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A billion barrels of "oil" found offshore Europe

by Jerome a Paris Thu May 20th, 2010 at 05:00:23 AM EST

UKs offshore renewable energy could match one billion barrels of oil, report shows

The UKs offshore renewable energy sector could generate electricity equivalent of one billion barrels of oil annually, matching North Sea oil and gas production, according to a new report.

The research, published by the Offshore Valuation Group and welcomed by industry body RenewableUK, said the offshore renewable energy industry could ensure the UK becomes a net electricity exporter by using less than a third of the total available resource.

At the same level, it would result in cumulative carbon dioxide savings of 1.1 billion tonnes by 2050 and create 145,000 new jobs in the UK with additional tax revenues of 28bn.

What is most interesting here is that this is not just a grand claim by a dismissable NGO - the working group includes the UK government (and Scottish and Welsh authorities), the main power utilities in the country and a couple of large North Sea oil&gas companies, ie Serious People. I am hopeful that as more such reports get published, and the utilities put an ever growing chunk of their investment budgets into offshore wind, the industry will finally take its rightful seat at the table, and be taken seriously as a large scale part of the solution, and not just a greenwashing gadget.

Part of my series on Wind power
Full disclosure: I advise wind developers on their financing needs.


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Back in the early eighties the incoming Thatcher government started to list North Sea Oil as an asset their balance sheet. This was done partly to improve Britain's standing in with "The Markets". I wonder if the new incoming Tory government is planning to do the same thing?

Money is a sign of Poverty - Culture Saying
by RogueTrooper on Thu May 20th, 2010 at 05:14:57 AM EST
That would be great, because it would create a massive incentive to get the harvest going. Maybe they could create a company (actually, it already exists: it's the Crown Estate, which holds the rights to all the offshore areas where wind will be built) and privatize it...

A privatisation of the future offshore wind-related income streams of the Crown Estate would be a brilliant idea.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu May 20th, 2010 at 05:23:01 AM EST
[ Parent ]
Jerome a Paris:
A privatisation of the future offshore wind-related income streams of the Crown Estate would be a brilliant idea
No, a monetization.

I think you need to have a chat with Chris Cook about energy units...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 06:07:08 AM EST
[ Parent ]
But the renewable energy, unlike the oil, should last forever. How would that work with the accounting?
by gk (g k quattro due due sette "at" gmail.com) on Thu May 20th, 2010 at 05:29:13 AM EST
[ Parent ]
markets actually love assets with stable long term revenues. The more stable the revenue, the lower the discount rate you need to apply to future income streams, and thus the higher the valuation.

For a fully certain income stream, investors are happy with a 3.5% return these days. So the "value" of the whole offshore production could conceivably be equal to 30 times net revenues from annual production...

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu May 20th, 2010 at 05:40:46 AM EST
[ Parent ]
For a fully certain income stream, investors are happy with a 3.5% return these days. So the "value" of the whole offshore production could conceivably be equal to 30 times net revenues from annual production...

The question is how much are the real capital investment worth? If a 1 milloin euro windmill produces 1 million euro revenue annually, the yield is not 3,5%, it is 100%. If the rentier income is 96,5%, the privatisation of this energy source is a very very bad idea.

by kjr63 on Fri May 21st, 2010 at 03:30:06 PM EST
[ Parent ]
You discount it at a constant interest rate per annum and you get a finite sum.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 06:06:11 AM EST
[ Parent ]
Yes, but what I wanted to know was what that rate was, and whether there was room for "creative" accounting. Jerome seems to have answered this above.
by gk (g k quattro due due sette "at" gmail.com) on Thu May 20th, 2010 at 06:08:20 AM EST
[ Parent ]
gk:
what I wanted to know was what that rate was
You think that's a constant set in stone?

Okay, so currently investors are happy with a 3.5% risk-free 30-year return rate. Check back a year from now and it may be different.

And changes in the discount rate can tip an investment into insolvency.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 06:14:28 AM EST
[ Parent ]
is that you can set it into stone from the start (given that you need most of the money upfront to build the windfarms). Markets (banks, anyway) are happy to give you a fixed rate.

Today, pensions funds are happy to invest in wind at 7-8% leveraged returns on equity; debt for projects costs roughly 6% flat for onshore, more like 7% flat for offshore. Public finance would make a big difference.


Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu May 20th, 2010 at 06:16:43 AM EST
[ Parent ]
Jerome a Paris:
you can set it into stone from the start (given that you need most of the money upfront to build the windfarms). Markets (banks, anyway) are happy to give you a fixed rate
And then if the interest rate environment changes the cost of refinancing an equivalent energy stream will be different. Balance-sheet risk doesn't go away just because all your debt instruments are fixed-rate.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 06:23:57 AM EST
[ Parent ]
They can always invest in a property bubble.

