In a period of transition for renewable energy, as government subsidies in Europe reduce, where and how are investors and developers deriving ...
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RENEWABLE ENERGY FINANCING The zero-subsidy renewables opportunity January 2019 In a period of transition for renewable energy, as government subsidies in Europe reduce, where and how are investors and developers deriving value from renewable energy investments?
Contents
Introduction 01
Key technical and commercial drivers enabling zero-subsidies 04
1. Reducing levelised cost of electricity 06
2. Reducing technical risk 16
3. Mitigating power price risk 18
4. Financial investor perspectives 28
Concluding thoughts 32
Appendix 1: Subsidy-free renewables projects 34
Appendix 2: Current renewable electricity price subsidies 38
2 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT Y
Introduction
The landscape for investments in
renewable energy projects is undergoing
a period of significant change.
Many European governments are reducing the It is therefore timely to consider what key
level of support and subsidies for renewable developments are on the horizon which are
energy investments, moving away from fixed enabling zero-subsidy renewable projects in
feed-in tariffs towards competitive auctions the medium to long term.
and even ‘zero-subsidies’ in certain cases.
The answers lie in assessing the historical and
This is an expected trajectory as technologies potential future trends in key value drivers
mature with the costs of deployment for which range across technical, commercial,
offshore wind, onshore wind and solar PV financial, legal and regulatory fields.
following downward trends and significant
In this paper we explore a selection of the
progress towards national renewable energy
key themes, which have historically enabled
targets being achieved.
renewable investments to continue to be
As cost to the consumer and security viable and attractive, despite the reducing
of supply climb higher up the political trajectory of government subsidies in Europe.
agenda, this has added further pressure on
Against the same themes, we then identify key
governments to reduce the support available.
developments on the horizon that may enable
However many countries are setting even a substantial pipeline of zero-subsidy projects
more ambitious renewables targets, well to be deployed in the future.
above 30% of generation capacity. This is
due to the reducing LCOE of renewables, for
example today onshore wind and solar PV
are amongst the cheapest sources of energy,
increased sensitivity from consumers and
climate change risks.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 1
ZERO-SUBSIDY OVERVIEW
Zero-subsidies projects today The term zero-subsidy as used here does
A number of subsidy-free renewables projects not necessarily mean no government
have emerged in Europe in recent times, in support or incentives.
onshore wind, offshore wind and solar PV There are many types of government support
technologies. Perhaps most striking are the both for renewables and other forms of
Dutch and German offshore wind auctions electricity generation, such as tax breaks and
where Nuon, Ørsted and EnBW won projects carbon pricing which are not specifically
at €0 strike prices. A small number of zero- considered in this paper.
subsidy projects have reached final investment Non-price forms of support may still exist.
decision in the onshore wind and solar sectors, For example the offshore wind projects
generally made possible through Corporate mentioned above are described as zero-
Power Purchase Agreements (PPAs). subsidy. However, these projects will not need
Subsidy-free projects remain the exception to fund all of the offshore grid infrastructure
rather than the rule at present, enabled by and the auction win gives the developer
specific favourable conditions, such as certain development rights. For example, for
reuse of existing infrastructure or through offshore wind in the Netherlands, as well as
guarantees of development rights or grid Denmark and Germany, developers do not
connection. However, if the emerging directly cover the whole cost of the wind farm
developments fully materialise, the market transmission connection or hub.
opportunity for zero-subsidy renewables By the definition applied here there
projects has a much larger potential in the are already a number of zero-subsidy
medium to long term. projects that have reached financial close.
Many of these projects have contracted
Zero-subsidy definition applied in
commercially through PPAs to manage
this paper
electricity price risks, instead of relying on
In this paper, we use the term zero-subsidy government programmes. We recognise that
or subsidy-free to refer to projects without a it is a minority of projects with favourable
direct subsidy-based premium on the current conditions which are currently able to be zero-
or expected average market price, such as a subsidy at present, but with continuing market
FiT or CfD premium, or to refer to projects trends, the number of viable opportunities is
that have no subsidy in place at all. This likely to grow in the longer term.
definition is selected because the value of the
subsidy is therefore expected to be low, and
only for a minority of the time. For simplicity
of the definition we do not consider wider
guarantees of origin, traded certificates or
carbon pricing mechanisms.
We recognise that price floors may still
provide some occasional subsidy payments;
as even a price floor at zero may protect
the project from negative electricity market
prices where permitted by regulation. The
zero-subsidy concept explored in this paper
includes the scenario where the subsidy is
expected to provide a ‘net zero’ or minimal
price-premium in the longer term.
2 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT Y
Focus of this report What have the key factors been in zero-
This paper principally focuses on utility-scale subsidy projects to date?
onshore wind and solar projects as the most A small number of subsidy-free projects
mature renewable energy assets. However, the already exist across the UK, Spain, Portugal
issues raised in this paper are relevant across and Italy, with some having secured debt
a wider range of technologies and selected financing. Selected case studies are provided
examples have been drawn from the offshore in Appendix 1.
wind industry. We have primarily commented
From the review of these case studies, we
on the situation in Europe but similarly have
observe that the enabling factors in zero-
incorporated selected global examples where
subsidy projects to date include:
relevant.
-- Competitive costs and favourable sites or
favourable integration with offtakers; FIGURE 1
-- Experienced supply chain for construction Capex, Opex, Permissions,
and operations; and Construction Programme,
Expected Yield, etc. remain
-- PPAs stabilising electricity prices, key equity investment
parameters irrespective of
improving bankability and enabling use of most types of Government
debt finance to reduce cost of capital. support scheme.
