ENERGY WATCH #2 - September 18, 2018
The Age of Renewables is here (II): more deals, more zero-subsidy, more PPAs, more grid integration
by Karel Beckman
The evidence that we are entering a new and dynamic Age of Renewables – as the Deloitte report shows – is all around us.
Thus, consultancy EY reported in its Power Transactions and Trends Q2 2018, published earlier this month, that “Global power and utilities deal value reached an all-time high of US$180b during 1H18, despite a 14% decline quarter-on-quarter to US$83b in Q2”, and that renewables accounted for almost half (46%) of this deal volume.
According to EY, “The trend toward investment in clean energy continued to gain momentum during Q2, with 63 renewables deals totaling US$12.9b. Notably, the European Union’s landmark agreement to achieve 32% renewable energy consumption by 2030, and three renewables deals in the US totaling US$3.8b, set the agenda for growing investment in clean energy globally.”
Utilities companies “also increasingly invested in new technologies during Q2. In Europe, US$5.5b was attributed to energy services and new technology deals, while Japan’s Tokyo Electric Power Company (TEPCO) launched a subsidiary to form joint ventures around the development of disruptive technologies.”
“After achieving record deal value in Q1 (US$63.1b), M&A in Europe remains strong”, notes EY, “reaching US$45.7b in Q2 and representing 55% of total power and utilities global deal value during the same period.“
Miles Huq, EY Global Power & Utilities Transactions Leader, said: “Around the world, we are seeing utilities companies increasingly exploring new technologies, including battery storage, electric vehicle infrastructure and digital grid technologies. With sector convergence on the rise, we are also seeing more non-conventional competitors emerge as the power and utilities landscape continues to undergo transformation.”
By the way, the “Power & Utilities” webpage on the EY website, has this ominous headline: “Time is running out for current utility business models”. (!)
That the cost of wind and solar has come down rapidly is of course no secret anymore. A recent market report from WindEurope, Wind Energy in Europe: Outlook to 2022”, notes that strike prices for wind have fallen significantly across Europe. Onshore prices have dropped from €117.10 (USD $137 at today’s rates) per megawatt-hour in Italy’s first auction in 2013, to €65 ($76) in France this year. France is a relatively high-value market that has only just started to introduce auctions. Last year saw onshore wind auctions going as low as €34 and €32 ($40 and $38) per megawatt-hour in Spain and Turkey, respectively.”
Offshore, the levelized revenue of electricity, including transmission costs at 2016 prices, has dropped from €156 ($182) per megawatt-hour for the U.K. Walney extension project in 2014 to €71 ($83) per megawatt-hour for the Baltic Eagle project in Germany this year.
As the cost of renewable energy is coming down, more and more projects are being built without subsidies.
Bloomberg reports that at least 15 solar farms in Europe are currently planned “on the basis that government support won’t be needed to profit”.
“Many governments believe that support is no longer necessary for the mature technologies which have seen significant cost reductions,” says Michelle Davies, head of clean energy and sustainability at the law firm Eversheds Sutherland. “They take the view that the sector is sufficiently advanced to enable the market to find its own solutions.”
As a result, developers are more and more starting to build plants that don’t rely on support mechanisms, writes Bloomberg. “Their costs are low enough that they can profit from selling power at the market price or by arranging a long-term power-purchase agreements, or PPAs, with big industrial consumers.”
In Italy, Octopus has five solar projects totaling 64 megawatts that don’t rely on support. The country’s MPS Capital Services Banca per le Imprese partly funded those plants with 23 million euros ($27 million) of project finance. The developer will build more solar farms across 12 sites in Italy a total capacity of 110 megawatts.
As more subsidies are abandoned, developers will tune into the wholesale power market, where prices have been rising in recent months, writes Bloomberg. “European benchmark rates for power have more than doubled since a trough in early 2016, reflecting higher costs for natural gas, coal and the carbon-emissions permits utilities must buy to burn fossil fuels.”
“It’s an exciting development, but the big question mark is around what electricity prices will be in future,” said Pietro Radoia, analyst at Bloomberg NEF in Milan. “Either project developers lock into long-term contracts, which debt lenders value very much, or they end up being exposed to price variations, which are hard to project 10 years down the line.”