Part of the insanity of the markets comes from insisting on returns which can only be created by bubbles.

Stability isn't quantified or considered a financial good - which is unfortunate, because volatility and uncertainty are excellent ways to destroy opportunities for real wealth creation.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 20th, 2010 at 07:11:45 AM EST
[ Parent ]
ThatBritGuy:
Part of the insanity of the markets comes from insisting on returns which can only be created by bubbles.
I wonder if most people realise the meaning of required rate of return when they learn the basics of finance.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 07:20:31 AM EST
[ Parent ]
When I was at the recent annual conference of the Swedish Green party, I spoke with some guys from Vattenfall. They told me that the required rate of return they were supposed to reach, as mandated by the government, was 15 %. Need I add that I started raving incoherently at them?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu May 20th, 2010 at 09:28:12 AM EST
[ Parent ]
Mig
I wonder if most people realise the meaning of required rate of return when they learn the basics of finance.

The "required rate" is determined by the issuer of the loan each time a loan is issued. US credit card issuers charge up to 30%, including fees, etc. 15% to 18% returns on equity is the rate that TBTF financial pirates "require" on an ongoing basis. The Fed is "requiring" almost nothing for TBTFs just now. Everyone else falls in between. Other than the Fed, if anyone reasonably thought they could get a higher return, consistent with acceptable risk, they would "require" that higher rate.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 20th, 2010 at 06:08:14 PM EST
[ Parent ]
This required rate of return is of course denominated in fiat currency eg $, €, £ - issued as a claim over debt.

The required rate of return by an investor in gold or in energy, on the other hand is zero per cent. These investors are not aiming to make a profit: they are aiming to avoid a loss.

There are currently tens of billions invested in energy markets - typically through futures markets and structured finance, but occasionally directly "peer to peer" (eg Shell's transaction with ETF Securities) - at zero percent in dollar terms.

Such funds could easily be deployed as direct investment in future energy production. Renewable energy, and energy savings, then have an advantage over all other forms, since it is possible to monetise energy which is essentially free.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri May 21st, 2010 at 08:37:29 PM EST
[ Parent ]
ThatBritGuy:
Stability isn't quantified or considered a financial good - which is unfortunate, because volatility and uncertainty are excellent ways to destroy opportunities for real wealth creation.
You can always make bets on the volatility by trading options.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 07:21:35 AM EST
[ Parent ]
Of course. And the markets love volatility for that reason.

Meanwhile in the real economy, volatility and high returns mean unemployment and impoverishment.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 20th, 2010 at 07:34:11 AM EST
[ Parent ]
Can't you avoid the need for refinancing by loaning the money over say 20 years?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu May 20th, 2010 at 09:29:26 AM EST
[ Parent ]
But each new project that gets financed changes the environment in which the existing ones operate. A market return on capital for a state of the art wind farm may look good.

But an off-market return on capital for a 5-year old farm maybe doesn't look that good any more. If interest rates are lower you'd want to refinance to take advantage of the lower costs, or new developments will price you out of the market. If interest rates are higher the present value of your production drops.

This is part of what drives the business cycle: the conditions at which a project is financed may be wholly inappropriate years later.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 09:44:37 AM EST
[ Parent ]
I don't see the problem. If interest rates go up, you're safe with your current loan. If they go down you refinance.

And you will hardly be priced out of the market by new more cheaply financed windfarms, when wind is just a few percent of the total power supply.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu May 20th, 2010 at 09:59:28 AM EST
[ Parent ]
If interest rates are lower you'd want to refinance to take advantage of the lower costs, or new developments will price you out of the market.

There is no problem with that which can't be solved by a 20-year take-or-pay contract with the receiving utility.

Feed-in-tariffs and preferential scheduling laws are, as far as I can tell, simply a way to force utilities into long-term take-or-pay contracts with an industry that isn't considered Serious, and/or where the utilities have more market power than the individual wind development.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 20th, 2010 at 04:24:43 PM EST
[ Parent ]
Balance-sheet risk doesn't go away just because all your debt instruments are fixed-rate.

Possibly.

But a going concern with a fixed-rate loan portfolio and sufficient net revenue to cover financial costs, investment and maintenance of its capital plant can tell The Market to sod off and value its assets according to its own internal discount rate.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 20th, 2010 at 04:20:12 PM EST
[ Parent ]
is that you can set it into stone from the start (given that you need most of the money upfront to build the windfarms). Markets (banks, anyway) are happy to give you a fixed rate.

Today, pensions funds are happy to invest in wind at 7-8% leveraged returns on equity; debt for projects costs roughly 6% flat for onshore, more like 7% flat for offshore. Public finance would make a big difference.

As I've been reading through articles from Spain about the FIT debate there, I've been thinking. Would it be best to have a gradual transition from production based incentives, e.g. FITs, to construction based approaches, e.g. loan guarantees.  In the latter case the revenue source could still be consumers, but as wind production costs pass through the band of market prices the focus would shift from infant industry protection to lowering start up costs.  