W H AT K E Y
CHANGE IN GOVERNMENT SUPPORT DEVELOPMENTS
SCHEMES FOR RENEWABLES OVER TIME ARE ON THE HORIZON
W H I C H M AY E N A B L E
ZERO-SUBSIDY
RENEWABLE PROJECTS
F E E D I N TA R I F F S CONTRACTS FOR ‘ZERO- IN THE MEDIUM TO
OR FIXED DIFFERENCE SUBSIDIES’ LONG TERM?
MAGNITUDE FROM MARKET In moving from CfDs to ‘zero-
SUBSIDIES PRICES subsidies’, the investor retains
Firm electricity tariff defined (THROUGH greater exposure to market
by Government provides AUCTIONS) power prices and renewables
fixed electricity price over a price cannibalisation,
In moving from a FiT scheme potentially mitigated to some
specified term. to a CfD scheme, investors extent by Power Purchase
Some countries offer may lose upsides of favourable Agreements. While this is
Capacity Payments, offering market prices, but in return for new for renewables, many
further protection against price certainty. conventional power sector
uncertainties in wind or solar Prices obtained may be lower investments retained electricity
resource. than FiTs, depending on the price risk.
level of competition in the
market and the budget or
capacity being auctioned.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 3
Key technical and commercial
drivers enabling zero-subsidies
This section provides an overview of both historical
and potential future trends in key drivers which could
bring value as renewable energy investments gradually
transition away from reliance on government support.
K E Y C O N S I D E R AT I O N S
A number of key drivers have enabled For each theme we describe in the
zero-subsidy renewable energy projects to following pages:
be possible and resulted in a number of the
-- Historical trends which have been
low auction bids made by developers to
favourable to renewable investments,
deliver current or future projects. We have
counterbalancing the reduction in
also identified future drivers of change on
government subsidies; and
the horizon which could facilitate the growth
of the market opportunity for zero-subsidy -- Future trends with potential to open up
projects. the opportunity for a significant subsidy-
free renewables market.
In this paper we describe these factors under
four main themes which bring together drivers
with a similar effect. The themes considered
here are:
Reducing LCOE: Capex, Opex,
1 capacity factors, repowering
Reducing technical risk: supply
2 chain and industry learning curve
Mitigating power price risk: PPAs,
3 storage and revenue stacking
4 Financial investor perspectives
4 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT Y
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 5
1. Reducing levelised cost
of electricity (LCOE)
The move from fixed subsidies to competitive
auctions has been made possible by reducing LCOE
of renewable technologies, as these trends continue
an increasing number of projects will be competitive
below market prices.
The Levelized Cost of Electricity (EUR/ This matches what we observe in the market,
MWh) (LCOE) represents the life-cycle costs where we have seen bid prices can be even
of a power generating asset over an assumed lower than those shown in the chart, and that
operational lifetime, taking into account the a small number of projects are already viable
cost of financing. without subsidies.
We have seen a significant fall in the LCOE of LCOE can be considered in the following
renewable energy projects across Europe and components: Development Expenditure
worldwide onshore wind, offshore wind and (Devex); Capital Expenditure (Capex);
solar PV. This is most notable in solar PV, due Energy Production; O&M Expenditure
in large part to technology improvements and (Opex); Decommissioning Costs; Financing
manufacturing processes revolutionising panel and cash flow parameters and construction
costs and also due to the increasing scale of and operating period.
deployment for each of these technologies.
When looking at the different components
Figure 2 shows global benchmark figures. of LCOE, two things need to be considered
However we are aware of recent projects with – firstly, what is the historical trend of each
LCOE well below even the figures shown for component and secondly, what is driving their
2017. IRENA’s auction price database also current trend into the future?
shows prices for both onshore wind and solar
Trends in Capex, Opex and Capacity factors
for 2019/20 reaching towards 0.05 USD/kWh
are drawn out here for particular attention.
as a global average, in some regions lower
prices of 0.03 USD/kWh have been achieved.
In addition, the chart shows a spread of
project LCOE around the averages, which
confirms that some projects attained lower
LCOEs than the benchmark figures provided.
6 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT Y
ONSHORE WIND SOLAR PV
0.4 0.4
0.3 0.3
2016 USD/kWh
0.2 0.2
0.1
Auction database
0.1 0.1
average
0.07
Min/max
0.05
LCOE database
average 0.05
Min/max
0 0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
FIGURE 2
Global levelised cost of
solar and wind projection
2020.
Source: IRENA renewable
cost database and auctions
database.
© Arup
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 7
8
7
2 0 1 7 U S D P E R W AT T D C
6
5 4.57
Soft costs (Other -
PII, Land Aquisition,
3.91
Sales Tax, Overhead 4
and Net Profit)
Soft costs
(Install labour) 3 2.66
Hardware BoS 2.04 1.89 1.82
(Structural & Electrical 2
components) 1.45
1.03
Inverter 1
Module
0
2010
2011
2012
2013
2014
2015
2016
2017
CAPEX
The historical trend in LCOE has been driven down by Future Trends FIGURE 3
System cost breakdown for
reducing capital costs of technologies, with solar panels The reduction in Capex is expected to solar PV, 2010 - 2017.
a case in point. We anticipate continued research and continue, particularly in solar PV and offshore Source: NREL BOS
development to drive incremental improvement. wind, driven by ongoing optimisation and Benchmark Costs (2017).
research and development initiatives. In
Historical Trends
addition, competitive auctions for capacity are
Solar PV in particular has seen a revolution
creating cost pressures, which drive further
in capital costs, with solar PV module prices
industry innovation and optimisation.
decreasing approximately 80% from 2009 to
2017, along with reductions in tracking systems Key drivers for Capex reduction include
and balance of plant costs. For onshore and continued technology development and
offshore wind, we have also seen a significant optimisation, particularly in the solar PV
reducing cost trajectory. sector where continuing reduction in panel
prices will reduce Capex.
