Into the unknown: evaluating drivers of low- carbon

www.cornwall-insight.comHELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORSHELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Into the unknown: evaluating drivers of low-carbon investment in a subsidy free world

17 October 2018

Cornwall insight


Setting the scene

17 October 2018

Gareth Miller

www.cornwall-insight.com

Who we are

CONSULTING

ANALYSIS

RESEARCH

TRAINING

Pre-eminent providers of

market, regulatory, and

policy research, analysis,

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Independent experts

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Trusted by customers for

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3


Our customers

4


2005 2010 2012 2016 2017

Company founded:- Nigel Cornwall

Unrivalled coverage- Regulation- Policy- Market

Intelligence

Full service offering:- Subscriptions- Financial

models- Consulting- Training

Growing customer base:- 300+

Secured investment:- Business

Growth Fund & Opens Irish business

Cornwall Insight’s journey

5


2014 2015 2016 2017

CPS frozenBiomass conversion RO grandfathering diluted

RO bands and Onshore wind and Solar<5MW RO closureCPS freeze extended

CfD AR2 excludes solar & onshore wind & new CfD auctions for less-established only

New accounting controls for low carbon “freeze”

Your journey…

No subsidy for onshore wind Solar >5MW RO closure LECs removed

6


What is subsidy free?

• It is clear that as we stand many renewable technologies are being asked to invest on a subsidy free model

• And to meet our targets the will need to succeed

• But what does subsidy free mean?

o Is it no government support or consumer levy funding at any time for a project?

o Or, is it a neutral cost position for the government or consumer over the whole life of a project?

• We would argue for the latter, even if some in government , and particularly treasury interpret it as the former in way cost controls designed

• Later we unpack a powerful model to split the difference and deliver scale deployment

• But the question remains, without new government policy now, can subsidy free actually be delivered?


Investment is fallingRenewable energy investment, UK 2005-18 ($bn)

Annual investment lower than anytime this decade with recent spikes driven by “gold-rush” of subsidy closures

From hereon likely to be lumpy and driven by commissioning dates of large offshore projects, and lower volumes of subsidy-free

8


Shaky investor attraction to the UK

Source: Renewable Energy Country Attractiveness Index, EY

Steady investment confidence under a stable regulatory environment – RO, ssFiTs, EMR white paper and prospect of change creating wobbles

The repeated incursions against renewable support schemes drives lower investor attractiveness

Attractiveness bounces back – thanks to talking up the investment potential in subsidy-free. But is it real!

9


Yet we must build more…Waterfall of capacity 2018-2050

Source: National Grid FES, Two Degrees, Cornwall Insight

160

1


New build pipeline not enough

2.72.1

0.8

16.1

7.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Capacity in planning

GW

s

Technology

Fuelled Solar Photovoltaics Tidal Barrage and Tidal Stream Wind Offshore Wind Onshore

Current renewables planning pipeline

Source: Renewable Energy Planning Database October 2018

11


Existing projects will lose support

Roll-off of subsidy for current fleet

Source: Cornwall Insight, 2018

0

10

20

30

40

50

60

GW

RO Subsidised FIT Subsidised CFD Subsidised

CFD Forecast New Subsidy RO Subsidy Ended FIT Subsidy Ended

CFD Subsidy Ended Total Subisidies Total Subsidy Ended

Peak subsidy in 2026 Over 45GW of existing without subsidy by 2040

12


And will need to be replaced…Projects within their useful 25 year asset life 2002-2039

Source: Cornwall Insight, 2018

0

10

20

30

40

50

60

200

220

03

200

420

05

200

620

07

200

820

09

2010

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2013

2014

2015

2016

2017

2018

2019

2020

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2022

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2042

2043

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2045

2046

2047

2048

2049

2050

GW

Onshore wind Offshore wind Solar PV Nuclear Biomass Hydro EfW ACT Wave and tidal Micro CHP

Over 53GWs of renewable assets may need to be rebuilt/repowered to recover the peak

Peak operating capacity within useful asset-life

13


Today we will try to answer that question!

How will we meet the challenge?

