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Financing European energy infrastructure

by Jerome a Paris Mon Mar 28th, 2011 at 07:26:45 AM EST

I was invited to speak in Brussels earlier last week about the financing of energy infrastructure. It was a breakfast organised by the European Energy Reviewand Interel.

I had the opportunity to make a presentation outlining some of the points I've made here on many occasions (the importance of the cost of capital, the difference between profitable and cheap, and the fact that "market-based" policies are not technology neutral) and I'm copying the slides below the fold.

Added to my Wind Power series with the usual disclosure: I advise wind developers on their financing needs

front-paged by afew


(yes, my firm's slides have a google-esque emptiness about them)

I started right off with the differences in cost structures between fuel based power sources (low capital costs, large fuel cost) and wind (or nuclear (high capital costs, low running costs) and thus the importance of the assumptions one makes (or has to make) about discount rates and the price of gas.

I added a point that I don't think I've made here before, ie that the assumption about the cost of capital decides what the cost of wind power will be for the next twenty years, whereas the assumption one makes about the price of gas has no actual impact on the actual price of electricity in the future, which will be driven by the real price of gas then. That means that investing in a high capital cost piece of equipment is a much bigger bet on future economic conditions than investing in an initiallly less expensive piece of kit.

That slides provides more detail on the factors identified above, to note that (i) the discount rate has a much bigger impact on the cost of capital-intensive technologies than on the cost of gas-fired power plants and (ii) gas price assumptions are typically based on IEA scenarios, which generally show gentle upwards slopes with no volatility, whereas the reality can be quite different.

My next step is to discuss the dispatch curve, remind everybody that market prices of electricity are driven by marginal costs which are low for nukes and wind, and high for gas-fired plants (and linked to the price of gas). I make two further points which set gas-fired plants from wind farms:

  • gas-fired power plants are largely price makers: it is their cost which drives market prices, and thus gas-fired power plants are pretty sure to always receive revenues close to what they need to cover their costs;
  • wind farms are price takers, but their effect on the system is to bring prices down, as they displace more expensive plants when wind blows (that's what is called the "merit-order effect", which I've discussed extensively in the past in my wind series);

I take this to the logical conclusion:

  • the more gas you have in the system, the higher the price of electricity on the market will be;
  • the more wind you have in the system, the lower the price of electricity on the market will be.

The next graphs show that reality does follow theory: over the past 15 years, as markets were deregulated, European power companies have built gas-fired power plants and nothing else - to the exception of renewables, thanks to very specific carve-outs in market regulations. De-regulated markets only get gas-fired power plants built, but that easily understood when you follow my previous arguments; gas-fired power plants are much less risky to invest in and, in a context where investment has to come from the private sector and money is more expensive than if provided by publicly-funded entities, capital-intensive goods tend to be avoided.

I used IEA data to underline that this does not even mean that gas-fired power plants are expected to be cheaper, in the long run, and use the following slide to show how profitable and cheap are not the same thing:

Wind power needs to be cheaper than the lowest cost of electricity over the next 15 years in order for a windfarm not to go bankrupt at some point in time in the period: in effect, wind power needs to be cheaper than what gas-fired power would cost if using the lowest price of gas possible for the 15-year period. This is a typical case of a public good (cheaper average cost of production) is inaccessible because of a private constraint (the investment does not make sense for you if you can go bankrupt at some point in the process, even if you'd make good money on average over time)

Finally, I used a table provided by DoDo (here) about Germany, and which I note is already obsolete, as 12 GW of solar and 3 GW of wind have been installed since then, to make the point that renewables are no longer a marginal part of the system: they already represent almost half of the installed capacity and one sixth of total general generation in 2010, numbers which will continue to grow each year. So the grid cannot be seen as something to the service of traditional producers which somehow needs to incorporate renewables in - it is a system which is equally to the service of renewables (and so far it has been up to the task, despite what the naysayers have been saying for years), and needs to be adapted taking into account that reality.

The last slide, which incorporates my conclusions, is self-explicit: there are no "neutral" policy choices, and energy will always be political - and it's time what the implicit political choices of current policies be acknowledged. I ended my presentation by my usual quip: it's time that European energy policies be something else than a jobs programme for City bankers and assorted parasites.

