banks and contractors alike wait for the result of the vote.

UK as renewable energy investment market …

According a 2016 policy briefing of the Institute and Faculty of Actuaries (IFoA), in the breakdown of funding by industry sectors energy accounts for around 60% of the pipeline 2015-2021.

UK remains still as an attractive market for investors, ranking 13 according the last PWC recai. This is despite “The UK Government’s noncommittal, if not antagonistic approach energy policy continues to go against the grain of almost universal global support for renewables. Not only stalling project development and investment in ows, this is arguably jeopardizing UK energy security”.

How the gap can be filled? ….

There are not many options to fill the gap. Either is public, private or mixed investment.

Post_2016UK Mindthe gap2Tighter government spending in core markets, particularly in UK as seen above, means that project sponsors are increasingly turning to be private finance and bridge the investment gap.

In addition, for IFoA, the planned breakdown of funding between public and private sectors in the National Infrastructure Pipeline demonstrates the crucial role of the private sector.

By far the greatest planned spending coming purely from the private sector is in energy, with approximately £220bn over the 2015-2021 period, being Water is next largest (£26bn).

Wealth and income relationship …

According Arcadis Global Built Asset Wealth Index, the correlation between economies’ stock of built assets/infrastrucure and their GDP is strong. Some proportion of national income is saved each year, and these savings can be used to make investment, rather than being consumed in that year. In turn, these investments generate returns in future years.

This seems true despite there are substantial differences between economies. For instance, some countries are more capital-intensive or manufacturing driven while other more service oriented. Another element likely to be significant is under-utilisation of assets

… Challenges

As seen private finance will be required to pay for new infrastructure and particularly clean energy. To secure it, schemes must be structured in a way that supports long term, consistent revenues and keeps risk low. This is what policy makers required contribution.

Moreover more dialogue between the public and private sectors will help to close the funding gap and unlock community and business benefits from these investments.

… Conclusions

According to most economists, weak investment is one of the UK three major economic issues and a longing running problem for the UK economy. This underinvestment, particularly in energy might reflect on the price and security of the UK electricity supply system. If this gap is filled with clean technologies, there are further benefits. On the top to effectively tackle climate change, will deliver on targets under UK national, EU and international law, and strengthen UK preparedness to make deeper emissions cuts beyond 2020. The “mind the gap” becomes more central as the UK picks itself up from recession.

Making meaningful green investments now will reap major benefits for the UK in terms of cleantech export markets, new green jobs, and new revenue streams for government.


 

 

Brexit, a quick review for the UK power sector

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The choice is in your hands. But my recommendation is clear. I believe that Britain will be safer, stronger and better off by remaining in a reformed European Union”. Speech of David Cameron to announce the date of the referendum over Britain’s future in the European Union.

Gas, nuclear and renewable power are pillars of the future UK energy system, as coal fired power plants are retired.

The UK Government has committed to cutting carbon emissions and meeting its obligations to reduce greenhouse gas emissions by at least 80% before 2050. However, it is also aiming to keep energy prices competitive and has pledged in recent budgets to reduce green regulatory costs.

In parallel, the prime minister David Cameron plans to have a referendum by June over whether to exit from the European Union, which would affect trade rules between the U.K. and its EU partners.

While the pools are around 44% stay vs 42% leave, the International Monetary Fund, the OECD and the governor of the Bank of England among others have made strong and clear arguments against a British exit from the EU. Yet more, recently and after being asked by the Financial Times, more than 100 economists, thought Brexit would adversely affect the UK’s medium-term economic prospects, nine times more than those who thought Britain’s economy would benefit.

… Consequences of UK and for rest of Europe

One thing is clear: Brexit will create economic uncertainty. Nevertheless, there are a wide range of possible outcomes from post-Brexit negotiations leading to a number of regulatory and market options for the UK’s relationship with the EU, with differing implications for investment and trade.

… Uncertainty in the UK power market

In recent years, UK energy policy has been framed in the context of the energy trilemma (secure supply, decarbonising our energy industry, and delivering electricity and gas at affordable prices). According PWC, all three components of the trilemma – per se conflicting- are at risk.

But, the impact of Brexit can reach beyond the energy trilemma:

  • It will also impact on the day-to-day operation of energy companies (e.g. restrictions on the movement of their people, particularly in recent years’ specialist and scarce skills or affect the ability of multi-nationals to operate in the North Sea).
  • A significant proportion of UK energy policy flows directly from European directives and regulations. We have implemented European directives and regulations on energy efficiency and low carbon generation.  European policy makers have also been working hard to introduce a common approach for the operation of the wholesale markets and for the “rule book” which governs the way gas and electricity networks operate.  The UK benefits from this integrated approach.  All of these gains are at risk from Brexit.
  • From an investor’s perspective, higher returns are required to compensate them for the risk of less favourable post-Brexit arrangements. This puts upwards pressure on the cost of financing, raising the cost of investment in the UK energy sector.
  • It is also unclear how an exit will affect UK projects which have received or expect to receive funding or guarantees from EU institutions.

Finally, many will applaud the opportunity to remove European “red tape”. But, this is likely to take considerable effort at a time when the industry has other pressing issues to address.

