Milk the Sun Team Posts

Guest Article: The German Direct Marketing Framework and Potential Benefits for your Assets

In the introductory blog post, I highlighted “tuning” options for your German renewable energy assets considering the nuances of the legislative framework. Next, I will elaborate on the first alternative mentioned: obtaining a slightly higher price for each kWh generated by, and exclusively available to, your (on- and offshore) wind or solar park. This is the so-called “direct marketing”, also commonly referred to as the “Market Bonus Scheme”.

Background

Martin Supancic discusses the opportunities for renewable energy asset owners under the EEG

The German Renewable Energies Act (EEG) of 2012 allows renewable energy assets to generate electricity from different sources and to sell to the market with a guaranteed offtake contract, ie. all produced electricity is sold at the contractually secured Feed-in-Tariff (FiT), regardless of the volatility in output or market circumstances (e.g. prices). Under the EEG, however, owners can select between commercializing their electricity via the FiT, the Market Bonus Scheme or Power Purchase Agreements.

The Market Bonus Scheme was established under the EEG as a way of integrating renewable energies into the electricity market. It was established in a way that would enable operators to improve control on the amount of electricity supplied to the market. Under the EEG Amendment from January 2012, three forms of direct marketing are defined (Art. 33b no. 1 – 3 of the EEG):

a)     Market Bonus Scheme

b)     Green Electricity Privilege (max. 2 MW parks)

c)     Other direct marketing (Power Purchase Agreements)

The cited amendment permits a monthly switching to any of the three direct marketing mechanisms, as well as reverting back to the classic FiT tariff.

Market Bonus Scheme

To better understand the pricing mechanisms, I will briefly explain how the German electricity market has worked to date. Since most, if not all (biomass may be an exception), renewable energy (incl. PV electricity) has a marginal cost of 0 EUR (sun/wind are free!). Renewable energy can also be sold, no matter the current pricing in the market, at times of peak production. At certain instances during the year, supply may outstrip demand causing negative prices. For example, conventional power plants (e.g. coal/gas-fired) sell at the marginal market price (as a function of marginal cost or what is commonly also referred to as the “dispatch curve”), normally quoted on the Leipzig Electricity Exchange (EEX). The burnt fuels cost money, thus, they determine the subsequent market price curve.

For the electricity market to operate efficiently, demand needs to equal supply. When demand shifts abruptly, energy generators need to quickly adjust production to meet the new consumption (price will depend on the “dispatch curve” of the added capacity). Ideally, future demand and supply can be predicted with high precision such that the most competitive prices are achieved to the benefit of all. The goal of direct marketing is dual:

– Reducing the additional costs on the German economy due to imprecise wind and photovoltaics electricity generation forecasts

– Improving demand-based electricity feed-in (esp. biomass)

Instead of the “produce and forget” strategy, which can lead to negative prices or higher EEG costs that are subsequently paid by the majority (there are exceptions!) of German electricity consumers, the direct marketer must make multiple estimates daily on the electricity production for the following day. This forecast is then sold daily on the spot market (day ahead). Any deviation of this prognosis from the actual electricity production results in electricity compensation costs, borne by the direct marketer, who thus is incentivized to make every effort to ensure a precise forecast or otherwise bear the compensation risk.

Under the ordinary EEG framework, the grid operators supply very inaccurate electricity generation estimates to the transmission lines operators, causing additional (compensation) costs. These are covered through the EEG levy account, consequently shared via the so-called “EEG-Umlage” (renewable energy levy) amongst the majority of German energy consumers, particularly households. When a grid connection point is registered for direct marketing, it is the direct marketer who assumes the risk. To illustrate the costs to the German economy, for 2013 the expected compensation costs due to imprecise PV electricity generation forecasts will cost German consumers an estimated 1.9 to 3.1 €/MWh. Currently, grid operators can already disconnect renewable energy assets. For them, grid stability is vital, particularly due to technical risks arising from an oversupply of electricity. The direct marketer does not manage the grid, thus, the reason for disconnecting a renewable energy asset are purely commercial, i.e. negative market price (utility PAYS consumer to CONSUME). In practice, this means that the negative market price must exceed the sum of the EEG FiT and the management bonus. By combining intraday trading with continuously updated forecasts and weather data, that are updated every few hours for all wind and solar assets, managed by the respective utilities,  the direct marketer can immediately respond to prediction changes, thus, minimizing the deviations and costs to both its profit & loss statement, as well as the German economy.

