Tag Archives: renewable energy finance

EU winter package brings renewables in from the cold

December 1, 2016 |

 

Joint press conference by Maroš Šefčovič and Miguel Arias Cañete on the adoption of a Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy

Christmas came early yesterday in Brussels, with the release of some heavy reading for the EU’s parliamentarians to digest over the festive season. Or at least that was the more jovial take on the launch of the EU winter package from Maroš Šefčovič, the EU vice-president in charge of the Energy Union (pictured).

Targets to cut energy use 30% by 2030, the phasing out of coal subsidies and regional cooperation on energy trading are central to the proposals, which updates the regulations and directives that support targets set out in 2014 as part of the Energy Package 2030.

Whether this gift is not just for Christmas will be down to the EU parliamentarians who have two years to debate these proposals and implement them.

So where does it leave us with the growth of renewables, the underpinning for a decarbonised power sector? If the EU meets its 2030 target, 50% of electricity should be renewable compared with an EU average of 29% today. That target remains unchanged, so those engaged in producing clean energy for Europe’s electricity grid should be reassured – up to a point.

A great deal was made of scrapping priority dispatch for renewables after that proposed change was ‘leaked’. In the end, the Commission merely soften its language but the outcome remains the same on priority dispatch, implying that policymakers think that renewable generation should be more responsive to the market.

Yesterday, Šefčovič and the Commissioner for Climate Action and Energy Miguel Arias Cañete both acknowledged that renewables need to be more integrated into wholesale markets, and those markets need to be more coordinated with each-other. Specifically, the package encourages member states to:

  • ensure that renewables participate in wholesale and balancing markets on a “level playing field” with other technologies. In particular, the new package removes the requirement for renewables to be given priority dispatch over other generation types (which most, but not all, member states currently abide by). It instead requires dispatch which is “non-discriminatory and market based”, with a few exceptions such as small-scale renewables (<500kW). In addition, renewables should face balancing risk and participate in wholesale and balancing markets.
  • increase integration between national electricity markets across the EU. Requirements include opening national capacity auctions to cross-border participation and an interconnection target of 15% by 2030 (ie, connecting 15% of installed electricity production capacity with neighbouring regions and countries). Earlier this year, the Commission established an expert group to guide member states and regions through this process.

What does this all mean for investors? The obvious concern is that removal of priority dispatch and exposure to balancing markets will increase revenue risk for renewables generators.

So, why is the EU removing these rules on priority dispatch once the mainstay of the Commission’s wholesale market rules? The main argument is to help reduce the costs of balancing supply and demand, and managing network constraints. Generally, it is most economic to dispatch renewables first because their running costs are close to zero regardless of whether they have priority dispatch.

But, when there is surplus generation, the most economic option is sometimes to curtail renewables ahead of other plant. For example, turning down an inflexible gas plant only to restart and ramp it up a few hours later can be expensive and inefficient. By contrast, wind generators can be turned down relatively easily.

Therefore, giving renewables priority dispatch can sometimes increase the overall costs of managing the system. When renewables were a small part of the market, any inefficiencies caused by priority dispatch were small and easy to ignore, while it helped reduce risks around renewables investment. But now renewables are set to become the dominant part of electricity markets it is harder to ignore.

Nevertheless, risks around balancing for wind can cause real headaches for investors. In our report from earlier this year, Policy and investment in German renewable energy we found that economic curtailment could increase significantly, potentially adding 17% to onshore wind costs by 2020.

The amount a generator is curtailed depends on a wide range of uncertain factors which wind investors have little or no control over (eg, electricity demand, international energy planning, network developments and future curtailment rules).

What could happen next?

So to maintain investor confidence (and avoid costly lawsuits) existing renewables investments need to be financially protected as rules are changed. There are many ways to do this. For example, priority dispatch status could be grandfathered for existing generators (as the winter package suggests) or, as set out in our recent report of Germany, generators could be fully compensated for curtailment through “take-or-pay” arrangements.

More generally, very clear rules around plant dispatch and curtailment are needed to avoid deterring investment. Ideally, dispatch will be determined by competitive, well-functioning balancing markets, where renewables are paid to be turned down based on what they offer, rather than by a central system operator curtailing without compensation.

The move to integrate renewables into balancing markets means they will compete with other options to balance the system such as storage and demand-side measures. These flexibility options should benefit from the sharper price signals and greater interconnection implied by winter package. But there is no clear consensus yet on the right business and regulatory models to support investment in flexibility. However, CPI is currently working on a programme as part of the Energy Transitions Commission to explore the role of flexibility in a modern, decarbonised grid and will be publishing our findings soon.

Ultimately, there is an unavoidable trade-off in designing electricity markets: it is very difficult to provide incentives for generators, storage and the demand-side to dispatch efficiently through market mechanisms without also exposing them to some risk. Yesterday’s announcement in the winter package means more countries will have to face this dilemma.

Disclaimer: Unless otherwise stated, the information in this blog is not supported by CPI evidence-based content. Views expressed are those of the author.