Vivid economics suggests 2 possible post-Brexit arrangements : (i) from continued membership of the Internal Energy Market (IEM), a scenario that is similar to the status quo (and similar to Norway’s current arrangements), (ii) to a new set of bilateral arrangements if the UK is excluded from the IEM (similar to arrangements in Switzerland). Although, most of these impacts could be effectively mitigated if the UK is allowed to remain in the IEM, there would be a loss of influence over policy design. Therefore, it will not be ensured that EU rules & policies are advantageous to UK.

The objective of the IEM is to create a competitive energy market in Europe – and an interconnected Europe will, in the longer term, lead to an opening up of the market and a reduction in energy prices.

Brexit, in whatever form, is unlikely to change the UK’s climate change goals; these are established at a national level under the Climate Change Act 1998. But, there will nonetheless be important issues to settle. For example, at an international level the UK’s emissions reduction commitment would need to be disentangled from the EU target under the United Nations Framework Convention on Climate Change (UNFCCC) and the recent Paris agreement. The UK would also need to submit its own Nationally Determined Contribution in respect of its intended climate actions under the UNFCCC processes.

… Uncertainty in the renewable market

Although Natural gas is less likely to face major cost implications due to Brexit in the nearer term. Over the longer term however, Brexit could increase exposure to supply security risks.

On the good side of news, Dong Energy A/S, the world’s biggest offshore wind developer, said neither a British departure from the European Union nor the precipitous drop in oil prices will derail its plan to invest 6 billion pounds ($8.6 billion) in wind farms off the U.K. coast by the end of the decade.

However, to be competitive with combined cycle gas turbines will require bigger turbines (with a capacity of more than 10 MW). To persuade manufacturers to develop such machines, governments must provide certainty on long-term. While Offshore wind has a certain level of clarity, with the intend of the 3 CfD auctions before 2020 announced by Amber Rudd, the onshore wind has seen dramatic support reductions after 2015 general elections. Notwithstanding, all technologies may be impacted for the uncertainty and the potential effects detailed above.

Conclusions…

The UK will vote on 23 June whether or not to stay in the European Union. The consequences and their extensions, in the case od a Brexit (British exit) are difficult to predict. However, the scale of planned infrastructure investment in the electricity sector over the next decade means that even small increases in the cost of financing could have large consequences for total investment costs. Further upwards pressure on costs would result from the likely fall in the exchange rate could raise costs to the energy sector further, given the role imported goods and services play in UK energy supply. This challenges the foundations of energy trilemma.

Onshore Wind trend: 3MW plus becomes the mainstream

Besides the wind sector has proven the ability to deliver low carbon energy at best value, wind energy is now at crossroads. While long-term growth remains strong and energy demand is rising everywhere, onshore wind energy is in a general parity with fossil fuels. In this direction, the blade industry has ventured deep into uncharted technical territory in the search for cheaper energy.

Although  offshore wind industry gathers momentum (e.g. bringing floating turbines from dream to reality), onshore wind focuses on LCG (Levelized Cost of Generation) and LCOE (Levelized Cost Of Energy).

Hereabouts, there are some clear trends for onshore wind: more powerful turbines, lager rotors and higher hub. Turbines in the 3MW range (3MW and 3MW plus) are shifting to the new normal onshore. Also onshore rotors mature larger than those of most current offshore machines.

… 3MW+ turbine rated power becomes the mainstream

Nowadays, under the 3MW-category falls there greater portion of onshore turbines; manufacturers recent announcements confirm the trend towards the 3MW plus category.

Vestas recently announced the V136-3.45 based on its V126 model. Nordex upgraded to 3.3MW its N131. Moreover, GE introduced GE3.2 with a 130m rotor. Senvion move to the 3.4M140 and Enercon already has a 4.2MW. Also Alstom has its ECO 1XX range (ECO 100, ECO 110 and ECO 122 wind turbines

The 3MW+ is the fast-growing market sector as manufacturers concentrate their efforts on low wind solutions.

… Larger rotors size

The oldest record I found for modern wind goes back to 1980 with a first rotor of 15m diameter, 20 years later the average was around 80m diameter. Larger swept area increases the production (energy yield) and helps decrease LCG and LCOE. The coming challenges of this route are clearly structural design, transport and the final assembly (if is on site).

The downsize of the larger rotors is maintaining the low noise levels which is a rising turbine procurement driver.

… Higher hub height

Back again to the 1980 the hub height was around 17-20m while today is easily above 100m. The 3MW+ generation is setting, at the minute, best in class towers in excess of 130m.

… Turbines for low wind sites

All previous turbines manufacturers announcements target the low wind speed segment IEC III (according IEC 61400). The cumulative pushing in LCG makes Europe and tendering market the most likely where these products will be deployed relegating 2MW to other sites and markets.

Summary …

Levelized costs of energy are anticipated to drop between approximately 10-14 per cent for every doubling of installed capacity.

However recent regulatory and economic developments in the EU have significantly changed the wind energy perspective for the next 15 years.

In this blog it was already discussed the wind industry race to mega-turbines and the some survival strategies fighting downturn, the answer of the renewable generation industry is be able to get the trust for the general parity with more established generation technologies. .

Turbine rated power, larger rotors and higher hub heights are just among the technology tools the wind industry is using to achieve that.