Time Topic Speaker

14:10 Wholesale prices: trends, cannibalisation and impacts on project performance

Mike Mahoney

14:40 PPA market and investment underwriting in a subsidy free world

Ben Hall

15:10 Alternative sources of return – upside and downside

Tom Palmer

15:40 Break

16:00 Small is beautiful – workable options for the post FiT world

James Brabben

16:25 The case for floor price CfDs Gareth Miller

16:50 Q&A Ben Hall

14


Sli.do

Do you think it is possible to meet our 2050 targets on the current subsidy-free status quo policy?


Wholesale prices: trends, cannibalisation & impacts on project performance

17 October 2018

Mike Mahoney


Price cannibalisation“The depressive influence on the wholesale electricity price at times of high output from intermittent, weather-driven generation such as solar, onshore and offshore wind”Cornwall Insight

“The more the wind blows and the sun shines and demand is saturated, the greater decline in prices on wholesale markets.” Foresight DK

“During windy hours…the excess supply of renewable based electricity depresses the power price, this is precisely when renewables generate the most energy, disproportionately earning low prices”Lion Hearth

17


Subsidy adjusted merit order

-200

-150

-100

-50

0

50

100

0 10 20 30 40 50 60 70 80 90

SR

MC

-£/

MW

h

Cumulative nameplate capacity - GW

Emissions

Gas

Coal

Biomass

ROC

CFD

Short Run Marginal Cost

Source: Cornwall Insight

18


Price cannibalisation in action

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

£ M

Wh

Day-ahead auction prices

11-Jun 12-Jun 13-Jun 14-Jun

11-Jun, base £53.55MWh, Wind 12%12-Jun base £53.33MWh, Wind 11%13-Jun, base £53.24MWh, Wind 21%

14-Jun, base £47.12MWh, Wind 42%

Source: N2EX, Cornwall Insight

19


40.00

45.00

50.00

55.00

60.00

65.00

0 5 10 15 20 25 30 35 40 45

Val

ue fa

ctor

Percentage market share of generation

Value factor of wind power 2018 to date Day-ahead auction prices for 2018

show strong correlation with

wind power production

Cannibalisation effect markedly

greater with wind above 30% of the

mix

Short term conditions such as

extreme cold weather can create premium for wind

power

Value factor - variation to base load

Source: N2EX Cornwall Insight

20


Distribution of wind penetration

0

5

10

15

20

25

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%

Day

s

Percentage of generation mix

Number of days renewable generation makes up X% demand

2019

2025

2050


2019: Wind power at 20% or more on half of all days



21


Future cannibalisation impact

60%

70%

80%

90%

100%

110%

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

Bas

eloa

d pr

ice

capt

ure

Solar

Average P05/95

60%

70%

80%

90%

100%

110%

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

Bas

eloa

d pr

ice

capt

ure

Wind

Average P05/95

22


0

10

20

30

40

50

60

70

80

£MW

h

Forward curves - baseload power

Change Curve 30/03 Curve 28/09

• Rising since 2016

• Pace quickened spring 2018

Prices rising

steadily

• Extreme cold depleted gas stocks

• Wind ‘drought’• Nuclear

outages

Gas supply issues

• European prices chasing Asia

• Coal back in merit

• Carbon

Gas demand in Asia

Wholesale markets

Source: ICE, Cornwall Insight

23


Is there a role for carbon?

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Apr

-18

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-26

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-32

Apr

-34

Apr

-36

Apr

-38

Apr

-40

Apr

-42

Apr

-44

Apr

-46

Apr

-48

Apr

-50

Carbon pricing (nominal)

€/t EUETS £/t CPS £/t Carbon

0.00

0.50

1.00

1.50

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2.50

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3.50

2/1/18 2/2/18 2/3/18 2/4/18 2/5/18 2/6/18 2/7/18 2/8/18 2/9/18 2/10/18

EU ETS Carbon v Brent Crude price index

Brent Crude EU ETSSource: Cornwall Insight

24


Sli.do

What will treasury do with the carbon price support in the upcoming budget in November?


