This is the first of a set of three papers conveyed to establish certain variables, drivers and facts, from both economic and technical perspectives, that commonly drives some journalist or energy sector professionals to wrong or weak conclusions unfortunately put on “black on white”.
Thus, in this first paper we are going to provide the general picture of Renewable Energy Sources (leaving out of the analysis the Hydro Power Generation from reservoirs or dams), hence uniquely those most predominant currently: Solar (mainly Photovoltaic) and Wind Power Generation.
Why RES are not competitive economically nowadays?
Simplifying, it can be concluded that the generation share of a system (technologies and power plants connected in a certain interconnected grid) is optimized by the demand evolution and generation’s Variables Cost of each power plant or technology in case they are considered as a whole. The so many times referred as the Marginal Cost Theory. Of course it is not the aim of the present paper to describe this theory, many references and lectures can be found out in internet.
It doesn’t matter if a Central Planner (some States of US) manages the generation share by launching auctions of certain capacity and technology as long as the demand grows or in the other way around is the market mechanism (Rest of US and EUROPE) which fit the optimal generation share. The common “before RES” generation share in western countries consisted on a base of Nuclear Power Plants (cheapest and complicated to operate for security reasons), coal power plants, Gas power plants (GT or CCGT) and very seldom, peaking fuel turbines (the most expensive ones, that only operates very few hours a day). Since power companies are usually private, they are to make benefits, and given the fact the above mentioned technologies can modulate or generate at discretion, they get those incomes from the operating manoeuvre (regardless strategies, management, fuel price risk hedging etc…), so they ask higher prices or are dispatched in a merit order, and consequently they cover their CAPEX and OPEX and get a certain net benefit. Now, what can RES power generators do to cope with this fact?, they have almost no variable cost (maintenance) but in the other way around they are entitled with very high investment cost (much higher than conventional generators’ ones) and they are constrained by a fact, they depend on random environmental circumstances to deliver energy, no chance to choose the peak hours and consequently getting the higher energy prices. How regulators are fitting this fact? They are obviously leashing the links by means of grants (tax credits or feeding tariffs schemes, apart of compensation in concept of loss of profit to conventional generators), no other suitable solution is available if Policy and Rule makers are concern and committed with GHG emissions reduction.
What was and still is the rationale to keep on trying to bring RES generation to a competitive scheme?
The answer can be summarized as follows: Every stakeholder thought at the earliest 2000 that by one hand commodities (coal, gas and oil) prices would have increased more rapidly than they are doing actually. By the other hand everybody expected at that time that the maturity of technologies and GHG market scheme would have pushed the RES to a total economical competitiveness.
The first prediction failed due the financial crisis and the second one simply didn’t occur; the technology has suffer a notable and remarkable improvement but the weather conditions (solar irradiation and wind flows) do not follow markets or customers’ behaviours what set the demand. This latter was a wrong misconception from the very beginning.
Let’s make a simple estimation according the preliminary assumptions:
Future Gas Prices: 25-30 €/MWh (settlement price at 11/15/2011)
Yield (power generated over heat power) of CCGT: 55% (those which set the highest prices)
Then we may assume the price of energy in peaking hours is in a range of 60 €/MWh (what fits with EU Energy Prices)
Natural Gas Emissions: 0.4 CO2 Tonne/MWh (much less pollutant that conventional coal power plants)
Current future settlement prices for EUA: 10 €/ Tonne CO2 (settlement price at 11/15/2011)
Some references of RES power generation CAPEX:
Solar PV 4000 US-$/kW (the lowest offered by incumbents PV manufacturers)
Wind Power Generation (one of the cheapest wind generators has achieved 1000 €/MW)
There are only 6 hours of peaking hours per day what means a mean of 2000 hours at peak hour prices per year (in addition is a rational value for generation factor of PV technology at nominal capacity).