The other two speakers were the Spanish rapporteur of the European Parliament report on energy investment, and a senior representative of the European Commission. Both emphasised the need for stable regulatory frameworks and the need for agreements on cross-border investments, which is fine as far as it goes, and largely uncontroversial. The audience (to a large extent, the "public affairs" representatives of large companies or organisations of the sector (ie lobbyists) where largely in agreement with me and most of the questions focused on my presentation. One person underlined the fundamental differences between the perspectives of bankers and politicians, and said that politicians were especially unreliable partners and should listen to bankers more; I responded that while I agreed on the need for regulatory stability, I thought that the problem was that politicians listened to bankers too much and that they needed to take decisions in line with their goals,  and stick to these without tinkering with things all the time. Bankers would grumble but would adapt to any consistent set of rules.

Display:
by Jerome a Paris (etg@eurotrib.com) on Sun Mar 27th, 2011 at 11:36:01 AM EST
On the rec list...
by afew (afew(a in a circle)eurotrib_dot_com) on Sun Mar 27th, 2011 at 04:12:57 PM EST
[ Parent ]
love slide 8, however, I think the line of fixed price gas is missing? But it shows very clearly your points...
by crankykarsten (cranky (where?) gmx dot organisation) on Mon Mar 28th, 2011 at 06:41:59 AM EST
[ Parent ]
of course, I meant fixed cost (not price) of gas. Sorry...
by crankykarsten (cranky (where?) gmx dot organisation) on Mon Mar 28th, 2011 at 06:43:02 AM EST
[ Parent ]
the graph is a simplification, but the fixed part of the cost of gas would be included in its overall variable amount (the total amount is the small fixed part plus the big variable one, so it's variable itself)

Wind power
by Jerome a Paris (etg@eurotrib.com) on Mon Mar 28th, 2011 at 08:35:14 AM EST
[ Parent ]
Its a white line at about the height of the text line "go bankrupt".

The white on white makes it a bit tricky to see.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Mar 28th, 2011 at 03:20:28 PM EST
[ Parent ]
This is a really great diary!

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 28th, 2011 at 07:22:44 AM EST
Great argument, illustrating important points that are not well understood by public policy makers generally.  Unfortunately my poor eyesight doesn't allow me to follow the smaller graphic slides. Why do PowerPoint slides have such poor image resolution?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 28th, 2011 at 08:15:24 AM EST
by Jerome a Paris (etg@eurotrib.com) on Mon Mar 28th, 2011 at 09:39:48 AM EST
[ Parent ]
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 28th, 2011 at 10:13:09 AM EST
[ Parent ]
Damn good presentation.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Mon Mar 28th, 2011 at 05:09:06 PM EST
[ Parent ]
A crucial diary.. .and the slides are good: not too much info per slide and main points bulleted. Presentation slides are there to support the speaker, but if they demand too much attention (too much or badly displayed info) they take away the focus from the human in the room.

The last slide I would maybe have split into 3 slides - but it depends how much you had to say about the 3 main points.

You can't be me, I'm taken

by Sven Triloqvist on Mon Mar 28th, 2011 at 09:08:19 AM EST
I usually try to write slides that can be read on their own (ie which can be understood without a need to hear the presentation as well).

During the presentation, I focus on the visual elements only and don't follow the text too closely.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Mon Mar 28th, 2011 at 09:41:15 AM EST
[ Parent ]
Content can be distributed in many forms, which is a problem for a lot of companies, in just the same way as distributing video for numerous platforms and OSs is a problem for visual content producers/distributors/carriers.

I try to write the 'long version' of a corporate message with plenty of headlines and sub-heads, which can then be used as pointers for more condensed versions. And, as you say, a slide presentation (I hate to use even the diminutive 'ppt') should vary according to its delivery. If it is only ever accompanied by a speaker, then the focus should be on the speaker and eye-contact. If  the slide presentation will be a leave-behind or a stand-alone for distribution, then it has to be rethought a bit.