Future capture prices

20

25

30

35

40

45

50

55

60

2018/19 2019/20 2020/21 2021/22 2022/23 2023/24

£MW

h

Solar capture prices

Solar (April) Solar (October)

20

25

30

35

40

45

50

55

2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25

£MW

h

Wind capture prices

Wind (April) Wind (October)Source: Cornwall Insight

26


Wholesale value

Source: Cornwall InsightDelivery Balancing Mechanism

Intra-day trading

Day-ahead Auction

Seasonal contractsCapacity Market T-1

Capacity Market T-4Floor pricing

Corporate PPA

Forwards Market

Years 5-15Mid & Long term PPA

Short term PPA

Higher risk/shape discounts

Low value floor prices, partial volumes

Steep de-rating expected

Lower risk/shape premiums

Fixed prices

Off-taker competition

High value, high risk , low utilisation

Third party trading, share of upside

Years 3-5

Year 1

Prompt

27


Networks

Generation

Markets

Additional factors

Networks• Constraints in the BM adding

to volatility in SIP• ‘Western bootstrap’ allowing >

north to south flow• Interconnector capacity

growing more scope for export but also imports

Markets• Price coupling via EUPHEMIA

at day-ahead at risk from no-deal Brexit

• interconnector trading• falling liquidity• New products for flexibility

Supply• Capacity and subsidy for

nuclear power• increasingly efficient flexible

gas plat

GB Market• Major transition in

progress• Value in flexibility for

some, significant risk to others

28


• Fossil fuel prices become progressively less influential, setting the marginal

price in fewer periods and renewables output grows

• First mover advantages for deployment to capture higher near-side prices

• Subsidised projects established as major proportion of the merit order and

remaining in situ into 2030s and holding a competitive advantage over

subsidy free projects

• Direction of market value heading closer towards delivery and flexibility.

Volatility is good for some but risky for others

Key take-aways

29


PPA market and investment underwriting in a subsidy free world

Ben Hall

17 October 2018


Current terms available from utilitiesLarge & growing renewables market

We calculate 23.5GW (~65% of market) is under some form of PPA

High liquidity & re-tendering Especially in short-term FiT and Roc

deals

New entry ~40 PPA providers with capacity, 20

offering long-term PPAs

Improved PPA pricing Competition and liquidity driving improved retention

for generators. Typically:• ~97% for solar; ~96% for wind

• 97% on Rocs; similar for embedded benefits

31


Sli.do

Are these the best terms we will ever see in the PPA market?


What comfort can the wholesale market give?

• Strong growth in wholesale power priceso But lack of liquidity post 12-18 monthso Difficult to fix prices for longer than 2-3 yearso Backwardation continues in the wholesale marketo Longer fix usually = larger discounts

35

45

55

65

75

85

Sep

17

Oct

17

Nov

17

Dec

17

Jan

18

Feb

18

Mar

18

Apr

18

May

18

Jun

18

Jul 1

8

Aug

18

Sep

18

£/M

Wh

Winter 18 Summer 19 Winter 19Summer 20 Winter 20

35

45

55

65

75

85

Day-ahead

Oct Nov Q418 W18 S19 W19 Ann Oct18

£/M

Wh

Last week Two weeks ago Last year

Seasonal power prices (baseload) Power forward curve

33



Stability through PPA floor prices?Previous structures

• Historically most lenders have requested a floor price, especially in Roc PPAs

• Less/ no requirement in FiT/ CfD• Hard floor • Some offtakers have the risk of wholesale prices dipping below now

Changing wholesale market: fewer offtakers have been willing to offer hard floors

Emerging structures• Floor design where the offtaker absorbs the reduction when wholesale

prices fall below the floor price and then recoups these loses when wholesale prices rise back above it

• Currently offered floor prices are £10-20/MWh, if offered at all

34


• Most popular structure in GB aka sleeving– common for subsidised CPPAs

• PPA between corporate and generator

• Back-to-back PPA with corporate and supplier

• Generator transfers electricity to supplier who sleeves to end user sites

CPPAs – direct structureGenerator CorporateSupplier

PPA price agreed

Power and certificates

Power (and certificates)

Potentialsleeving fee

Potentialsleeving fee

35



• AKA synthetic PPA• PPA between generator and supplier• Supply contract between corporate and supplier• Price guarantee agreement between generator and corporate• Can be packaged to more than one corporate

CPPAs – indirect structure

Generator CorporateSupplier

Price guarantee instead of PPA

Back to back PPA and supply contract for supplier

36



Who are the buyers?

