Tag Archives: solar

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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Millennials: the new power generation fueling the future with clean energy

October 12, 2016 |

 

wind-turbines

You might expect wind industry executives at last week’s AWEA Wind Energy Finance & Investment Conference 2016 in New York to talk enthusiastically about the transition to clean energy. But over the last year, utility companies and Independent Power Producers (IPPs) have joined them – proclaiming that that the clean energy future has arrived now – much sooner than any of us thought possible.

What’s driving this? First, in much of the US it now costs more to generate additional electricity by burning more fossil fuel in existing plants than it does to buy it from a new utility-scale onshore wind or solar PV farm. This is a result of steady policy support and steep cost reductions in solar and wind costs.

But another, less well-known driver is that the millennial generation – the largest generation in US history, even bigger than the Baby Boomers – wants renewable energy. Utilities and IPPs point to surveys that indicate a strong demand pull from millennials as their emerging customer base with a strong desire to get off coal. Millennials want their electric vehicle, or better still car share vehicle, to be powered by the sun and wind, not millennia-old carbon.

For the renewables industry, it’s a perfect storm. But one of the challenges the industry now faces is to figure out how it can finance all that new generation in a market with low costs of generation, low demand growth, falling prices, and subsidies that are scheduled to phase out over the next decade.

The only way this can happen is if costs can keep falling.

One way this could happen is through continued technological progress. Last month, researchers at the National Renewable Energy Laboratory and the Lawrence Berkeley National Laboratory published their forecast for a 24%-30% drop in the Levelized Cost of Electricity for wind by 2030 and a 35%-41% drop by 2050.

But we think the decrease in costs could be even more dramatic than that with new financing instruments that could reduce the cost of financing by 20%, which in turn will accelerate those LCOE reductions.

Over the past year, we have been working with investors on such an instrument as part of a program funded by the Rockefeller Foundation. Despite the volatility YieldCos experienced last year, we believe there is a new model that can salvage the positive elements of this design, while restoring a much closer link to the cash flows of the underlying renewable assets.

The new instruments – Clean Energy Investment Trust (CEITs) – will still be publicly traded listed vehicles, but instead of a growing portfolio of assets, each CEIT will consist of a fixed portfolio of assets generating reliable cash flows over the life of the vehicle. A closed pool of assets, the CEIT would offer a fixed income-like return profile that would be more sustainable over the long term but at a level somewhat higher than currently available on investment grade bonds.

uday-on-awea-panel-cropLast week, I spoke about CEITs during an AWEA conference panel moderated by Susan Nickey at Hannon Armstrong who led the introduction of Real Estate Investment Trust (REITs), a market now worth $1.8 trillion in the US.

We’re hoping for a similarly transformational impact from pension funds and insurers looking to match their investments with their long-term liabilities. Our analysis shows that US-wide, a 10% reduction in Power Purchase Agreement prices would allow wind to economically displace an additional 30.5GW of mostly coal generation and 154.5 million tons of CO2 – equivalent to taking 28.2 million cars off the road.

CPI Energy Finance’s executive director, David Nelson, will this week present some of our work on CEITs so far to an audience of institutional investors – pension funds, life insurance companies – at the IPE Real Assets & Infrastructure Investment Strategies Conference in London. We will also be publishing several reports on CEIT structure and market potential by the end of the year, the first of which you can read here.

Pensions and life insurance policies are probably the furthest thing from the minds of Millennials, many of whom are just now coming of age and entering the job market. But their expectations about the world they want to live in and actions to mitigate climate change are driving a transformation in energy that will benefit not only their generation, but those that follow them.

 

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India Needs to Fix Finances to Make Renewable Energy Dreams a Reality

February 16, 2015 |

 

Over the past few years, the government of India has set ambitious targets for wind and solar energy: current targets would see wind and solar capacity grow by 600 percent through 2022, to 60 GW and 100 GW of energy, respectively, from current cumulative installed capacity of about 25 GW. To put those numbers in perspective, 1 GW provides power for 700,000 modern homes; 160 GW would power a sizeable portion of India’s energy needs.

These targets are good for both India’s energy supply and for economic growth – a theme emphasised by US President Barack Obama and Indian Prime Minister Narendra Modi recently in announcing their joint commitment to increasing investment in clean energy and low-carbon economic growth.

However, this task is made difficult by the government’s limited budget, which is constrained by a large fiscal deficit and multiple development priorities.

Further, markets will not provide finance to meet these targets alone. In fact, our analysis shows that the single biggest challenge to scaling up renewable energy is the cost of finance – in particular to debt. Unfavourable debt terms add 24-32 percent to the cost of renewable energy in India, compared to similar projects in the US. Domestic debt is expensive due to unfavourable macroeconomic conditions as well as underdeveloped capital markets, and foreign debt becomes expensive once hedging costs are added.

The good news is that India can address this situation in a way that also saves money for taxpayers, electricity customers, and scales up renewable energy.