Let’s assume a plant of 1 MW F-V;
CAPEX: 3,100,000.00 € (according the current exchange rates)
Leverage: 75 %
Interest Rate: 6% (currently commercial Banks are offering higher rates in Europe)
Annual payment (25 years of amortization period; principal plus interests): 163,077.00 €
Annual revenues: 120,000.00 €
Annual deficit: 43,077.00 €
Annual incomes for reduction of CO2 emissions (Displacement of CCGT power plant generation): 8,760.00 €
Annual deficit according GHG trading scheme (cap and trade): 34,317.00€
Only a price of EUA allowances of almost 50 €/Tonne would make the power plant profitable (leaving out the Gas price)
Obviously in a real case this simple estimation should be more accurate (many critical conditions have been deliberately left out), but notwithstanding this above sample gives a range of values to bear in mind when dealing with RES power generation economic competitiveness.
As a conclusion, we can sustain that we are rather far from the point to release grants to RES power plants if GHG emissions reductions commitments want to be met and in order not to hamper the RES promotion which provides other undisputed “intangible” global benefit apart of the environmental aspect as is the case of the energy dependency release.
Remark:
In Spain by 2007 a Royal Decree was enacted which settled a Feed-In Tariff of 44 c€/kWh 440 €/MWh what jointly with another wrong measures led to increase the PV RES sources in 10 times the amount expected by the year 2010 with disastrous impact in the Tariff Shortfall which reached 20 billion Euros this year.
miércoles, 16 de noviembre de 2011
jueves, 3 de noviembre de 2011
Ofgem, NETA & BETTA new challenges to achieve the EU RES policy commitments
New Energy Trading Arrangement (2001) and its successor British Energy Transmission Trading Arrangement (settled in April 2005 as long as Scotland joined the England and Wales transmission and trading system and leading to an UK wide market), are to be modified in order to face the new challenges addressed to achieve the committed 20% of RES (Renewable Energy Sources) power generation by 2020 as a compulsory target stated by the European Union’s Directives (20/20/20 2020).
The new challenge should be sought by reviewing and analyzing the current market scheme in case the UK policy’s aim is to promote RES at large scale and market based (long term contracts and balancing and settlement undertaken by National Grid and ELEXON for the Real Time operation of the entire system and economically fixed after the operation according the maturity of contracts and agents deviations) or in the other way around changing the paradigm due the lack of success with the current Feed In Tariffs (hereinafter FIT) that uniquely promote small scale facilities (less than 2 kW primarily for self consumption) , what additionally might lead in a very complex operation of Power Distribution Companies and its consequent increase in regulated remuneration of this activity.
The achievement of the targeted 20 % of power generation, in order to maintain the integrity of the whole system, can be addressed uniquely by the promotion of big Wind Generation farms (regardless certain promotion of other technologies as Photovoltaic or Geothermal in a limited scale) for the following reasons given the maturity of this mentioned technology:
1. Wind Power Generation is capable to maintain power factor under certain limits, even compensate it to prevent blackouts
2. The Offshore option provides with high amount of capacity and low environmental impact (2 MW in a single mill with less permits and environmental requirements that those potentially required inland)
3. As it has been evidenced in other countries or systems’ experiences, the uncertainty of power delivered in a day ahead is not subject to suffer significant deviations (in many cases less than 10%)
4. The CAPEX or unitary cost per MW has been sharply decreased.
Notwithstanding it shall be remarked that these set of strengths of the Wind Power generation do not match properly in the current market scheme as it exist by the time being, since even the lack of the uncertainty in the day-ahead power delivery, it is currently impossible setting long term contracts and compete with the conventional power generation (Coal, Nuclear and Gas) in terms of CAPEX (regardless the Marginal Cost usually misunderstanding by some authors, and the compensation for programme deviations). Nowadays RES (but Hydro Power Generation) need grants or compensations in a market based model with no scarcity of installed capacity (therefore Not Supplied Energy is not a driver) and in a rather messed power system (leaving out of this briefing the isolated systems).
Therefore the single solution to achieve RES promotion and deterring “dramatic” reforms in the current trading arrangement shall be leaving out of the current scheme the RES technology (but hydrogenation).
One suitable solution would be to transfer liquidity to the day-ahead spot market (as the SSE Power Company’s initiative) and settling a floor price reviewed each certain time-frame or period (with no retroactivity and maintaining the stable legal framework) in order to avoid of excess of Wind Power Installed capacity what could be managed by the Government and/or Ofgem regulation and market and system monitoring.