Just as in the case of wind and sun, biomass can also be a source of electricity production. In this sense, the second objective of the EEG amendment is to better integrate into the grid demand-induced biomass-based electricity generation, particularly to make-up for the shortfall between forecast and actual energy production. Currently, this role is primarily played by gas/coal fired power plants.

Green Electricity Privilege

This mechanism is primarily of interest to renewable energy assets with relatively low FiTs (e.g. wind). It is a form of direct marketing as a means of reducing the EEG levy paid by the asset owners. Electricity is sold directly to the final consumer, thus, the electricity generator is legally entitled to savings of 2 cents per kWh on the EEG levy (costs that are shared by all German households). This type of commercialization is subject to very strict rules in terms of contribution of green energy sources to overall electricity production mix of the utility (asset owner and/or distributor). This commercialization option is extremely restricted and will probably be phased out, thus, it is challenging to create a final consumer product considering the regulatory backdrop.

Other direct marketing

Power Purchase Agreements (PPAs) fall under this category. Due to the low FiT and given the current construction and operating costs of PV plants, some PPAs are in fact, reaching break-even but primarily due to tax breaks. Legislators are scrutinizing these fiscal incentives and may scrap them altogether, reducing the attractiveness of PPAs.

Benefits of Market Bonus Scheme

The incentive of switching to the Market Bonus Scheme is revenue-wise. For electricity produced under the EEG since 1.1. 2012, the additional revenues amounted to 12.00 €/MWh (legally established by the EEG), which was and is shared between the direct marketer (e.g. utility, wholesaler) and the asset owner. The revenue sharing depends on the utility’s commercial strategy and the associated costs – some are willing to offer 60% or more, others less, particularly if additional costs have to be assumed (e.g. payment guarantees). In 2012, some utilities and traders offered between 4 to 6 €/MWh of the 12 €/MWh mandated by law. This means in 2012, a park, annually generating 25,000,000 kWh could have achieved additional revenues of approximately (assuming 0.006 EUR/kWh) € 150,000.

For 2013, considering the different payment guarantee levels and associated costs, utilities have offered clients between 3.00 €/MWh and 4.00 €/MWh. The table below reflects the legally sanctioned management bonuses.

Management Fee in Cents/kWh

2013

2014

2015+

Without Remote Control

0.65

0.45

0.30

Including Remote Control

0.75

0.60

0.50

Depending on the results of the German parliamentary elections in September 2013, many industry experts predict an end to the market bonus model either in 2014 or 2015. Thus, time is of the essence if one wishes to benefit from this window of opportunity. If you have already switched to the market bonus scheme or are in the process of doing so, feel free to share your experience with a comment. What risks do you see?

This is the second part of a series of guest articles written by Martin Supancic. You can find his first article on managing a renewable energy asset under the German EEG here.

 

Guest Article: How to Tune Your German Green Energy Asset Without Getting Sun Burnt in the Attempt

How can the returns on green energy assets be amplified without refinancing? What can be done to eliminate those “love handles” on wind or solar parks? For some readers, what follows will probably be a review of the basics of managing a renewable energy asset in general, however, I will highlight a few focus areas  that can generate further value, considering nuances of the German renewable energy regime (Erneuerbare Energien Gesetz – EEG). Perhaps as a backdrop, I have been focusing on the photovoltaic (PV) business (particularly large parks), yet, the EEG itself covers a much broader spectrum of technologies from hydropower and different types of biogases, to biomass, geothermal as well as wind (onshore, offshore, repowering), the tactics below, a priori, being applicable to all of them.