The problem of multiple platforms is compounded by language versions  - which is a particular problem for Finnish companies. We have two official languages, and Sweden is also an important market that needs to be addressed in Swedish, even though English is acceptable from many other countries. Smaller Russian companies prefer to be addressed only in Russian. And then there's the big hope for Finland's future, China.

The interesting difference I found in communicating with the Chinese market (working in co-operation with a translator) is that a picture of the person 'behind the message' is important: that audience likes to know who it is dealing with. In a world of potential social shame, putting your picture with the message is a 'testimonial' to the veracity of the facts.

And of course a live speaker in any W*stern country is usually going to be more effective for the same reason.

You can't be me, I'm taken

by Sven Triloqvist on Mon Mar 28th, 2011 at 10:15:30 AM EST
[ Parent ]
There is a danger, if you go too far from the text on screen, that people will lose the thread. It's hard to follow the logic of two arguments simultaneously. It may be easier for the speaker, but not for the audience.

OTOH there is nothing worse than sitting thru a presentation where the speaker simply reads off what's on the screen - especially when they look at the big screen all the time and make little eye contact with the audience. It is really easy to set up a script on the laptop that is separate from the presentation as projected. If you have to look at the script at least your face stays visible, even if the eyeline drops.

My main advice always is that people sell things, presentations don't.

You can't be me, I'm taken

by Sven Triloqvist on Mon Mar 28th, 2011 at 10:25:11 AM EST
[ Parent ]
As noted previously, a low "fixed cost of gas plant" line, about the level of "go bankrupt", might clarify that its the fuel cost that can swing to a very large share of total power cost when fuel costs spike.

Last slide: "with firm policies supporting that" -> "without firm supporting policies"

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Mar 28th, 2011 at 03:27:30 PM EST
European Tribune - Financing European energy infrastructure

My next step is to discuss the dispatch curve, remind everybody that market prices of electricity are driven by marginal costs which are low for nukes and wind, and high for gas-fired plants (and linked to the price of gas). I make two further points which set gas-fired plants from wind farms:

  • gas-fired power plants are largely price makers: it is their cost which drives market prices, and thus gas-fired power plants are pretty sure to always receive revenues close to what they need to cover their costs;
  • wind farms are price takers, but their effect on the system is to bring prices down, as they displace more expensive plants when wind blows (that's what is called the "merit-order effect", which I've discussed extensively in the past in my wind series);

I take this to the logical conclusion:

  • the more gas you have in the system, the higher the price of electricity on the market will be;
  • the more wind you have in the system, the lower the price of electricity on the market will be.

I have been thinking a bit about this and how to argue in Sweden (where gas is almost non-existent). What I wonder is how the picture changes if gas is replaced by hydro. Hydro shares the cost structure of wind and nuclear but the market making powers of a flexible power source.

Is it gas flexibility that allows them to charge rent or its high cost that drives high prices?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Mon Mar 28th, 2011 at 04:09:43 PM EST
I think the argument for hydro is the same as for gas, not for nuclear and or wind, at least in Sweden. The reason being is that hydro plants in Sweden were built during a regulated power regime, and the strict credit regulations we had until 1985 especially excepted hydro power (and public housing), shoveling vast amounts of credit in their direction. Furthermore, there are (I suppose) far fewer possible surprises during the construction of a dam than a reactor, as there is so much greater experience of constructing the former, and the fact that it is inherently simpler. Add to this that hydro is not only flexible but also cheap, and you get a throughly superior mode of generation. Countries with an abundance of hydro (like Norway) use nothing but it.

So yes, even in a deregulated environment everyone is going to build hydro, until you run out of good sites, Which usually happens mighty quick. The Swedish hydro program was more or less completed by 1965-1970, after which it was topped up by oil-fired power plants (Stenungsund, Karlshamn etc). Then came the oil crisis, which meant a massive push for district heating and nuclear power to replace oil.

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

by Starvid on Mon Mar 28th, 2011 at 06:39:12 PM EST
[ Parent ]
Both wind and hydro are price takers in a market system, however while wind is a volatile power source ~ "use it or lose it", hydro is a dispatchable power source.

So while they are both price takers, hydro can choose when and where it takes the going price. Indeed, in a pure market setting, it ought to take the prospective future prices that it may be able to take into account when it decides whether to generate and if so how much to generate.