There have been significant further cost reductions
evidenced even in the last 18 months, with lower Wind turbines continue to increase in size,
auction prices seen both in Europe and on other with greater energy capture per unit of Capex
continents, particularly in Asia. Recent auction spent. There is also growing activity in wind
prices confirm that projects are being built with farm extension projects, which can benefit
lower LCOE than even one year ago. from existing utility connections and site
infrastructure. Repowering also has potential
European examples include the three 2018
to reduce Capex of repowered projects
onshore wind auctions in Germany which have
through re-use of existing infrastructure and
given average prices of €0.047 to €0.062 per
increased turbine size.
kWh, although slightly increasing over the year.
Similarly in Germany, LCOE of utility-scale PV Offshore wind technology development
is estimated in the range of €0.04 to €0.07 per continues apace with floating foundations
kWh in 2018, showing that the declining cost set to be the next game-changer, opening
trajectory is continuing. Outside of Europe, the up sites in deeper waters, whilst mitigating
lowest reported prices we have seen are PPAs the additional Capex burden this would
for onshore wind and solar at $0.025 to $0.03 impose if using traditional monopile or jacket
per kWh in countries such as India, Brazil and foundation solutions.
Mexico. As such we envisage that in the next few
years European projects could attain these figures.
8 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT Y100
90
OPEX COSTS 2016 USD/KW/YEAR
80
70
60
50
40
30
20
10
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
OPEX
Market competition for O&M services has Improved performance metrics for O&M FIGURE 4
O&M costs for onshore
grown with new parties entering the market in providers have included moving from time- wind in Sweden, 2008 –
various geographies. Potential for synergies from based availability incentives to energy-based 2016.
managing portfolios continues to grow with greater incentives which better align interests and Source: IRENA Renewable
project density. Power Generation Costs.
timing of maintenance with regards to
Historical Trends resource forecasting to avoid periods of
high production.
As the wind and solar PV markets mature
we have seen an improvement in the O&M To take an example from the offshore wind
strategies of projects, with an increased sector, we increasingly see O&M optimisation
amount of knowledge around these through use of residential service operating
technologies present in the industry and vessels (SOV) solutions. These vessels remain
lessons learnt from previous projects being offshore for weeks at a time and service
applied. The industry is actively pursuing turbines more efficiently by reducing time
operational optimisation strategies on existing and costs of daily transit for technicians. For
project portfolios. A number of independent onshore projects, drones are increasingly used
operational benchmarking tools have entered to optimise blade and panel inspections.
the market allowing portfolio owners to test
Investors are increasingly considering life
their project performance against similar
extension of renewable assets, which can
projects. Data analytics are also increasingly
also affect Opex forecasts over the period if
used to identify and rectify faults and
refurbishment activities are required.
underperfomance efficiently.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 9Future Trends
There is growing competition in the third Larger service portfolios can also drive cost
party O&M service provider market, efficiencies by combining control centres or
particularly for onshore technologies and we spares holdings, as well as technicians and
see well developed markets for third party skills. This could be in the form of either
O&M services in certain countries, such as larger investor portfolios or third party O&M
Spain, which has driven down Opex. We provider portfolios.
have seen instances in some countries where
Increasing volumes of data are being
solar PV projects for example have obtained
collected, such as detailed 10 minute SCADA
significant O&M cost reductions of 5 to 35%
data for 10 years plus of operation. This
when negotiating older O&M contracts at the
offers the opportunity for optimization
end of their term, reflecting current market
and improved efficiencies across large
rates and some centralisation of services in
renewable energy portfolios. Condition-based
regions where O&M services have become
monitoring also provides opportunities to
most highly competitive.
intervene in a preventative manner, prior
The O&M strategy is going to be key going to failure, thus minimising downtime and
forward, as an aging asset base of renewables component replacement costs. For example
start to require increased maintenance there adding vibration monitoring can enable some
will be a drive to limit or transfer performance drive train or rotational imbalances to be
risk. remediated before significant damage occurs.
The development of digital twins for turbines
With the wind and solar markets moving
will allow underperformance conditions to be
towards zero-subsidies or reaching the end
identified and rectified.
of their price guarantees, new types of O&M
contract could emerge where service providers Improved weather forecasting will also allow
take on performance, resource and market planned and preventative maintenance to
risk in exchange for a revenue based service be more targeted at periods of low resource
guarantee. allowing focus to shift from time-based to
energy-based, and where market pressures
We expect that O&M strategies will
exist even revenue-based, availability. The
continue to improve in efficiency through
quality of the O&M strategy will become
the implementation of operational process
increasingly important in order to maintain
and the expanding use of modern technology
high availability.
such as drones, allowing for cheap aerial
thermography – permitting thermal problems
in PV plants or blade damage on turbines
to be detected rapidly – or computerized
management systems identifying faults at
string or panel level for leaner operations
at portfolio scale.
10 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT YC A PA C I T Y FA C T O R S
Capacity factors are a key driver in reducing Wind projects have benefitted through
LCOE, as higher capacity factors mean that more increases in rotor size and hub height and
energy is produced per MW of plant installed. offshore wind has also benefitted from
increasing distances offshore, which bring
Historical Trends
more stable winds. Larger solar PV farms
Energy production for wind and solar PV
with more efficient designs, have increased
farms depends on the capacity factor of the
the amount of energy that can be captured
project, which is defined by the resource
from a given site. Solar cell technologies
FIGURE 5 characteristics, technologies applied, site,
have developed through several generations
Increase in Country-specific layout and other project-specific factors.
weighted average capacity of design and are continually developed
factors for new onshore
Technological improvements in wind and and refined.
wind projects between
2010 and 2016. solar generation, have allowed capacity
Source: IRENA, 2017. factors to increase dramatically.