Regarding technical constraints, Ofgem is to settle the conditions to be fulfilled by these types of generators in the Grid Code and/or Connection Conditions, which can be designed in order to release or increase the ancillary services’ responsibilities and connection charges (shallow-deep charges) or conditions’ duties in the same direction than market pricing (floor price) to manage the RES capacity installed .
Finally, assuming that the Green House Gas emissions reduction leads to common benefit, the total cost burden of whatever solution is adopted it should be carried out by every market participant and therefore the cost shared among them.
The new challenge should be sought by reviewing and analyzing the current market scheme in case the UK policy’s aim is to promote RES at large scale and market based (long term contracts and balancing and settlement undertaken by National Grid and ELEXON for the Real Time operation of the entire system and economically fixed after the operation according the maturity of contracts and agents deviations) or in the other way around changing the paradigm due the lack of success with the current Feed In Tariffs (hereinafter FIT) that uniquely promote small scale facilities (less than 2 kW primarily for self consumption) , what additionally might lead in a very complex operation of Power Distribution Companies and its consequent increase in regulated remuneration of this activity.
The achievement of the targeted 20 % of power generation, in order to maintain the integrity of the whole system, can be addressed uniquely by the promotion of big Wind Generation farms (regardless certain promotion of other technologies as Photovoltaic or Geothermal in a limited scale) for the following reasons given the maturity of this mentioned technology:
1. Wind Power Generation is capable to maintain power factor under certain limits, even compensate it to prevent blackouts
2. The Offshore option provides with high amount of capacity and low environmental impact (2 MW in a single mill with less permits and environmental requirements that those potentially required inland)
3. As it has been evidenced in other countries or systems’ experiences, the uncertainty of power delivered in a day ahead is not subject to suffer significant deviations (in many cases less than 10%)
4. The CAPEX or unitary cost per MW has been sharply decreased.
Notwithstanding it shall be remarked that these set of strengths of the Wind Power generation do not match properly in the current market scheme as it exist by the time being, since even the lack of the uncertainty in the day-ahead power delivery, it is currently impossible setting long term contracts and compete with the conventional power generation (Coal, Nuclear and Gas) in terms of CAPEX (regardless the Marginal Cost usually misunderstanding by some authors, and the compensation for programme deviations). Nowadays RES (but Hydro Power Generation) need grants or compensations in a market based model with no scarcity of installed capacity (therefore Not Supplied Energy is not a driver) and in a rather messed power system (leaving out of this briefing the isolated systems).
Therefore the single solution to achieve RES promotion and deterring “dramatic” reforms in the current trading arrangement shall be leaving out of the current scheme the RES technology (but hydrogenation).
One suitable solution would be to transfer liquidity to the day-ahead spot market (as the SSE Power Company’s initiative) and settling a floor price reviewed each certain time-frame or period (with no retroactivity and maintaining the stable legal framework) in order to avoid of excess of Wind Power Installed capacity what could be managed by the Government and/or Ofgem regulation and market and system monitoring.
Regarding technical constraints, Ofgem is to settle the conditions to be fulfilled by these types of generators in the Grid Code and/or Connection Conditions, which can be designed in order to release or increase the ancillary services’ responsibilities and connection charges (shallow-deep charges) or conditions’ duties in the same direction than market pricing (floor price) to manage the RES capacity installed .
Finally, assuming that the Green House Gas emissions reduction leads to common benefit, the total cost burden of whatever solution is adopted it should be carried out by every market participant and therefore the cost shared among them.
martes, 1 de noviembre de 2011
Yorgos Papandreou, the New European Lehman Brothers:
Too big to fall, -somebody will help us-, -public funds are needed-, these are many of the excuses and last resort weapons that Lehman Brothers, Bearn Stearns, and the rest of the financial industry thought about and took into consideration when denying to declare their bankruptcy or going directly to the edge, they already knew that they would receive bailout since the system relied on their own financial institutions.
They were right, the evidences were shown in the mid 2008 credit crunch. Now the tame has passed and a similar blackmail is on the table, the public debts, bonds and obligations, it doesn’t matter the maturity of them, one five or ten years, the single difference is that the menace is not the financial behaviour of a small group of bankers traders or a handful of greedy bankers, now comes directly from a Government.