In an small country open economy context, where there is a broad export market that can take up surplus production, that means that on the same gross annual energy production, this ability to cherry pick strong price periods means that hydro is financially viable at a higher average price than wind is financially viable, and so that despite its high fixed cost component, it can survive on a higher cost basis than a volatile power source such as wind can.

The same logic applies, of course, its just that hte ability to cherry pick the prices to take means that the logic applies at a larger hydro capacity, and in many instances a country will run out of high quality dammed hydro sites to exploit before they run out of ability of the power grid to absorb hydro capacity without prices dropping below the rates that will refund the capital cost.

Note that run-of-river hydro, unlike conventional dammed hydro, is a volatile rather than dispatchable power source, so it is in general in the exact same boat as wind.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Mar 28th, 2011 at 08:17:29 PM EST
[ Parent ]
... mangles the meaning, too ...

"this ability to cherry pick strong price periods means that hydro is financially viable at a higher average price than wind is financially viable, and so that despite its high fixed cost component, it can survive on a higher cost basis than a volatile power source such as wind can."

... this ability to cherry pick strong price periods means that hydro is financially viable at a higher average cost than wind is financially viable, and so that despite its high fixed cost component, it can survive on a higher cost basis than a volatile power source such as wind can.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Mar 28th, 2011 at 11:28:02 PM EST
[ Parent ]
wind and water complement each other beautifully. I could spend all day watching Spanish production.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Tue Mar 29th, 2011 at 08:08:05 AM EST
[ Parent ]
the answers above are all valid, but there is another point to note: even though Sweden does not have gas, its prices are still influenced by fossil fuel generation thanks to the NordPool, is the joint electricity market of Scandinavia, which includes also Danish coal-fired plants and gas-fired plants, as well as Norwegian hydro.

It's increasingly influenced by links to the main continental market (via Germany) so gas-prices get expressed via these exchanges.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Mar 29th, 2011 at 08:15:10 AM EST
[ Parent ]
... assumption.

The capitalized cost per unit annual production capacity and the degree to which hydro has a premium revenue yield over the unweighted-average prices determines whether and for how that volatile market price path falls below break-even.

So there is a market penetration where hydro shoots itself in the foot under marginal market pricing, but its a higher market penetration, and in the small open economy assumption, its market penetration of the broader regional market.

A closed economy would have a lower threshold before its necessary to adjust the marginal pricing policy to gain the full benefit of hydro potential, though as a closed economy it may also have more freedom to impose a pricing policy tailored to its circumstance.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Mar 29th, 2011 at 01:23:04 PM EST
[ Parent ]
The funny thing in recent years, is that when power prices are high down on the continent, power lines work well and the price up here is pushed to the continental level. However, when prices for once are low down in Germany, the power links usually suffer mysterious breakdowns, or nuclear reactors suffer unexpected extended maintenance breaks, and so on. This has resulted in Swedish average power prices (in the completely non-transparent Nord Pool power exhange) actually being higher than those in Germany, in spite of radically lower production costs!

Why is this? Well, the power market in Sweden is an oligopoly controlled by Eon, Fortum and Vattenfall, who jointly own the nuclear stations. Vattenfall is wholly owned by the state and delivers fat annual dividends to the state coffers, and the higher the price of power, the more revenue electricity taxes bring in. No one, not power companies or the government, except consumers have an incentive in the market not being manipulated. And consumers have no pricing power what so ever.

Just sayin'.

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

by Starvid on Tue Mar 29th, 2011 at 02:29:48 PM EST
[ Parent ]
to Sweden's energy strategy, and no doubt necessary to the zero-carbon plan.

If electricity prices were lower, reflecting true costs, that would not give such a strong push to conservation, urban heating etc. People might even use electric heaters.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Mar 30th, 2011 at 05:07:18 AM EST
[ Parent ]
The high prices actually have nothing to do with any environmental concerns, and everything to do with the deregulation of the power market and lining the pockets of corporate fat cats, including the over-payed exectuives at state-owned Vattenfall. The chairman of the board was fired last week by the government due to corruption over corporate compensation.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Mar 30th, 2011 at 05:23:28 AM EST
[ Parent ]
If they were playing the game and letting letting the market operate, electricity prices would sometimes be lower, or in other words, prices would fluctuate more.