COUNTRY % INCREASE
50%
China 6%
France 9%
United Kingdom 11%
40% Germany 12%
C A PA C I T Y FA C T O R
India 12%
Italy 13%
Canada 14%
30% Spain 16%
Sweden 18%
Denmark 20%
United States 24%
Brazil 28%
20%
Netherlands 38%
Turkey 76%
2010 2016
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 11© Arup
Future Trends
Capacity factors are a key driver in reducing Improved modelling methodologies in the
LCOE, as higher capacity factors mean that area of pre-construction resource assessment,
more energy is produced per MW of plant such as 3D scanning LiDAR, will allow
installed. improved layout optimisation to maximise
With increased experience, lessons learnt are capacity factors and provide greater certainty
shared across the industry and help to reduce around P50 yields. This will be vital to
levels of downtime, which contribute to investors in a zero-subsidy world requiring
improved production and thus capacity factors. greater comfort around total production but
also the ability to meet PPA requirements or
For both solar and wind, improved weather other market incentive targets. For example
forecasting allows maintenance to be some Corporate PPAs will require a guarantee
increasingly targeted to periods of low of the proportion of time power will be
production, thus increasing the energy-based available as well as the total production.
availability and project capacity factor.
Energy-based availability is increasingly Improved certainty will ensure that projects
used in performance metrics for maintenance will not proceed in locations without
providers in order to optimise maintenance viable wind or solar resource where poorly
schedules and minimise outages during periods performing projects have previously survived
of high production. Advances in operational thanks to generous subsidies.
wind measurement such as nacelle-mounted
LiDAR allow for yaw and other parameters to
be optimised to maximise yield.
12 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT Y51M DIAMETER 118M DIAMETER
FIGURE 6 Other enhancements are increasingly being Continuing technology innovations will
Average turbine rotor
diameter increase from integrated into the original design, such as enable even higher capacity factors to be
2000 to 2018. high wind ride through options for wind achieved. In onshore wind, technology
turbines or aerodynamic improvements improvements are allowing longer turbine
to turbine blades. Similarly, analytics will blades, opening up projects in lower wind
continue to develop to optimise performance speed areas to achieve commercially viable
across both wind and solar technologies, capacity factors. In offshore wind, capacity
including turbine management to maximise factors have already reached almost 50%; new
wind farm output with regards to wakes and technology such as floating foundations allow
improved tracking options for solar panels. turbines to move further offshore to deeper
waters and higher wind speed regions, which
Repowering existing wind farms with modern
could allow offshore wind capacity factors to
turbines could also improve capacity factors
rise even higher. Solar yield improvements are
on existing sites, as further explored below.
largely driven by advances in material science
Further, the co-location of storage at such
reducing defects and improving efficiency.
sites, particularly those that have localised
grid constraints, can also increase availability
and shift production to more profitable times.
50%
In offshore wind capacity
factors have already
reached almost 50%.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 13LIFE EXTENSION AND REPOWERING
Repowering brownfield assets with newer Repowering encompasses the updating of
technologies and optimised design can wind turbines by either replacing older wind
improve yield while reusing site infrastructure turbines and foundations entirely or upgrading
with a longer asset life, such as electrical assemblies and components with higher
assets or grid connection. capacity and more efficient technologies to
increase production. Leases, planning and
Historical Trends
environmental permits would need to be
Wind farms reaching their final stage of
revised and extended. In particular, physical
the design life are currently limited in
turbine sizes have increased significantly over
their number but increasing. In 2017, wind
the lifetime of most wind farms at this stage
farms more than 15 years old comprised
of operation causing significant planning and
approximately 15% of total onshore wind
foundation design considerations. Similar
installed capacity, and this share will continue
savings can be made by extending existing
increase over time.
sites using existing infrastructure.
More and more wind farm investments will
There are some examples of repowering
therefore be considering end-of-design-life
already taking place in the UK, Germany, US
options. Three options are analysed:
and other geographies, although we expect
1 Lifetime extension that the historical volumes are much smaller
than the future opportunities in light of the age
2 Repowering
profile of existing wind farms.
3 Decommissioning.
Decommissioning is usually required where
Life extension is a key topic as investors are there are no further plans to operate the wind
increasingly commonly considering up to 30 farm after it has reached the end of its design
year operating scenarios. For solar assets, life. In a maturing market there may be
depending on the level of degradation, the greater opportunities to recycle useful parts in
assets may continue to operate beyond design this case.
life with little investment, or a refurbishment
campaign to replace faulty panels may
be undertaken. For onshore wind, some REPOWERING CASE STUDIES
refurbishment of blades or gearboxes may be
undertaken in order to extend operating life.
Leases, planning and environmental permits
for the sites would need to be extended but the
costs and risks associated with this can be less
than associated with developing a new site. DELABOLE
CARLAND CROSS
DELABOLE CARLAND CROSS
The capacity of Delabole wind farm, The capacity of Carland Cross wind
Cornwall, commissioned in 1991 farm, Cornwall, increased from 6
increased from 4 MW to 9.2 MW MW to 20 MW while the number of
between 2009 and 2011 while the turbines was reduced from 15 x 400
number of turbines was decreased kW to 10 x 2 MW in 2013 accounting
from 10 x 400 kW to 4 x 2.3 MW for an uplift of 233%. Hub height
accounting for an uplift of 133%. Hub increased from 49m to 100m.
height increased from 49m to 99m.
14 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT YFuture Trends
Repowering brownfield wind assets with
WindEurope estimates a
newer technologies and optimised design yearly repowering volume of
can improve yield while reusing site
infrastructure with a longer asset life, such as 1-2 GW in 2017 that reaches
electrical assets or grid connection. Therefore
repowering can obtain a reduced LCOE 5.5 to 8.5 GW by 2027.
compared to greenfield wind projects.
In addition, the 15+ years of operational
data provide a stronger certainty for yield
studies, whether life extension or repowering,
providing greater investment confidence.