A legacy program could "grandfather" existing wind farms into a FIT regime that would be phased out after 10 years. But, future wind farm construction could be fomented through small equity stakes taken by  the Sociedad Estatal de Participaciones Industriales, State Corporation for Industrial Participation.  This would be consistent with the policy adopted at the regional level, where the autonomous communities have fostered private participation in wind farm development through taking small stakes.  (This was particularly true in Navarra, where Sodena, the Navarra Economic Development Society, was a huge player in building wind farms in the province.)

Direct lending would provide could create wider access to capital, allowing a broader group of players to get involved in wind farm construction. As of 2010, the total Spanish FIT budget is around €6.3 billion.  About half (53%) of that goes to solar installations, and about a third (31%) to wind.  I honestly believe that FITs for PV are a bad idea.  Residential cost parity is rapidly approaching, particular in the sunny south of the country.  Since these are small installations, why not subsidize construction through a direct lending program for building co-op boards?  That would spread the money a lot further. FITs, I think, should be reserved for utility scale production, which is primarily going to be thermo-solar.

If FIT rates for wind in the legacy program were cut from €0.0792/kWh to €0.05/kWh, that would reduce the amount going out from €1.953 billion to €1.232 billion.
That would liberate €721 million annually for a program to provide capital access to wind farm developers.  Used to cover interest costs, that would be enough to finance interest free loans for perhaps ten times that amount.

I've got more, but this is turning into a diary, which I think I'm going to write later.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu May 20th, 2010 at 11:35:49 AM EST
[ Parent ]
What would your proposal do to the preferential dispatch schedule? If wind isn't guaranteed a preferential dispatch, it gives unreasonable market power to utilities.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 20th, 2010 at 04:33:39 PM EST
[ Parent ]
I don't see any reason why that couldn't continue.  I think that it's an essential part of the merit order effect.

My thinking would be to transition wind away from production incentives towards ones for construction. Wind basically has no marginal cost, so practically, there's not a huge difference.

On the other hand, I think that thermo-solar still needs infant industry protection, although the rate needs to be more reasonable.  PV on the other hand I think should have financing support, and should be limited to supplying the needs of the building that they are attached to instead of put on the grid.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu May 20th, 2010 at 05:24:44 PM EST
[ Parent ]
There is always room for creative accounting.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 06:26:34 AM EST
[ Parent ]
by Jerome a Paris (etg@eurotrib.com) on Thu May 20th, 2010 at 06:13:49 AM EST

which I might have posted above...

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu May 20th, 2010 at 06:14:27 AM EST
[ Parent ]
I think you'll find that the US coastguard would prohibit that lower picture from being taken.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Thu May 20th, 2010 at 08:36:21 AM EST
[ Parent ]
What I worry about is the cost of offshore wind. According to a recent article Vattenfall is near completion of its offshore wind farm Thanet, off the coast of Kent.

It will produce 1 TWh per year (biggest in the world). It costed 9 billion kronor (SEK) to build. In comparison, the new Finnish reactor will produce 13 TWh, and if it was an offshore wind farm it would hence cost 9*13=117 billion kronor. It was budgeted to cost 25-30 billion, and even with the current 100 % cost overrun, it will still only cost half as much as the Thanet offshore wind farm, if Thanet was constructed to have the same annual output.

Sure, the variable costs for the nuclear station might well be higher than for Thanet, but not by that much. So this is certainly a problem, in my opinion.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu May 20th, 2010 at 09:25:59 AM EST
offshore wind probably costs double what (reaonably well-run) nuclear costs today, on a per MWh basis.

But it will still cost the same in 20 years (or probably much less, as economies of scale kick in and operating costs go down some more), and requires no cooling water, no mining of uranium in far away places, no costly decommissioning, and no waste to store.

It's not an unreasonable trade off. Both are needed.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu May 20th, 2010 at 11:14:19 AM EST
[ Parent ]
Lifecycle Cost is becoming a more important metric in many areas, but the media still don't get it. LCC is a social metric. It can include not only end-of-life disposal, but also safety factors such as loss of life (e.g. coal mining), employment, risk of catastrophe etc.

The LCC for wind power, as you point out, must be one of the lowest per MWh of any energy source, except hydro and maybe wave power.

You can't be me, I'm taken

by Sven Triloqvist on Thu May 20th, 2010 at 12:25:57 PM EST
[ Parent ]
I meant to add that offshore wind should be using the LCC cost benefits more forcefully in arguments in favour.