Would this not be problematic for the zero-carbon plan?

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Mar 30th, 2011 at 12:39:33 PM EST
[ Parent ]
Not really, Swedish electricity is almost zero-carbon as it is. If anything keeping the electricity price elevated makes it harder to get electricity to replace oil in traffic.

Note also that Vattenfall uses part of the profits to expand buy buying coal and nuclear on the continent and stripmining pictoresque German villages for low grade coal. So while high prices could be part of a green strategy, it is not so here. It is just part of Vattenfall's strategy for empire building.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Mar 30th, 2011 at 12:44:22 PM EST
[ Parent ]
This one of those things that piss me off the most. So much that I wrote a debate article for the local paper last fall - and got it published!

It's in Swedish, but at least you can read it. :)

   

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

by Starvid on Wed Mar 30th, 2011 at 12:52:09 PM EST
[ Parent ]
Good proposals for regulation. Did you get any reactions?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Wed Mar 30th, 2011 at 02:42:20 PM EST
[ Parent ]
Lots of positive e-mails from readers to the newspaper, but no replying article arguing against my proposals.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Mar 30th, 2011 at 03:05:58 PM EST
[ Parent ]
A friend of mine who is an active social democrat wrote a proposition to their regional annual meeting which was more or less verbatim based on this article. It was shot down for being too far to the left, and probably contrary to a number of EU rules.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Mar 30th, 2011 at 03:09:16 PM EST
[ Parent ]
Far to left of the Socialdemocrats? You commie :)

But that is a good result from an article.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Thu Mar 31st, 2011 at 12:29:42 PM EST
[ Parent ]
This was what I was looking for, though my question was vague and all answers are appreciated.

So if I understand right, building wind in Sweden should lower electricity prices as Danish and German gas gets replaced?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue Mar 29th, 2011 at 04:03:04 PM EST
[ Parent ]
If everything works the way it's supposed to, yes.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 29th, 2011 at 04:18:39 PM EST
[ Parent ]
But I have a feeling that the more wind we build, the more "problems" will happen at our nukes and in the power lines, so the need for German/Danish gas/coal plants will never go away. If that happened, power prices would fall which would erode the profits of the power companies, not to mention the power tax revenues of the state. And we can't have that, can we?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Tue Mar 29th, 2011 at 04:21:23 PM EST
[ Parent ]
Unfortunately, that seems like the likely scenario. Vattenfall has a long history of running its own policies, going back at least to the 1930ies when they prevented Sydkraft (then owned by southern Swedish city councils, now part of Eon) from establishing itself as a parallell national power company.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Tue Mar 29th, 2011 at 05:02:52 PM EST
[ Parent ]
The German gas plants are price makers whether Sweden is buying from or selling into that market, so as long as the Germans continue to need the German gas plants.

One thing to be noted in Jerome's "wind killed by volatile gas prices" is that if a substantial share of windfall gains by wind turbines in a are channeled into more construction of wind turbines, then those new wind turbines will have even bigger windfall gains during upswing periods, financing more construction.

This would be a construction boom and bust with gas prices, but one could envision the windfall-financed turbines as paying a revenue share back to the windfall providing turbines, rather than financing forward, when the price drops below the long term finance cost of the windfall providing turbines.

So the financed turbines "save", eg, 50% of their windfall gains in more wind turbine capacity. If they have "seeded" an additional 10% capacity when the downswing hits, they are now selling from 110% of the capacity on the same fixed cost, so the effective fixed cost is 9% lower. If they have "seeded" an additional 20% capacity, they are now selling from 120% of the capacity on the same fixed cost, so the effective fixed cost is 17% lower.