Martin Supancic writing about how to Tune Your German Green Energy Asset Without Getting Sun Burnt in the Attempt

German renewable energy assets are quite appealing due to the stable regulatory framework, although costs are mounting for German households. As a consequence, the pressure is growing for painful political decisions to be taken in order to curb this phenomenon. The surge of German renewable investments over the past few years has led to a gradual adjustment of the corresponding Feed-in-Tariffs (FiTs) in an attempt to disincentivise the amount of newly built capacity, especially in the form of large ground-mounted projects going forward. Thus, investors who were lucky enough to fetch a park in recent months have had to conform themselves to ever lower returns.

Finding strategies to lift the relatively low equity IRRs (5% to 6%) is challenging but not impossible. Buyers of PV parks prior to Jan. 2012 will probably find it easier to uncover hidden value – during the heydays of investment frenzy, project developers, EPCs and O&M contractors could easily turn a quick buck while dictating the transaction terms. Demand was gleaming hot and projects quickly sold in competitive bidding processes, even before being completed, to ensure the highest possible FiTs. As the tariffs dropped, all stakeholders adjusted to the circumstances: PV module prices fell substantially (e.g. global glut, new manufacturing capacity being added in China…), EPC and O&M costs came down to permit attractive prices perMWp, while project developers reined in their margins. As a result, both project costs (EUR/MWp) and O&M prices are quite different today compared to those two or more years ago, opening the door to optimisation potentials.

When we examine options allowing investors to extract further value from their existing assets, we can differentiate between pure financial (e.g. refinancing) and operational measures – I will focus on the latter. The typical “P&L” of a PV park is a good starting point:

– Sales
– Maintenance
– Insurance
– Miscellaneous Expenses: Accounting, Electricity…

Sales: Since the first of January2012 the revised EEG 2012 offers under §33b the opportunity to directly market renewable energy via the so-called “Market Bonus Scheme”, a limited-time opportunity. Provided the park is equipped with remote control devices, allowing it to be decoupled from the grid (e.g. negative market prices), the owners may earn two small margins (total approximately 1.4-1.7%) on top of the FiTs. Sounds like peanuts but for parks upwards of 20 MW, this can easily mean some EUR +100,000 over 18 months.

Maintenance: This is a more complex issue, where risk, covered/non-covered expenses and legal contracts must careful be considered. The result will depend on the existing supplieragreements, options to premature rescissions, and particularly bank consent, assuming the assets are debt financed. Its weight in overall operating costs is significant, thus, even a 1 or 2 EUR/kWp reduction positively impacts the recurring cash flow.

Insurance: As a percentage of operating costs, this is a relatively small item but it too, can be optimized, although absolute savings will be more limited.

Miscellaneous Expenses: This is a bit of a rag bag, with limited potential for a “hair cut”.

Stay tuned as subsequent blog posts shed additional light on the revenue-enhancing and cost cutting potential available to German green asset owners. Looking forward to your comments and particularly for your experiences in executing the mentioned optimization measures.

About the Author

Martin Supancic (37) is external financial advisor to Sojitz Europe plc, the European operations of Japanese trading company Sojitz Corp., with offices on all continents and in major European business capitals. He analyzes photovoltaic investments in Europe and Latin America, and has closed transactions worth 27 MW (more than EUR 65 mill.). In addition, he scouts for innovative cleantech start-ups, helping them grow their sales and arrange venture capital financing. Prior to advising Sojitz Europe plc, Martin advised companies in their internationalization efforts, headed international corporate development at now defunct Spanish biodiesel start-up Green Fuel Corporacion, SA, (shareholders included Endesa, Tecnicas Reunidas, Grupo TSK) and worked on multi sector deals, incl. wind and solar parks, at Deloitte Corporate Finance/Transaction Advisory Services in Madrid, Spain.