Once again we are facing the tricky and mafia-style situation, who is actually the borrower and the debtor? When a borrowing entity relays in a single debtor with a huge amount of money the situation could (or will) derive in an out of control situation, confidence is the single collateral in that case, and the default of the debtor a total disaster.
Going back to the credit crunch situation, the Wall Street bankers knew that they were managing the situation and that at the end of the day, the Government (FED and Treasury), should have to interfere in their own affairs since otherwise the whole financial system would had collapsed and the wrong defined as “real economy” would be dragged down with them. Now Mr Papandreou’s Government is playing their own strengths and advantages in the same way, he and the Greece Government got financing from French and German banks (regardless other financial institutions overseas that have already suffered the impact of this dishonest politician behaviour), and now, who is actually in a risky situation?, for sure Greece has taken the lead, and European Union’s politicians have lost the initiative since they currently have a deep hole in their financial system.
At the end of the day, every single European Union citizen is going to pay for the Greece debt (note that 50% of them have been already deducted), and maybe the “euro never ending tap and bailout agreements” might be closed after this blackmail in order to prevent the rest of PIGS to use the strongly damaged confidence path and environment of the European Union Rescue Fund uniquely for domestic sort term political aims whatever the impact might be.
Thus, it is the lack of regulation and laisser faire scheme the real cause of the crisis or in the other way around the politicians interference and policy making currently are actual basis and seed for the present situation?, note that the sub-prime mortgages problem arose from Freddy MAC and Fannie Mae lending policy (see URL below) that were GSE (Government Sponsored Enterprises) the latter founded in 1970 and the former in 1938 as part of the New Deal even though Fannie Mae was reformed in order to promote indebtedness of house owners, overall it is to be remarked that was a transitional period from a Democrat to Republican administrations, no unique political blaming then.
(1) http://en.wikipedia.org/wiki/Fannie_Mae
(2) http://en.wikipedia.org/wiki/Freddie_Mac
They were right, the evidences were shown in the mid 2008 credit crunch. Now the tame has passed and a similar blackmail is on the table, the public debts, bonds and obligations, it doesn’t matter the maturity of them, one five or ten years, the single difference is that the menace is not the financial behaviour of a small group of bankers traders or a handful of greedy bankers, now comes directly from a Government.
Once again we are facing the tricky and mafia-style situation, who is actually the borrower and the debtor? When a borrowing entity relays in a single debtor with a huge amount of money the situation could (or will) derive in an out of control situation, confidence is the single collateral in that case, and the default of the debtor a total disaster.
Going back to the credit crunch situation, the Wall Street bankers knew that they were managing the situation and that at the end of the day, the Government (FED and Treasury), should have to interfere in their own affairs since otherwise the whole financial system would had collapsed and the wrong defined as “real economy” would be dragged down with them. Now Mr Papandreou’s Government is playing their own strengths and advantages in the same way, he and the Greece Government got financing from French and German banks (regardless other financial institutions overseas that have already suffered the impact of this dishonest politician behaviour), and now, who is actually in a risky situation?, for sure Greece has taken the lead, and European Union’s politicians have lost the initiative since they currently have a deep hole in their financial system.
At the end of the day, every single European Union citizen is going to pay for the Greece debt (note that 50% of them have been already deducted), and maybe the “euro never ending tap and bailout agreements” might be closed after this blackmail in order to prevent the rest of PIGS to use the strongly damaged confidence path and environment of the European Union Rescue Fund uniquely for domestic sort term political aims whatever the impact might be.
Thus, it is the lack of regulation and laisser faire scheme the real cause of the crisis or in the other way around the politicians interference and policy making currently are actual basis and seed for the present situation?, note that the sub-prime mortgages problem arose from Freddy MAC and Fannie Mae lending policy (see URL below) that were GSE (Government Sponsored Enterprises) the latter founded in 1970 and the former in 1938 as part of the New Deal even though Fannie Mae was reformed in order to promote indebtedness of house owners, overall it is to be remarked that was a transitional period from a Democrat to Republican administrations, no unique political blaming then.
(1) http://en.wikipedia.org/wiki/Fannie_Mae
(2) http://en.wikipedia.org/wiki/Freddie_Mac
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