Indeed, a region or major municipality that was in a position to publicly fund a "seed farm" on a revenue share rather than fixed annual obligation basis could have an even firmer footing, since the "seed farm" could be set to be bankruptcy proof with 100% net revenue share at or below the target capital cost level and 50% net revenue share to the public owner and 50% net revenue share to seeding new capacity on the increment above the target capital cost level.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 30th, 2011 at 01:07:44 AM EST
[ Parent ]
This is more or less equivalent to accelerated amortisation of existing wind farms (for the record, the latter seems more sensible, since it avoids boom-and-bust cycles in the construction industry). The problem with that is that it depends on the timing of the gas troughs. It works well when you have time to aggressively amortise your loans before the gas slump hits. But if your new construction comes online during a slump, you go tits-up real quick.

Given that it takes at least two years from the time you start committing serious money to a wind farm and until it goes online, this means that you have to be able to predict gas prices 2-4 years into the future. If you can do that, you can make better money playing liar's poker in the futures market.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 30th, 2011 at 01:47:44 AM EST
[ Parent ]
Given that it takes at least two years from the time you start committing serious money to a wind farm and until it goes online, this means that you have to be able to predict gas prices 2-4 years into the future. If you can do that, you can make better money playing liar's poker in the futures market.

The point of the futures market is that if you're in the wind business it shouldn't matter to you what the price of gas is since you can hedge it. In other words, at 2-4 years ahead you can lock in a price for gas if you need to.

Also, it doesn't matter what your view of gas prices is, since the only price you can lock is the futures price.

At least that's the theory, and I wouldn't be surprised if it didn't work in practice. I'd appreciate hearing from Jerome about how it actually works in practice.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Migeru (migeru at eurotrib dot com) on Wed Mar 30th, 2011 at 02:36:47 AM EST
[ Parent ]
it takes more something like 6-12 months onshore (and yes, probably 2 years offshore) to go from financing to operations.

But at financing, you need to have entered into your power purchase agreements, in order to lock in the revenue you need to justify the funding (if you are not in a FIT regime), so you - or rather the buyer - have made at that point whatever bet you wanted to make on power/gas prices.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Mar 30th, 2011 at 06:45:53 AM EST
[ Parent ]
A substantial difference with accelerated amortisation with windfall gains is that accelerated amortisation does not roll out more wind power capacity, and so does not have the same positive impact on Sweden's net exports.

It avoids the boom and bust in the building cycle by avoiding the boom part. That's not the part we want to avoid. And since a substantial share of the boom and bust falls to German capital goods industry.

To the extent that we can shelter windpower from under predatory state institutions with a feed-in tariff, that's a superior option, but if we cannot get windpower out from under predatory state institutions, better to structure things so that there is a boom while busts can be ridden out without bankruptcy.

In terms of the "seed farm" wind turbines, structured as described they survive through a bust and reproduce when experiencing windfall gains. And every windfall gain financed turbine only needs to cover minimal operating and maintenance costs.

Once the prorated "seed farm" capital costs over the output of the "seed farm" and "seeded farm" are below the capital costs plus lowest fuel cost of gas turbines, the whole complex becomes always-reproducing, and the boom and bust is about the rate of reproduction.

All assuming, of course, a relatively small open economy with cross transmission into a larger regional demand sink.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 30th, 2011 at 02:50:43 AM EST
[ Parent ]
A substantial difference with accelerated amortisation with windfall gains is that accelerated amortisation does not roll out more wind power capacity, and so does not have the same positive impact on Sweden's net exports.

I think you're tacitly assuming that the "seeded" farms have a lower required rate of return on equity than the "seeding" farms. After all, if the "seeded" farms make sense on a seeding basis with constant cost of equity, then they should also make sense on an accelerated amortisation basis, assuming that you have available, equally priced, equity from other sources. As long as wind is a small(ish) fraction of total real capital investment, the latter does not strike me as an unduly unreasonable assumption.

And since a substantial share of the boom and bust falls to German capital goods industry.

Yes, if you allow a boom-and-bust cycle, you'll keep production in Germany. But if you have stable onshore demand, you'll get onshore industry (the economics of transporting windmills relative to transporting the raw materials say that the manufacturing will relocate to the vicinity of the demand). That's why you want to avoid a boom-and-bust cycle in the first place.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 30th, 2011 at 03:05:47 AM EST
[ Parent ]
... equity from the seeded farms is the realized flow of revenue from the sale of the power they generate over operating costs, since the seeding farms own a pure equity stake in the seeded farms and in all farms they seed in turn during surplus periods.