Photovoltaics in Canada – An Introduction

Canada is one of the highest energy consumers per capita in the world. Due to its geography, Canada is currently the world’s second largest producer of hydroelectricity and is sixth in wind power generation. Nevertheless, solar energy is also expanding rapidly in Canada and especially, in Ontario. In 2011, there was 289 MWDC photovoltaic (PV) capacity installed throughout the country representing 335 GWh annually.

Canada has a significant amount of annual solar radiation, much greater than that of Germany’s the leader in solar energy. Ontario, Quebec, and the Prairies are leading the country in solar resources. Solar potential tends to accumulate in the southern regions but is much lower in the territories due to their high latitude. Canada’s small population is most scattered throughout the country with very few densely populated regions besides the Greater Toronto Area, Vancouver, and Montreal. In the last decade, PV installations were concentrated in off-grid systems for purposes such as navigational aids, remotes homes, and telecommunication.  These systems made up almost 90% of the solar capacity in Canada in 2009. Off-grid system remains prominent in Canada but will decrease in its market share as grid-connected systems continue to grow swiftly.

Government Regulations

Federal incentives are lacking in Canada, with the exception of the Income Tax Act’s Accelerated Capital Cost Allowance for certain PV systems. Solar energy legislature is almost always left solely to the provincial government. Most provinces in Canada have Net Metering programs that allow smaller renewable energy generating units to connect to the grid system.

Ontario has so far been the clear winner in Canada’s solar race. Ontario’s Renewable Energy Standard Offer Program (RESOP) and feed in tariff (FIT and microFIT) program has had substantial support. In 2010, the public budget for photovoltaics in Canada was $61.8 million with the majority funding Ontario’s solar efforts. Formal solar networks and testing facilities for panels have also been established, funded by both federal and provincial governments, which have worked to increase the collaborations and PV innovations throughout Canada.

Community

In 2010, Sarnia, Ontario’s solar plant, Sarnia Solar, was considered the world’s largest solar plant. It has since been exceeded by other plants around the world. It has an installed capacity of 97MW and consists of 635 acres of modules, approximately 1.3 million thin film panels. Municipal governments and communities have also worked towards developing renewable energy. House owners now view the addition of a PV system as a normal house upgrade and base it on affordability and reductions in environmental impact. In 2007, the Drake Landing Solar Community was completed in Okotoks, Alberta. It is the first community heated by a district system and is able to store energy generated during the summer for the winter months. This allows 90% of each home’s heating to be generated directly from solar energy.

Despite all this, Canada is still behind some of the major competitors. However, politicians all around Canada are aiming to reduce greenhouse gas emissions through use of renewable energies. New legislation such as Ontario’s Green Energy and Green Economy Act established in 2009 is also pushing the country towards a renewable energy  -based economy. As older electricity plants begin to degenerate and age, Canada is looking towards renewable energy to replace ever increasing energy demands. Canada’s vast landscape is an unlimited resource for sustainable energy from renewable sources.

Check out the article on Ontario later on in the week which will expand on its legislation and accomplishments in solar energy.

Sources: Canmet, Cansia, DLSC, Pembina Institute

 

Mainstream utility generation ‘trending’ in the PV sector

Utility-scale applications have doubled in a year to 12GW, while growth in other parts of the PV sector has slowed. Philip Wolfe, whose book on solar power stations was published recently, explains why these applications will continue to march on.

Photovoltaic in the United Kingdom – an overview

Country: United Kingdom (UK)United Kingdom UK Solar PV
Area: 244,820 km2
Population: 61.8 Million
Language: English
Government: Parliamentary Constitutional Monarchy

Electricity Consumption: 341,918 GWh/Year
Electricity Import: 5,234 GWh/year
Percentage Renewable Energy: 5.1%
Percentage Photovoltaic: 0.07%
Installed Photovoltaic Output: 1 GW
Solar Irradiation: 750kWh/m2 to 1,100kWh/m2

Solar PV UK Britain Marketplace

© Katarzyna Chojnacka

Electricity and PV in the United Kingdom

The largest energy sources in the UK are Coal, Gas and Oil, comprising over three quarters of the country’s total energy production. Renewable energy is receiving more and more government support, however, due to the UK’s geographic location photovoltaic plays only a minor role in these developments. Currently only 0.07% of electricity production comes from solar installations.