Nevertheless, there are a number of project
issues to consider when repowering, including
existing land agreements and consents, grid
connection, visual and radar issues, which can FIGURE 7
Repowering volume
have a significant impact on the viability of a estimates for Europe.
zero-subsidy repowering project. Source: WindEurope.
10,000
9,000
8,000
7,000
6,000
MW
5,000
4,000
3,000
2,000
1,000
Low - high range
0
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 152. Reducing technical risk: Supply
chain and industry learning curve
As the supply chain continues to mature and
experience of all parties grows, lessons learned
are integrated into standard industry practice and
risks are better understood and mitigated.
Historical Trends
A number of factors have contributed There are a good number of portfolio-scale
to improvements in technical risk as the developers in the market today who have built
renewables market has matured. up experience and are more familiar with and
efficient at navigating the required permitting
The supply chain has been a key part of this
processes.
as equipment manufacturers, construction
contractors and O&M providers have Yield assessment techniques have been refined
all benefited from growing experience over the years, with many opportunities for
through the wide deployment of renewable yield modelling validation against actual
generation technologies across Europe and performance. Improved methodologies in
beyond. Examples of improvements include yield assessment result in greater certainty on
optimisation of performance and lessons capacity factors and reduce uncertainties.
learned in design and manufacturing; greater
The increased scale of deployment of turbine
understanding of foundations, loads and soils;
models from first tier manufacturers also
as well as greater understanding of weather
provides benefits such as an increased level
impacts such as icing on turbines or dust on
of sharing of spare parts between wind farms,
solar panels. These lessons learned contribute
reducing deployment costs and downtime
to reducing technical risk as more is known
risks due to part lead times. The larger fleets
in advance about expected performance and
of turbine models in operation also offer
investigations into some key risks or mitigating
improved risk management and performance
actions can be carried out earlier in the process
optimisation opportunities through portfolio
before capital is fully committed.
data analytics and knowledge sharing.
The maturity and experience of the supply
As demonstrated by the examples above,
chain is also an important determinant of how
many of the risks in renewable generation
efficient and predictable total installation costs
investments in European countries are better
are. In some zero-subsidy projects, we see
understood today, with opportunities for
vertical integration of the construction party
minimisation and mitigation as the market
and the owner party, due to the confidence in
has matured. This has contributed to enable
in-house delivery experience.
the cost of capital to reduce accordingly and
Permitting process are better understood renewables investments in Europe have grown
today meaning that the related risks are better over the period.
accounted for and the development process
planned accordingly.
16 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT YFuture Trends
As renewables deployment continues to grow Developers of the offshore wind projects
globally, experience and risk management in who have bid at zero-subsidy anticipate some
international markets will continue to mature, benefits of technology development and cost
thus improving risk profiles in international efficiency in the years before the projects are
greenfield investments. In particular, we due to be constructed.
see implementation of onshore wind and
For onshore wind, the industry is further
large scale solar, established technologies
along the maturity curve, but continued
in Europe, across Asia-Pacific and South
improvements in the industry are expected
America already achieving competitive
to improve returns for investors, either
auction prices in line with, or even lower than,
through improved efficiencies thanks to larger
those in more established regions with prices
and better blades or in application of new
in Brazil, Mexico and India reaching as low as
technologies such as drones and improved
$0.03 per kWh.
resource forecasting to improve operations.
Globalisation of supply chains may also
Solar power has seen the most dramatic
increase efficiency in transportation due to
reduction in LCOE over the last few
scale of procurement, as companies compete
years driven largely by the potential for
to accommodate this increasing demand.
efficient mass production of components.
This is already seen to a greater extent in
Technological improvements are expected to
solar panels, but could further develop in
continue in this sector with potential Capex
wind technologies.
savings on module and panel manufacture,
The offshore wind industry is less mature improved efficiency of new panel designs and
than onshore. We expect that offshore wind improved Opex through better monitoring and
will continue to mature and become more increased inverter lifetimes.
attractive, with a larger international activity
stimulating progress through lessons learned
and technology developments. For example,
wider implementation of the new larger
turbines and maturing of floating foundation
technologies will contribute to de-risking
their application as well as making a wider
area of sea accessible for offshore wind
farm developments.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 173. Mitigating Power Price Risk
With increasing renewables penetration in electricity
markets, there is a risk of increased price volatility
and cannibalisation. PPAs and electricity storage offer
opportunities to mitigate against low price capture.
LACK OF LONG-TERM C A N N I B A L I S AT I O N E F F E C T
INVESTIBLE PRICE SIGNAL The effect of significant volumes of low-
There have been a few examples of subsidy- cost renewable energy being brought to the
free/merchant deployment of renewables wholesale electricity market at the same time
in the UK. These have tended to be where can lead to periods of low, even negative,
projects are benefiting from use of existing wholesale electricity prices – this is termed the
infrastructure of adjacent subsidised power price ‘cannibalisation effect’. This effect
renewable projects, with Clayhill Solar Farm is seen where there are substantial amounts of
(10 MW) and Withernwick II onshore wind weather-driven renewable power generation.
extension project (8.2 MW) being high-profile This results in lower capture prices for
examples. renewable generation and increasing discounts
Investors to date have been less comfortable to the wholesale electricity price. This can be
assuming merchant wholesale market price seen in Figure 8 which shows wind installations
exposure compared to the relative security in particular achieving significantly less than
of long-term (15-20 year) subsidised price the market price.
levels which were historically offered by The European Commission, in an effort to
Government subsidy schemes. Where there is reduce the extent of the distortive effect
limited certainty of revenues over the project that weather-driven renewables in receipt of
payback period, far fewer projects proceed. subsidies have on wholesale electricity market
However there are mechanisms such as prices has imposed European Commission State
PPAs which can provide alternative business Aid Requirement that generators do not have an
models, discussed further overleaf. incentive to generate electricity under negative
prices. If the day-ahead power auction hourly
price is below zero, support will be capped
at the strike price. Moreover, if prices remain
negative throughout a six-hour period or longer
then the subsidy will be set to zero for the
entirety of that period. This is know as the
‘6+ hours negative price event’ rule.