Bloomberg notes that “European nations are the first to get offers from developers to build solar plants without government support, partly because market structures elsewhere haven’t yet squeezed costs that low. European countries slashed incentives rapidly as the price of PV panels fell.
- In the U.S. by contrast, the federal government offers a tax credit approved by Congress to stimulate solar power.
- Latin American nations from Mexico to Brazil are using competitive auctions to reduce the cost of renewables.
- Japan and China still rely on feed-in tariffs to pay for solar power, though the Shanghai Securities News reported last month that the government has a pilot project that would give solar the same payments as coal plants receive.”
Similarly, the market report from WindEurope, notes that since April 2017, Europe has seen 6 zero-subsidy bids in offshore wind in the Netherlands and Germany:
WindEurope does add that “zero-bids are not the new normal. They are only possible in certain markets, for certain players, under specific conditions. These include high competition in the market, the
scalability of offshore wind, the optimisation of the value chain and exploited synergies between existing infrastructure and transmission system assets, long lead times and expected decline in technology costs. All these conditions de-risk projects, therefore, in countries with such policy frameworks zero-bids are possible.”
One of the key new drivers in the renewables market, as the Deloitte report notes, are corporate power purchase agreements (PPA’s).
Until recently, these took place mainly in North America and in a few EU markets, such as the Nordics and the Netherlands. Now however they are increasingly seen to be spreading to other European markets as well.
WindEurope notes that “Due to the fact that they do not receive any market premium from the State, the viability of zero-bid projects depends on the level of the wholesale electricity price, or on a corporate PPA.”
Bloomberg also notes that among the subsidy-free renewables projects being planned in Europe, there are many that rely on corporate PPAs. For example:
- Natixis’s Mirova unit owns a Portuguese solar farm, financed by Banco BPI, PPA with Axpo Holding’s Iberia unit
- Iberdrola’s 391-megawatt Nunez de Balboa project in southwest Spain, PPA deal with Kutxabank
“Corporate PPAs will be a key tool,” Matt Setchell, head of energy at Octopus Investments, a renewables investor in London, told Bloomberg. “Clearly subsidies aren’t going to be around forever.”
Another example: Germany’s Norddeutsche Landesbank Girozentrale recently provided 100 million euros in bridge finance to BayWa for a solar PV farm near Sevilla in Spain. “It’s not the feed in tariffs anymore that we’re banking against,” said Marco Wedemeier, a senior director at Nord/LB. “We’re banking against a PPA.”
Greentech Media (GTM) also reported recently that, according to industry body WindEurope, “Europe is on the cusp of a corporate PPA revolution”.
The reason for this is that governments are increasingly cutting down on or abolishing subsidies for renewables. “A significant decline in in government-set feed-in tariffs is forcing previously reluctant investors to take PPAs seriously as a way to take projects to financial close”, said WindEurope.
GTM mentions another example: “In August this year, automotive giant Mercedes-Benz signed a PPA to buy power for its manufacturing facility in Jawor, Poland from a 45-megawatt wind farm operated by VSB Energie Odnawialne Polska. The deal was the first corporate wind PPA in Poland and the first in Europe from an automotive sector player. And while corporate PPAs have so far been restricted to onshore wind, experts believe the trend could soon extend to offshore.”
The corporate PPA market will also be boosted by “recent changes to the European Union Renewable Energy Directive”, writes GTM. “The new directive instructs member states to identify and remove any administrative barriers to corporate PPAs for wind and solar.”
“We expect the post-2020 Renewable Energy Directive to have a positive effect on the development of the corporate renewable PPA market in Europe,” said WindEurope public affairs adviser Viktoriya Kerelska. “And European governments will have to outline in their 2030 National Energy Plans concrete policy measures to incentivize corporate renewable PPA uptake. All of this will help.”
Focusing in particular on the German market, trade magazine Windpower Monthly similarly reports that “PPAs promise a second life for German wind farms”.
WindPower Monthly notes that “in 2020, 4.4GW of German onshore wind will have dropped out of the 20-year support system, with the capacity rising to about 16GW by 2025. Once support expires, wind farm owners can either close down the project, or sell their electricity into the market.”