Policy and Feed-in Tariffs

Since the 1st of April 2010, the United Kingdom provides feed in tariffs for renewable energy. The primary beneficiaries of these tariffs are private households. They receive subsidies when they produce electricity that is not fed back into the grid, but rather used directly at home. Installations over a total capacity of 5MW are not supported.

The original range of the subsidies was between 0.1049 €/kWp and a maximum of 0.5343 €/kWp. The following cutbacks of 2011 were further decreased in September and November 2012, with a current subsidy range of 0.0876 €/kWp to 0.19 €/kWp. The larger the installation, the lower the tariff.

Grid Parity in the United Kingdom

Net parity in the United Kingdom has still not been achieved. Predictions place grid parity in the year 2020.

Outlook

The United Kingdom must fight to keep the momentum of its renewable energy development going. To this end, this year more money has been freed up. At any rate, discussions are already in progress regarding the establishment of feed in tariffs for renewables. Low acceptance in industry and politics, and well as the difficult geographic situation, do not bode well for PV development. Oft overlooked, however, is the fact that London lies farther south than Berlin – conditions exist for photovoltaic in the southern parts of the UK.

Source: British Photovoltaic Association UK Solar PV Update, November 2012

Photovoltaic in: France – an overiew

Country: FranceFrance PV Solar Milk the Sun
Area: 668,763 km²
Population: 65.4 Million
Language: French
Government: Republic
Electricity Consumption: 425. 655 GWh/Year
Electricity Export: 56.570 GWh/year
Percentage Renewable Energy: 13.3%
Percentage Photovoltaic: 1%
Installed Photovoltaic Output: 3.6 GW
Solar Irradiation: 900kWh/m² bis 1,600 kWh/m²

Solar in France PV

iStockphoto.com©Gyula Gyukli

Electricity and PV in France

France is known in Germany as „Atomland” (over 75% Nuclear powered). Although at 13.3% they are similar to Italy in their percentage of electricity sourced from renewables, in light of their high export of energy (above all nuclear), these numbers are relative. Photovoltaic is still skeptically received in France by industry and policy makers alike, the effects of which are seen in the low quantity of installed PV at around 3.6 GW. Just recently, the country approved construction of several additional nuclear plants, and when it comes to renewable energy there is a clear preference for hydroelectric. Photovoltaic comprises less than 1% of the total energy consumption, divided between more than 258,800 plants.

Policy and Feed-in Tariffs

French legislation regarding solar plants began with the first administrative regulation in July 2006 („Arrêté du 10 juillet 2006“). A peculiarity of the French regulation is that compensation varies depending not only on the type of plant, but also on its geographic location. Especially high tariffs are in place for overseas “Départments“ and Corsica.

With the “Arrêté du 12 janvier 2010“, the second administrative regulation in January 2010, France has aligned itself with the EU directive requiring that at least 20% of energy consumption be provided from alternative energy sources by the year 2020. The compensation clauses were modified, and since this last “Arrêté” rooftop installations in France can receive up to 0.58 €/kWh, the highest tariff for rooftop PV worldwide. At a minimum building and roof installations will make 0.42 €/kWh.

Grid Parity in France

Grid parity has still not been achieved in France. Current prognoses predict parity by 2020.

Outlook

Should the 20% renewable energy mark not be achieved by 2020, France will fall under the jurisdiction of hefty EU sanctions. Likely in response to this, the current president François Hollande seems to be taking steps to separate his party from nuclear energy in general.

If and to what degree photovoltaic is a factor here is still unknown. At any rate, the high feed-in tariffs for PV in France are attractive for international, as well as local, investors. Potential changes to these tariffs are currently in debate, with arguments being made for increases as well as decreases.