Accelerating amortization of finance capital funded windpower under predatory state market arrangements can reduce exposure to the being bankrupted by a downswing ~ and downswings are to expected, since the ride down from Peak Oil will be a bumpy one ~ but cannot eliminate insolvency risk. By contrast, a pure equity holding with no fixed obligation has no insolvency risk if the operating costs themselves are below the price maker's capital cost.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 30th, 2011 at 05:15:40 PM EST
[ Parent ]
What is the relationship between different power sources (+their financing) and the financing/buildout of [different] transmission networks. Does one follow the other? More wind -> more appropriate networks? Less networks (for whatever reason) -> less wind growth?
by epochepoque on Tue Mar 29th, 2011 at 05:26:41 PM EST
... and to a degree combined cycle as well, is the ability to build them closer to consumer grids, allowing utilities to postpone the construction of needed new transmission capacity.

A big public investment in an electricity superhighway would benefit most volatile renewables, since the broader the geographical spread and range of types of sources, the steadier the supply tends to be. In the US, the Great Lakes, northern Great Plains and southern Great Planes are distinct wind resources and the movement of weather systems means that variations in distinct wind resources can partially offset each other.

When the range of the electricity superhighway network includes solar resource of sufficient quality for utility grade concentrated solar thermal day peak plants and a substantial distributed portfolio of dammed hydro, its even better, because of the complementarity of a combined wind and solar portfolio when set against typical consumption patterns.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 30th, 2011 at 01:14:14 AM EST
[ Parent ]
Just look at Texas, where windfarms get curtailed because there is not enough transmission capacity from the production area to the load centers.

It's slightly less sensitive in Europe (wind is more widely dispersed), but it is a bottleneck in some places, and most of the current investment in grids is meant to accommodate the growth of wind production. In particular, transmission lines from the regions near the North Sea to the rest of the continent are necessary. So far this is done on a country by country basis, mostly.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Mar 30th, 2011 at 06:48:23 AM EST
[ Parent ]
Yes, Texas is the smallest of the three interconnects.

That's one of the things this Steel Interstate is planned to be doing, after all:

... with the Wind Resource of the Southern Great Plains and the hydro capacity of the Southern Mountain West on one side and Tennessee on the other.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 30th, 2011 at 05:23:35 PM EST
[ Parent ]

Energy investment needs 'strong regulatory push'

Europe needs to invest hundreds of billions of euros in new energy networks and renewable energy production. Most of this money will have to come from "the market", but financial experts agree that, left to their own devices, banks and energy companies are neither able nor willing to do all that needs to be done. They say that a strong inflow from additional sources, such as dedicated investment funds and public institutions, will be indispensable. The European Commission has already started preparing a "tool box" that will contain "innovative market-based solutions" intended to seduce investors. But one private investor warns that if the EU is to achieve its ambitions with regard to climate and the internal market, the EU and member state governments will have to take a much more active role. 'A strong regulatory push is required'.

(...)

érôme Guillet, co-owner of Green Giraffe Energy Bankers (GGEB), a French-Dutch specialist advisory company focused on the renewable energy sector, sounded a slightly different note at the breakfast meeting. According to the Frenchman, who has been active in the financing of virtually all offshore wind projects in North West Europe to date, money as such is not the biggest problem for the renewable energy sector. The problem is that unlike gas-fired power plants, renewable energy projects require large upfront investments and therefore yield a lower initial rate of return.

As financial markets are always looking for high initial rates of return, said Guillet, a purely market-based regulatory framework will always favour investment in gas-fired generation. `Gas-fired electricity is not necessarily cheaper', he said. `But since gas-fired power sets the price in the market and has low capital costs, it does tend be more profitable - and in a shorter time. Gas-fired power also provides more trading opportunities.' For this reason, he said, investments in renewable energy will require a strong `regulatory push' from the EU and Member State governments. `Nothing capital-intensive will get built without firm supporting policies', he said. `The key investment requirement is long-term price visibility - and this can only come from public decisions.'



Wind power
by Jerome a Paris (etg@eurotrib.com) on Fri Apr 1st, 2011 at 04:34:41 AM EST


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