To mitigate against these challenges, PPAs, can
provide fixed or floor electricity prices, and/or
energy storage can be installed, which can offset
time of sale of the electricity generated. These
are both considered in the following sections.
18 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT Y100%
C A P T U R E P R I C E C O M PA R E D
TO MARKET PRICE
90%
80%
High
70% Base
Low
Historical
60%
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
FIGURE 8
Annual GB wind power
capture spread.
FUTURE TRENDS
Some of this excessive price variability is
likely to reduce with:
-- Technological advances in smart metering
and appliances and energy storage levelling
demand processes;
-- The move to half-hourly settlement and
increasing use of time of use tariffs to
incentivise consumers to utilise excess
electricity; and
-- Improved interconnectors across Europe
allowing excess power in windy/sunny
regions to be exported further afield.
© Arup
Moves to electrify the transport and heat
sectors, in particular the roll-out of electric
vehicles, are likely to result in higher
electricity demand to maintain prices.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 19C O R P O R AT E P O W E R P U R C H A S E
AGREEMENTS
Some countries are already seeing renewable Corporate appetite to enter into Corporate
projects reach financial close without price PPAs is driven by a variety of factors,
support from governments. An increasing including:
number of such projects are using Corporate
-- Greater power price certainty;
PPAs to provide price certainty.
-- The desire for green credentials, for
Power Purchase Agreements example the RE100 initiative where 156
To date PPAs provide a route to market for the global companies have committed to
electricity produced by renewables projects, source 100% of their global electricity
allowing the exchange of physical electricity consumption from renewable sources; and
for cash flows aligning to the terms of the -- Increased energy security.
relevant government-backed subsidy. With the
withdrawal of these incentives, there is a need Nevertheless, these drivers differ between
for other mechanisms to address the lack of a Corporates and there is no single “type” of
long-term investible price signal. Corporate PPA offtaker. Entities who have
signed Corporate PPAs include Google,
The evolution of Corporate PPAs has been
Facebook, Norsk Hydro, Ikea, Unilever,
seen by some as the principal means of
McDonalds, and Mars, with the predominant
allowing developers to de-risk projects by:
technology being onshore wind.
-- Providing a degree of longer term
Further, electricity procurement is not the
certainty in project revenues for
core business of these entities. The corporate
investors and lenders;
offtakers must be comfortable signing off
-- Seeking to substitute to some extent on longer-term energy deals in the place of
the support that government subsidies the short to medium term contracts that they
traditionally provided; are accustomed to, which requires additional
-- Mitigating against increasingly volatile understanding of energy markets and future
power prices; and power prices amongst other things. As a
-- Offering an alternative route to market result, the execution of a Corporate PPA can
from the traditional offtaker. be a lengthy, complex and time-consuming
process and the lack of standardisation in the
market presents a barrier for zero-subsidy
projects where efficiency is key.
156
In the RE100 initiative, 156 global
companies have committed to
source 100% of their global electricity
consumption from renewable sources.
20 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT Y8 32
7 28
C U M U L AT I V E V O L U M E ( G W )
ANNUAL VOLUME (GW)
6 24
5 20
4 16
3 12
APAC
2 8
EMEA
AMER 1 4
Cumulative
0 0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
YTD
FIGURE 9 Historical Trends
Global Corporate PPA
volumes by region Corporate PPAs are not new, however, there The lack of standardisation in the Corporate
Source: Bloomberg NEF. has been a significant growth in the volumes PPA market has been a barrier to wider
Note: Data is through July of Corporate PPAs being procured over the deployment, as each Corporate PPA has
2018. Onsite PPAs not
included. APAC number is
past five years. different requirements depending on the
an estimate. Pre-market geography, technology and capacity of the
In Europe, activity to date has focused on
reform Mexico PPAs are project, market conditions, counterparties,
not included. These figures jurisdictions such as the UK, Nordics and the
are subject to change and financiers etc. Nevertheless, there has been a
Netherlands, however, other markets are now
may be updated as more trend of cross-fertilisation of practice across
information is available. developing. European Corporate PPA volumes
jurisdictions, which has seen:
amount to approximately 1 GW of capacity
in 2016 and 2017. The 650 MW Markbydgen -- The main sleeved or virtual structures
PPA has contributed significantly to the 2017 emerge, depending on the local regulatory
volume. requirements; and
However, there are still only a handful of -- A move away for more simplistic long term
renewables projects that have managed to be fixed pricing, particularly in light of falling
completely financed with Corporate PPAs power prices in recent years.
alone without government subsidies and many
of the Corporate PPAs captured in the chart
above exist alongside subsidies.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 21© Dreamstime
Future Trends
The Corporate PPA market is very dynamic There is currently a significant imbalance
and we expect to see further innovation in between the number of prospective zero-
Corporate PPA structures, including: subsidy renewables projects and the number
of potential Corporate counterparties and this
-- Increased use of a stacked PPA approach,
is expected to continue for the foreseeable
whereby the Corporate PPA accounts for
future, in part for the following reasons:
a percentage of the volume, with other
top-up arrangements being put in place -- Some Corporates, such as Apple, have
in addition; already achieved their goal of sourcing
-- More sophisticated approaches to 100% of their electricity from renewables;
volume, balancing and shape risk by both -- There are also questions over whether the
generators and Corporates and the role that procurement of green electricity is always
utilities can play in taking on balancing achieving the desired additionality of
responsibility in such structures; and unlocking investment in new projects, or
-- Aggregated / multi-party PPA models, such whether such procurement simply relates
as the structure proposed for Vattenfall’s to existing renewables projects (which are
South Kyle onshore wind farm, which likely to benefit from subsidies); and
is offering index-linked fixed prices for -- Conversely, only a small overall proportion
periods of between 10 and 20 years in of Corporates have a renewable energy
multiples of 1 MW. procurement target.