Today 2020 2030 2040Long-term

commitments

37


Corporate/ buyerDrivers of interest in CPPAs

Developer/generator

Removal and reduction of subsidies

Bankability/creditworthy

counterparties

Lower cost of capital and

levelised costs

Long term route to market

Lack of forward liquidity to provide fixed price long-

term certainty

Meet/match demand requirements

No upfront capital

requirements

Long-term wholesale

price certainty/ hedges

against price volatility

Internal/public renewables/ low-carbon

targets

Corporate social

responsibilityEstablished project finance

markets

Government-led targets

Success of CPPAs in other markets (e.g.

US)

Experience of developers/utilities

is growing

38



Developer/ generator Corporate/ buyer

Complexities and issues

Creditworthiness of offtaker becomes even

more important if subsidy free

More complex to negotiate and

likely to take more time

Fairly limited pool

of corporates

– but increasing

CPPA may create 100% of revenue

Board appetite for the deal

Unlikely to agree to pay more in the short-term for long-term certainty

Not core business – Lack of knowledge and expertise in closing the contract

Security may be required e.g. a direct agreement

Contract termination costs

Still requires a supplier for top-up, spill and registering of metes

for settlement

Power offtake not core for

corporates

Complexity and costs associated

Pricing is heavily dependent on forward curve/ forecasts of prices

39



Sli.do

What do you think is the biggest barrier to more CPPAs?


2008 2008-17 2017 2018-19 2020

First CPPA signed • Sainsbury’s 10-

year agreement with Lochhead wind farm

CPPA market breaches 400MW • ~2% of

total PPA market

First subsidy free solar farm• Anesco

project co-located with batteries

First subsidy free wind farms• EnergieKontor

wind projects –England (and potentially Scotland)

Furtherdevelopments?• Vattenfall

South Kyle• Hive

Hampshire/ Kent

UK CPPA and subsidy free

41


European subsidy free• Överturingen – 235MW in Sweden

o GIG recently reached financial close o 29 year CPPA with Norsk Hydro, an

aluminium producero Some limited subsidy

• Vattenfall Dutch offshore wind by 2022o Hollandse Kust Zuid – 750MWo “Is profitable with our view on

market prices and market price development”

• Other European comparisons o German “subsidy-free” offshore

wind by 2024-25, but with grid connections provided for by German government and ready-defined sites

42



Key take-aways

• The wholesale market is currently buoyant and the utility PPA market is at its most competitive

o PPA fees at all-time low

• Despite this, investments in subsidy free projects are challenging

o Lack of stability/ certainty in forward prices – utility PPA market is not providing this

o Levelised costs too high for many investments for merchant only projects

o Network charging review adds to the uncertainty

• CPPAs can provide some stability but there is a lack of liquidity and contract negotiation is complex/ time consuming

• Other subsidy free developments are very site-specific

o Other revenue sources, “cheaper” network access, PoC schemes

43


Alternative sources of return – upside and downside

Tom Palmer

17 October 2018


• In the absence of any subsidies, assets with need to stack and jump between elements if better opportunities exists

• Will be competing and locating with flexibility assets and likely to result in sharing connection / infrastructure / O&M or portfolio management virtually

It used to be so simple

Wholesale Market

Subsidy

Markets in transformation

Capacity Market

Balancing Market

Wholesale Market

Balancing Services

Other

45



• Renewables with subsidies were unable to participate in the Capacity Market o Not compliant with state aid rules

• No de-rating factors for wind and solar in practice means its not possible to participate

• Hydro (excluding tidal / waves / ocean currents/ geothermal) and biomass have been able to participate

• This is despite the objective of the CfD to lead to ‘return to market investment’ renewables

Though shall not enter

Why not try?