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International public finance supports South Africa’s deployment of concentrated solar power

August 21, 2014 |

 

Among emerging economies, South Africa has particular potential for solar power because of the country’s excellent solar resources. While fossil fuel power generation currently provides over 90% of its electricity, South Africa is seeking to reduce its reliance on carbon-intensive coal-based energy.

The Government of South Africa (GoSA) has developed policies to transition to a clean and sustainable energy system. In order to exploit its abundant renewable energy resources, South Africa has adopted an ambitious plan to add 20 GW of new renewable power generation capacity by 2030 (almost 50% of current generation capacity). Of this, 3.3 GW is expected to be from concentrated solar power (CSP). This is approximately equal to the current installed capacity of CSP worldwide.

CSP: A promising technology for low-carbon energy systems
CSP is a promising energy technology for low-carbon energy systems as, in combination with thermal storage, it can store solar energy in the form of heat to deliver clean power when it is most needed. It offers a real chance to act as a viable substitute for coal-based energy. Despite its potential, CSP technology lacks a long deployment track record and still comes with high technology risks, which translate to higher financing and overall costs. This means that most projects need public assistance in the form of low-cost public finance or political support to be bankable.

South Africa’s state-owned electricity utility Eskom is currently planning to install its first CSP power plant in Upington in the Northern Cape region of South Africa. In a recent Climate Policy Initiative (CPI) case study, conducted with support from the Climate Investment Funds Administrative Unit, CPI examined this plant to understand how public support helped advance this project. It also looks at the financial and technological challenges for Eskom and the reasons behind the extended project development time.

Eskom CSP plant in Upington now back on track
Eskom CSP remains one of the most ambitious CSP power tower projects under development anywhere outside of the U.S. with respect to its technology choice, capacity and storage. After several years in development, the project was placed on hold in 2009 during the global recession, largely because reduced access to capital and increased pressure from GoSA to improve the country’s energy security at low cost led Eskom to reassess its investment priorities.

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Indian concentrated solar power policy delivers a world-leading CSP plant but still needs adjustment

June 5, 2014 |

 

Solar power is one of the most promising options for India to meet its growing electricity demand. While the construction of further fossil fuel power plants is slowing due to lower domestic coal production than expected and the high cost of fuel imports, installations of solar plants are on the rise.

As discussed in a CPI blog, the Government of India’s National Solar Mission, started in 2010, has achieved targets for promoting solar photovoltaic (PV), having seen 660 MW deployed by January 2014. However, plans to deploy concentrated solar power (CSP) – a less mature and currently more expensive alternative with key technological advantages that allow it to deliver power reliably and when it is needed – did not meet with the same success. Over the same period, the government tendered 500 MW of CSP but successful bidders have only installed 10% of this deployment target to date.

In the coming days, however, the National Solar Mission takes an important step forward in its CSP efforts, when the 100MW Rajasthan Sun Technique CSP plant – the largest CSP plant built so far in India and the largest worldwide using linear Fresnel technology – is connected to the grid. In a recent CPI case study, financed by the Climate Investment Funds Admin Unit, Climate Policy Initiative examined this plant to understand why this project was implemented, while others under the National Solar Mission are still delayed. Some of our key findings include:

  • The Government of India’s measures, including awarding a subsidized power purchase agreement (PPA) and payment security scheme through a competitive reverse auction, were essential to getting the Rajasthan plant built but they were not enough to deploy CSP at the desired scale. Indeed, the only winning bidders able to build CSP plants at the low tariffs that resulted from the competitive bidding process were those that had financially strong private stakeholders and were able to source public debt. The 100MW Rajasthan Sun Technique CSP plant, for instance, benefitted from USD 280mn of long-term foreign public debt, a project developer both willing to take risks to establish itself in the Indian CSP market and willing and able to accept low returns, and a technology provider that contributed comprehensive warrantees.
  • India’s CSP policy kept costs to the public low but it will need adjustment to increase the certainty and speed of deployment and meet the country’s ambition to establish a national solar industry. Strong competition among project developers resulted in several submitting bids at prices that put them among the cheapest CSP tariffs worldwide (see also our previous paper on the global CSP landscape). However, project delays, possible cancellations, and difficulties in sourcing technologies and financing experienced by several of these developers – due in part to the challenge of building at such low tariffs – meant India was unable to meet its CSP targets and capitalize more fully on learning-by-doing, establishment of local supply chains, and investments in basic infrastructure, as developed during the implementation of projects like Rajasthan Sun Technique.

If a reverse auctioning scheme is used in India for future scale up of CSP, the design could be substantially improved and the Indian government could increase the likelihood of timely project implementation by:

  • Including stricter qualification requirements for bidders in terms of CSP experience and financial strength
  • Setting out more realistic timelines for bidding
  • Making reliable on-site solar irradiation data available
  • Allowing sufficient time for construction but also then enforcing penalties more strongly for delayed projects

With the 100MW Rajasthan Sun Technique plant commissioning, Indian CSP policy takes an important step forward but there is still a way to go before large scale up of the technology allows the country to balance the cheaper but fluctuating solar PV and wind power with more reliable CSP plants.