100%
Some Corporates, such as Apple, have
already achieved their goal of sourcing
100% of their electricity renewables.
22 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT YWe expect to see an increase
in appetite from Corporates in
jurisdictions where power prices
are predicted to increase over
the coming years.
This can result in an unbalanced negotiating The long-term creditworthiness of the
position between developers and Corporates. Corporate counterparty (and wider viability of
Nevertheless, we expect to see an increase the Corporate group’s industry) will continue
in appetite from Corporates in jurisdictions to be an area of focus for developers and
where power prices are predicted to increase lenders. We expect further innovation in this
over the coming years. area, particularly in light of the diversification
of corporate offtakers, for example, the use of
Corporates are likely to seek a more holistic
export credit agencies to provide assurance
approach to their procurement, for example
has already been trialled.
via tender exercises, in order to ensure to the
extent possible uniformity of approach and Where Corporate PPAs are not required or
transaction efficiency across their portfolio available, traditional utilities have a role
of PPAs. to play. In some countries such as Spain,
offtakers such as Statkraft, are enabling
It is clear that Corporates will continue to gain
subsidy-free projects to reach financial close
in sophistication and their requirements, such
without any guaranteed price support by
as in respect of the construction and O&M
providing 15 year PPAs on terms that enable
documentation and security provided in the
the project to be developed.
context of debt financing.
Floor prices structures on offer from utilities
These issues are driving the market to
also have a place in unlocking investment
consider the next tier of medium – smaller
in zero-subsidy projects and this is an area
sized Corporates, which:
in which we expect further development.
-- Individually have a smaller demand Other approaches may include moves
requirement; and towards vertical integration from the more
-- May be less creditworthy than the sophisticated developers seeking to avoid
traditional “blue chip” counterparties. profit leakage.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 23R E V E N U E S TA C K I N G
Subsidy schemes often prevent renewable SECURITY AND RESERVE SERVICES
( E . G . B L A C K S TA R T A N D S T O R )
technologies from competing in other
markets. As subsidies are removed
FREQUENCY RESPONSE SERVICES
opportunities emerge to explore secondary
revenue streams.
BALANCING MECHANISM
REVENUE STREAM
Renewable energy projects can mitigate
against exposure to fluctuating electricity
power prices and merchant risk to some I N T R A - D AY M A R K E T
degree by offering multiple services and
combining several revenue streams, for
example, by providing system services and/
WHOLESALE MARKET
or participating in balancing services, in
addition to the sale of electricity.
By having more than one revenue stream,
zero-subsidy renewable energy projects can C A PA C I T Y M A R K E T
diversify their level of risk when compared
with the sale of electricity to an offtaker
alone.
Revenue stacking can boost revenues and
profitability, however, such an approach
adds complexity and introduces potential
downside risks, for example, non-delivery
penalties. As a result, such arrangements The approach can allow for some contracted FIGURE 10
may be less attractive to investors who revenue streams of different contract lengths, Illustrative revenue stack
for flexible generator.
are not familiar with the different revenue which can underpin any debt financing, while
streams and should be carefully considered allowing participation in other revenues to
depending on the technology, location, provide upside to equity investors.
available revenue streams and contractual
arrangements in place. In order to successfully stack revenue
streams, the relevant project must meet the
Potential revenue stacking could include: technical requirements (de-minimis capacity
-- Participation in a capacity market; threshold, ramp rate, response rate etc.) for
the relevant services, which differ between
-- Energy arbitrage with associated
countries. The commercial implications of
storage facilities;
contracting to deliver multiple services at the
-- Participation in trading and system same time must also be carefully considered.
balancing; and For example, specific balancing services may
-- Provision of system services, such as prohibit contracting for multiple revenue
frequency response, reactive power etc. streams in their terms and conditions.
24 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT YHistorical Trends
To date, there has been little take-up of Nevertheless, such additional revenue streams
revenue stacking by renewable projects, are subject to regular regulatory reforms,
other than: reducing prices due to increasing competition
and, unlike many subsidy regimes, do not
-- Participation in curtailment / balancing
often benefit from grandfathering, which
services, which can be particularly
can add further uncertainty. In addition, we
lucrative depending on the jurisdiction; and
expect system operators to continue to move
-- Where projects are obliged to provide to shorter lead times in the procurement of
certain system services to the system system services.
operator.
There are likely to be further revenue
One barrier to the uptake has been the opportunities for zero-subsidy projects, for
approach of offtakers, who have tended to example, pan-European mechanisms such as
restrict the ability of generators to participate Project TERRE, for developers and investors
in balancing and system services under their to consider in the near future. As a result, we
PPA terms. expect projects to seek to retain a degree of
In addition, only a handful of projects have flexibility in their revenue strategy in order to
co-located energy storage to date, which is be able to amend the revenue stacks as more
a key enabler of revenue stacking for wind lucrative revenue streams become available.
and solar, given the intermittent nature of We anticipate that utility offtakers will
the technologies. increasingly allow developers to participate
in other system services (in return for a share
Future Trends of upside). However, Corporate offtakers may
The level of uptake of revenue stacking be more reluctant in this regard, given the
for zero-subsidy projects will depend on potential that such services conflict with the
the regulations of the relevant jurisdiction, Corporate’s drivers for energy security and
which may limit the revenue streams that green credentials and the further complexity
renewable projects are able to participate in. revenue stacking introduces.