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Instruments of Change: Raising Investments for India’s Climate Commitments

December 18, 2015 |

 

The international climate agreement that emerged from the Paris negotiations this past weekend marks a historical turning point for the whole world, but particularly for India.

As a part of the global climate deal, national governments have shared plans for their countries’ action on climate change, and India’s contribution is ambitious — promising that renewable energy will be 40% of the country’s expected electricity generation capacity in 2030, along with a 35% reduction in carbon intensity by 2030 from 2005 levels.

India has also set one of the most ambitious renewable energy targets of all ¬- 100GW of solar power by 2022. This is more than half of the amount of solar power deployed worldwide at the end of 2014, and more than 20 times India’s current solar deployment. Additionally, India has also set a wind power target of 60GW by 2022, up from 25GW currently.

At the same time, Prime Minister Modi’s administration is likely to significantly increase the production of domestic coal. This is because one of the nation’s top priorities is to rapidly deploy energy in order to meet the needs of its growing economy and to provide electricity to the 400 million Indians who currently lack it.

Recognising the harmful air pollution and greenhouse gas emissions that an increase in coal production will bring, Prime Minister Modi stated during the Paris negotiations a willingness to further move away from coal if there were more finances available for renewable energy.

However, India faces two key challenges around funding for renewable energy and other green infrastructure: a shortage of available financing, and financing at unattractive terms — such as high cost of debt, short tenor and variable interest rates — which can add up to 30% to the cost of renewable energy in India, compared to the US or EU.

 

Public-private collaboration will be essential to raising the finance needed for India’s cleaner growth. While the right domestic policies will be key to facilitating finance, greatly scaling up investment from the private sector will be the only way to mobilise the full amount of capital needed to meet India’s renewable energy targets.

In order to scale up private investment, India needs financial instruments for renewable energy and other green infrastructure that are a better match with investors’ needs.

For example, one source of investment that has great potential but requires innovative finance instruments to facilitate it is foreign investment. Over the next five years, India expects over $160 billion of investment from international developers and banks to finance renewable energy projects. However, foreign investors are wary of investing in infrastructure in India due to the risk of extreme and unexpected currency devaluation.

Because currency exchange rates can be volatile, when a renewable energy project is financed by a foreign loan, it requires a currency hedge to protect against the risk of currency devaluation. Currently, market-based currency hedging in India is too expensive, making foreign financing just as expensive as domestic financing. An innovative instrument that can reduce the currency hedging cost could mobilise more foreign capital and spur investment in renewable energy.

A new public-private initiative in India, the India Innovation Lab for Green Finance, aims to identify, develop, and accelerate these innovative solutions to drive more investment for green growth in India.

The India Lab brings together experts (from the government, financial institutions, renewable energy, and infrastructure development) to select and help launch this next wave of cutting-edge finance instruments. Since its launch on 12 November, the India Lab has received the endorsement of the Ministry of New and Renewable Energy, and was supported in a joint announcement on energy and climate by Prime Minister Modi and UK Prime Minister David Cameron, during Prime Minister Modi’s visit to the UK in November.

The India Lab is currently seeking ideas for innovative finance instruments for renewable energy (including utility scale, distributed, and off-grid), energy efficiency, urbanisation, and other channels for green growth that can overcome barriers and risks and scale up more capital from new investors. Interested parties can visit www.greenfinancelab.in/ideas to learn more.

The new global climate agreement represents a moment of opportunity, for both India and the rest of the world, to capture the momentum and excitement that has come with the hope for a more climate-resilient future, and channel it into real work and real action.

There has never been a better, or more important, time to scale up finance for renewable energy projects and other green infrastructure that can support cleaner economic growth in India.

The India Innovation Lab for Green Finance can help India achieve its vision for a cleaner and more prosperous future by driving needed private investment to its green infrastructure targets. Let’s get to work — now.

A version of this first appeared in the Huffington Post.

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Will California’s AB327 help or hinder renewable energy? The devil is in the details

November 18, 2013 |

 

California Assembly Bill 327 (AB327), signed into law October 7th, 2013, drew fire from solar and energy efficiency proponents, The Sierra Club, and other environmental groups over the rate-setting powers it would give the California Public Utilities Commission (CPUC). These opponents worry that the bill allows changes in rate and regulatory structure that could discourage renewable energy investment in California. However, local governments, industry groups, utilities and some consumer groups argue these same powers could, used wisely, make electricity rates more equitable, protect consumers and help utilities adapt to an increasingly renewable and distributed grid. Climate Policy Initiative’s analysis suggests they could also create a very fertile and cost-effective environment for renewable energy for years to come.

AB327 allows the extension of the Renewable Portfolio Standard (RPS) and requires the extension of the Net Energy Metering program, both of which Climate Policy Initiative analysis has shown to be significant drivers of renewable energy growth in California. Many of the details of their implementation are left to the CPUC, though, and these details will decide the ultimate impact of AB327 on renewable energy in California.

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