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Adjustments to Indian renewable energy policies could save up to 78% in subsidies

April 21, 2014 |

 

Recently, the Government of India announced plans to award licenses for an additional one gigawatt of solar in the next year – about half the capacity of the Hoover Dam and enough to meet the energy needs of two million people. This move is part of India’s already ambitious targets for renewable energy that aim to address rising energy demand, decrease the country’s dependence on fossil fuel imports, and mitigate climate change.

To ensure the country meets these targets, India provides a package of renewable energy support policies that includes state-level feed-in tariffs and federal subsidies, which are in the form of a generation based incentive – a per unit subsidy; viability gap funding – a capital grant; and accelerated depreciation.

However, given the ambitious goals, but limited budget in India, the cost-effectiveness of these policies is an important factor for policymakers.

Our recent study “Solving India’s Renewable Energy Financing Challenge: Which Federal Policies can be Most Effective?” took on the question of cost-effectiveness by comparing a range of policy alternatives to the status quo.

Our findings were striking. We found that a policy that both reduces the cost of debt and extends its tenor is the most cost-effective. In fact, for wind energy, reducing debt cost to 5.9% and extending tenor by 10 years can cut the cost of total federal and state support by up to 78%. For solar energy, which is more capital-intensive, reducing debt cost to 1.2% and extending tenor by 10 years can cut the cost of support by 28%.

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Is concentrated solar power getting any cheaper? And what role can policy play in bringing costs down?

January 22, 2014 |

 

In the past, renewable energy technologies have been much more expensive than their fossil fuel competitors but costs of wind and solar have come down after public support has deployed them at scale. In fact, costs of solar photovoltaic power plants have decreased roughly 20% and wind power plants 15% every time installed capacity has doubled.

For concentrated solar power (CSP), experts have projected a cost reduction of 10-15% for every doubling of capacity. However, new CPI analysis shows that CSP has not demonstrated cost reductions at the global level with increased deployment over the last five years, but it has done so in some regions for some CSP technologies.

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India’s Solar Mission is making good progress for solar PV but not for solar thermal

August 28, 2013 |

 

Gireesh Shrimali is an Assistant Professor of Energy Economics and Business at the Monterey Institute of International Studies and a Fellow at Climate Policy Initiative.

In 2010, India set an ambitious target to develop 20,000 MW of solar energy by 2022.

This target, implemented through the Jawaharlal Nehru National Solar Mission, called the Solar Mission hereafter, was to be achieved in three phases: Phase 1 by early 2013; Phase 2 by 2017; and Phase 3 by 2022. The Phase 1 was to be implemented in two batches: Batch 1 with capacity targets for solar PV and solar thermal; and Batch 2 with a capacity target for solar PV only.

As of June 2013, it appears that the Solar Mission has been moderately successful in deploying solar PV. Based on metrics developed in a recent paper with Vijay Nekkalapudi (submitted to Energy Policy), “How Effective Has India’s Solar Mission Been in Reaching Its Deployment Targets,” where we looked into the effectiveness of the Solar Mission in achieving its targets and offer suggestions for improving its design, the performance of the Solar Mission has been 8.4 on a 10 point scale.

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What’s working and what’s not in state renewable portfolio standards

July 11, 2013 |

 

Combined renewable portfolio standards in the United StatesRenewable portfolio standards (RPS) are an important part of the U.S. renewable energy policy landscape.Twenty-nine states, from California to North Carolina, have enacted these policies to require utilities to provide at least some of their power from renewable sources. This year, at least fourteen of these states considered bills that would have watered down or repealed these policies. But these rollbacks proved to be unpopular, and on balance state legislatures have made RPS policies more ambitious in 2013.

Taken together, RPS policies will require nearly 10% of electricity sold in the U.S. to come from renewable sources by 2020. And with the help of federal tax credits, grants and loan guarantees, most RPS policies appear to have had limited impacts on electricity rates so far. But every state’s RPS is different, and the diversity of policy designs is a great opportunity to learn what is working well and what can be improved in these policies.

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Could one of the cheapest Concentrated Solar Power plants be a turning point for this technology?

July 2, 2013 |

 

Has Concentrated Solar Power (CSP) finally turned the corner, going from an emerging technology (albeit with 20 years of history) to an (almost) commercially-ready one?

Ouarzazate I CSP less expensive than average CSP plant

CPI recently published an update to an earlier report on a large-scale CSP plant to be built near the city of Ouarzazate in Morocco. CPI finds that the project has apparently broken two taboos with the successful completion of its financing: the widely held view that a large scale infrastructure project could not be financed within its planned budget, even more so in an emerging economy; and that technology costs for CSP could not come down from the USD 6000/KW mark where they have been stuck since the ‘90s.

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