A key enabling factor in facilitating further
It is expected that more complex operations
revenue streams will be the removal of
and maintenance arrangements will be
regulatory barriers in order to allow renewable
required given the more sophisticated
projects to participate in the different energy
operational requirements for such projects
markets. For example, the UK government
pursuing revenue stacking. There may be an
is considering allowing wind and solar to
increasing role for aggregators who are able
participate in its Capacity Market, although
to offer access to revenue stream procurement
the de-rating factors that are proposed to
expertise and support in delivery of the
apply to these technologies are very low.
services procured.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 25WHOLESALE C A PA C I T Y & TRANSMISSION DISTRIBUTION
MARKET BALANCING NETWORK SERVICES
SERVICES SERVICES
Frequency Response Transmission Upgrade Deferral Distribution Upgrade Deferral
Energy Arbitrage, minimising
exposure to price
cannibalisation periods and/or
targeting high demand periods
Reserve Services (short term) Constraint Management
Reduced Imbalance Costs Voltage Support/ Reactive Power
Black Start Active Network Management
Capacity Market Services
(longer term)
Utility scale Transmission level Distribution level
ENERGY STORAGE
The majority of investment in the energy However, there are a number of issues for FIGURE 11
The range of services
storage sector to date has focused on stand- zero-subsidy projects to consider when offered from electricity
alone energy storage, where projects stack co-locating storage, for example, the import storage coupled with
utility-scale renewable
revenues from a number of different ‘markets’ and export agreements (if any) between the generation.
such as capacity, wholesale electricity, renewables and storage projects, the impact
balancing services, frequency response and on the construction and operation agreements
local network services with typically single and the grid connection arrangements (for
digit returns. example, the extent to which the storage
device will import electricity from the
Nevertheless, co-location of energy storage
system). The relevant issues are shaped by
with zero-subsidy renewables projects
who owns and operates the storage device and
provides risk diversification and a range of
whether this is the same entity as owns and
potential benefits, such as:
operates the renewable project.
-- Maximising generation output and
Further, there are a range of options in terms
managing intermittency and balancing
of technical configuration, such as metering,
costs;
and whether the storage device is considered
-- Enabling projects to avoid grid to be part of the generation station, is
constraints issues; separately metered or is “network side” within
-- Revenue stacking opportunities the connection point. The configuration of
(as detailed in Figure 11); and the generating station and the storage device
-- Access to price arbitrage and limiting directly influences the relevant issues to
exposure to negative power prices, for consider.
example, as well as the opportunity to
seek to benefit from possible cheaper grid
connection arrangements and other cost
associated with sharing infrastructure.
26 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT YHistorical Trends
Whilst it remains more the exception rather
We anticipate the proportion of
than the rule, co-location storage capacity when compared
is gaining more traction with recent
examples including: to renewables capacity will
-- ACCIONA Energía’s 3 MW wind
turbine in Spain, which is co-located
increase in the future.
with storage consisting of two batteries
- one fast-response battery capable of
maintaining 1 MW of power for 20
minutes and other slower-response
battery capable of maintaining 0.7 MW
for 1 hour; and
-- Anesco’s Clayhill solar farm / battery
energy storage project, with 10 MW The scale of the storage will be significant in
solar PV with 6 MW / 6 MWh of defining which and the extent of the services
energy storage. can be offered by the co-located zero-subsidy
project. Much of the storage deployed to date
Some of the services that co-locate has been de-minimis when compared with the
storage technologies such as batteries with total capacity of the renewable projects.
renewable energy sites could provide are
highlighted in figure 11. As other energy storage technologies develop
and mature to deliver at lower cost, this may
Future Trends support growth in this area. Two in particular
Further growth in the co-location of storage are:
as part of the design of new-build zero- -- Vanadium redox batteries, which are better
subsidy renewable projects is expected for suited to longer term storage than lithium-
the reasons set out above. ion technology, and are able to provide
This will be further enabled by future green solutions for islanded networks; and
cost-reductions in lithium-ion batteries, -- The production of hydrogen by the
but will also be driven by the extent of renewables project. There are various
market volatility and whether the additional opportunities in hydrogen in terms of
revenue streams and risk diversification injection into the gas network, transport
can justify the additional interfaces and fuelling, additional electricity generation
complexity. and wider chemical applications.
THE Z ERO- SUB SI DY RENEWABLES OPPOR TUNI TY 274. Financial Investor Perspectives
In the transition of renewable energy towards zero-subsidy,
the bankability of commercial and technical solutions
applied will be key. Investors are seeking solutions to
achieve price stability for bankability.
Historical Trends
Internal Rates of Return (IRRs), debt and Projects operating under a merchant model
funding margins for renewables projects have (focused on ancillary services and wholesale
declined in past years owing to the following hedging) as opposed to with contracted
key drivers: revenues such as capacity market contracts,
PPAs, FiTs or CfDs are expected to have a
-- Better industry understanding of the
higher cost of finance as merchant revenues
renewables asset classes;
are less certain. The challenges are both due to
-- More competition between equity the difference in price certainty, but also price
providers/more renewables-specific stability. We anticipate that in a zero-subsidy
mandates; and context, PPAs will be required for bankability.
-- Better technical execution of projects.
It will therefore be important to manage
Future Trends risk with respect to each of these when
We see that CfDs or other subsidy types retain establishing a Corporate PPA or other
an important role in offering price stability, commercial solution to replace subsidies.
even if the premiums to market electricity However we note that PPAs are often short-
prices are declining. term, and therefore longer-term PPAs may be
required to open up the zero-subsidy potential.
In the transition of renewable energy
towards zero-subsidy, the bankability of
the commercial and technical solutions
and business models applied will be a key
consideration for renewables project design
and development.
We recognise that investors and lenders
consider pricing and revenue risk in light of:
PPAs are often short-term,
-- Extent of exposure to market prices; and therefore longer-term
-- Term of any price support or stabilisation;
and
PPAs may be required to open
-- Strength of payment counterparties. up the zero-subsidy potential.
28 T H E Z E R O - S U BS ID Y RENEWA BL ES OPP OR T U NIT YYou can also read