“Smaller German onshore wind farm operators generally do not have the means to participate in wholesale electricity markets, and lack the financial resources to ride out fluctuations in wholesale electricity prices. But the first two PPAs for electricity from projects leaving the guaranteed price support system indicate the wind sector has found a way to ensure 20-plus-year-old wind assets can continue to operate outside the state support system.”
“Green electricity company Greenpeace Energy has signed Germany’s first PPA for direct supply of private customers, with wind-generated electricity from citizens’ wind farm Ellhöft in Schleswig-Holstein. The five-year PPA for electricity from the six AN Bonus 1.5MW turbines runs from 2021, after renewable energy act (EEG) support for the 9MW site expires at the end of 2020.”
Greenpeace Energy’s announcement on 6 September “follows Statkraft’s PPA for electricity from six citizens’ wind projects with a total of 41MW in the German state of Lower Saxony that kicks in when the sites finish their 20-year wind energy support periods, between 2021 and 2023.”
“They will sell power through the PPA for periods of three to five years, Statkraft said. The wind-generated electricity will be packaged into a supply contract for an industrial company that Statkraft declined to name. The purchase price is fixed and not indexed to other price parameters, a Statkraft spokeswoman told Windpower Monthly.”
In terms of grid integration, the Achilles Heel of variable renewables, rapid progress is also being made, as the Deloitte report [LINK TO EPW109-1] notes.
Market players are increasingly finding innovative ways to integrate renewables into the system. One trend that is emerging is that hydropower plants are increasingly turned from baseload generators to backup plants.
On the website Cleantechnica, author George Harvey writes that “A number of stories have popped up in the news recently about turning traditional hydroelectric stations, which generate power by using water captured from a flowing river, into pumped storage facilities, which cycle the water using more energy to do so than they produce.”
He adds that “One of the most interesting things about these stories is that they are not about small power plants. In fact one of the largest hydro facilities in the country, the Hoover Dam, is being considered for a change from a baseload power plant into a backup plant for wind and solar resources.”
Another exciting possibility to provide grid stability is by integrating the batteries of electric cars into the system ( “vehicle-to-grid integration”). This is still something for the future, but several experiments are ongoing, with promising results.
The latest pilot was announced on 10 September by German virtual power plant (VPP) operator Next Kraftwerke and the Dutch EV aggregator and smart charging platform provider Jedlix. The two companies won a tender from Dutch-German transmission system operator (TSO) Tennet for a pilot project delivering secondary control resrve (aFRR) through the batteries of electric cars.
In a press release, Next Kraftwerke and Jedlix announce that “the project begins in early 2019 and will run for two years, during which Next Kraftwerke and Jedlix provide aFRR through Jedlix’s EV fleet using the company’s smart charging solution. Next Kraftwerke provides the interface to the TSO TenneT and markets the aggregated energy in TenneT’s reserve control auctions, while Jedlix steers the charging of EV’s over-the-air via its platform.”
How this will work: “Jedlix establishes the connection by linking its system to Next Kraftwerke’s remote control unit Next Box. In doing so, the Jedlix fleet can be controlled by Next Kraftwerke’s central control system. This enables real-time data exchange between the Jedlix fleet and Next Kraftwerke, while also making it possible for the Jedlix fleet to receive setpoints from Next Kraftwerke that change the EV’s power consumption.”
“Jedlix vehicle drivers will be introduced to the service through a user interface app, which Jedlix offers to all EV drivers in The Netherlands. By taking part in the pilot, all EV drivers can get rewarded for making the car’s flexibility available whenever it is being charged at the driver’s home. By connecting the EV to the Jedlix platform, Jedlix can receive user charging preferences and establish a live connection with the EV, making sure they are charged smartly.”
“Depending on the charging preference, each EV can provide either positive or negative control reserves. Jedlix will be able to combine user preferences, car data, and charging station information for a continuous forecast of the available capacity. This is then used by Next Kraftwerke in the bidding process. To level out any potential unavailability of the EVs, Next Kraftwerke and Jedlix pool the EVs with other assets in the Next Pool such as greenhouse lighting, wind, and solar plants, and biogas- as well as greenhouse CHPs.”
Now you can see why the EY website notes: “Time is running out for current utility business models”.