You can't be me, I'm taken
by Sven Triloqvist on Thu May 20th, 2010 at 12:27:25 PM EST
[ Parent ]
Life cycle costing has been used in renewables for decades, and is widely accepted.  The problem comes in determining how to include externalities, and what do they actually cost.  For example, what (roughly? exactly?) is the cost of a coal miner's life?  What is the cost of a gulf or two?  What are the long term costs of isotope storage, factoring in the cost of capital over a few millenia, give or take.

Thus it always comes down to the politics.

"Life shrinks or expands in proportion to one's courage." - Anas Nin

by Crazy Horse on Thu May 20th, 2010 at 12:45:57 PM EST
[ Parent ]
For example, what (roughly? exactly?) is the cost of a coal miner's life?  What is the cost of a gulf or two?  What are the long term costs of isotope storage, factoring in the cost of capital over a few millenia, give or take.

Thus it always comes down to the politics.

Ultimately we can only estimate, however that has benefits.

Why not require that companies engaged in harmful resource extraction like this be required to contribute 2.5% of revenues towards a compensation fund?

  1. This would billions to cover the costs created externalities from operations.

  2. Some portion could be used to fund the development of alternatives, including loan guarantees for renewables, etc.


And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu May 20th, 2010 at 01:03:57 PM EST
[ Parent ]
It may be accepted in the industry, but my general review of media and politics is that the point is not made strongly enough to voters. How to do this is another matter; but to me it seems it should be an easy sell. The benefits are clear.

You can't be me, I'm taken
by Sven Triloqvist on Thu May 20th, 2010 at 01:51:40 PM EST
[ Parent ]
It is actually somewhat worse than that, since the engineering lifespan of a openwater windmill is about 20 years, and the EPR is built to last 60, so you have to count in rebuilding the windfarm twice.. This is not a tripling of relative cost, as you need to apply the discount rate to the second and third build, but it does matter, and while life cycle accounting helps when comparing costs with coal (which has externalities that makes building it effectively criminal) it does not help when comparing costs to nuclear, since nuclear was the first energy industry to get its life cycle costs internalized.
by Thomas on Thu May 20th, 2010 at 06:01:56 PM EST
[ Parent ]
Deepwater Horizon environmental impact study: 13 pages
Cape Wind environmental impact assessment: 3,800 pages (and there's another 60,000 pages of studies)

Wind power
by Jerome a Paris (etg@eurotrib.com) on Thu May 20th, 2010 at 03:51:48 PM EST
Of course, drilling is tried and tested, and the effect of oil spills are well understood...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 03:53:41 PM EST
[ Parent ]
Emphasizing that's only the UK, + per year, and + replicable in a lot more of Europe's coasts/land, makes a knock-out sale point.  

Huge guess-tion:
Now that the 'zero-emission' electric car is a regular item in the msm, is there anyway to estimate how much more electricity do we need to produce for our current mobility?  

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Thu May 20th, 2010 at 04:00:10 PM EST
There is, and the number is very manageable. Maybe 20 % more power or something like that. The reason the number is so very low is because of the much higher efficiency of electric motors ccompared to internal combustion engines.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu May 20th, 2010 at 04:16:37 PM EST
[ Parent ]
mobility is not the only thing we need to electrify tough - Nitrogen fertilizer production, and the wide spread use of electricity based industrial processes to replace heat driven ones* are going to run electric use very high indeed in a zero-carbon economy. 150-200% of current use is a conservative guess, and there are directions things could take that would go way higher than this - for example there are methods of trash recycling for raw materials that would be drink juice like nobodys buisness.

*Ive looked at the various proposals for high-temperature reactors for industrial purposes. Do Not Want. Umpteen thousand ELSY's? Fine. Reactors operating at 1200+ degrees routinely? eeeeck.

by Thomas on Thu May 20th, 2010 at 06:11:11 PM EST
[ Parent ]

Dolphin and seal damage warning over wind farm expansion

A new generation of offshore wind and tidal farms could produce £14 billion of electricity every year for Scotland but pose a "significant" threat to wildlife, the fishing industry and islanders' ferries, an official report has warned.

They are talking about the exact same report... with a rather different headline...

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat May 22nd, 2010 at 06:13:58 AM EST

Against the wind

Chicago's early planners weren't talking about Lake Michigan when they devised the famous dictum: Forever open, clear and free.They were protecting an uncluttered city lakefront.

But those are the words that came to mind when we heard about Evanston's designs on Lake Michigan.

(...)

"This is not a question of what any individual municipality should be doing," Brammeier says. "But how it fits in transforming the region's and nation's energy supply. What we don't want is an army of windmill skeletons left in the lake after 30 years because we didn't think this through before we started."

He's right. This has to be a careful decision, a regional decision.

I'm on the record saying that when it comes to decommissionong offshore wind turbines (the cost of which is easy to quantify, and is basically considered to be equal to the scrap value of the metal), none will be decommissioned because they will be considered as natural sanctuaries...

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat May 22nd, 2010 at 06:20:00 AM EST


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