Glen Kyllachy Wind Farm owned by Innogy registered

for 2021/22 delivery year

48MW site initially registered as Hydro before finally being

rejected

46


• Government held its 5 year review into the Capacity Market

• Renewable involvement identified as a priority

• Likely to be in 2018 auction (delivery for 2023/24

Well that was quick

Historically had low carbon support schemes – CfD, RO, FiT, FiDER

Assumed to participate once Renewable Obligation support ended

Contribution of solar to Security of Supply?

Development costs for projects decreased quicker than expected

New Routes to market – Corporate PPA and subsidy free PPAs

47



• All other assets that participate in the Capacity Market are dispatchable and controllable with the exception of Interconnectors

• Responding to a Capacity Market event is not possible, but may still deliver in periods of stress

• Desire to focus on wind and hybrid sites, potentially solar

This is all new for me

Review de-ratings for solar and wind

How to treat hybrid projects

Penalty Regime

48


• Officially no de-rating for wind and solar

• Winter Outlook suggested a de-rating of around 17% for wind

• Experience from Ireland and others suggest o Solar – 5.5%o Wind – 10.3%

• May impact the returns for East-West facing solar panels

There when I needed you


49


• Increasing number of sites will not be purely a renewable deployment, understanding the need for flexibility to support deployment

• Hedge against the uncertainty in revenue volatility

• Increasing interaction with o Storageo Gas reciprocatingo Other renewableso EV charging

Let’s get physical?

Uncertainty in renewable generation

Exposure to system

imbalance price

Meet end user shape

Revenue diversification

(cannibalisation)

Contracted revenues

Capture locational benefits

50


• Identified concerns on the penalty regime – limited penalty

• Concerns penalties are insufficiento Increased form of penalties likely

to be punitive to renewableso Potentially linked to Value of Lost

Load (VOLL)

• Would require further development of secondary trading market – only 145MW of assets in 2018 delivery year

Paying the penalty

Penalties

All capacity providers holding an agreement must deliver

sufficient electricity during a stress event to meet their

obligation or pay a penalty.

The penalty rate (on a MWh basis) is set at 1/24th of a

provider’s annual capacity payments and capped at 200%

of its monthly capacity payments and 100% of its annual capacity payments.

51


• Will capacity market prices be worth it to justify entry

• Rewards will be minor, but nonetheless meaningful over the lifetime

• Importance of being contracted revenues for debt

• Real value will be determined by the change in penalty scheme

Enough Value?

Estimated de-rating Value £/MWh

Onshore Wind 17% £0.35 to £1.32

Solar 5% £0.23 to £0.86


52


• Balancing Services are going through significant reform under System Needs and Product Strategy (SNaPS)

• Opening up existing market previously occupied by large thermal assets – now storage, reciprocating engines and DSR

• Solar and wind only really provided intertrip arrangements with National Grid in South West Scotland

• Subsidy free – provides greater flexibility to participate and more competitive with other forms of generation

Managing the system

53


The art of the possible?

System Needs and Products Strategy

InertiaFrequency Response

Reserve Reactive Black start

NoYes, but limited

No Yes Maybe

Enablers• Power electronics• Hybridisation• Location

Limitations• Flexible generation• Market size• Location

54



• Currenltly no wind participates in any of the Balancing Services competitive markets as lack of certainty

• Desire for high only response (reducing output) in Balancing Services

• Increased opportunity if able to integrate hybrid / co-located solution

• Future emissions target in Balancing Services?

Competitive?

55


• National Grid uses to balance electricity supply and demand close to real time

• Not new - traditionally 100MW in E&W; 30MW in South Scotland; and 5-10MW in north Scotland

• The Balancing Mechanism is not new for wind, but solar has not participated to date

• However, predominantly taken to manage regional constraints through system actions rather than energy actions

Matching supply and demand

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

Tota

l val

ue (£

)

Bid Value Offer Value

Value of BM actions by technology


56


• Project TERRE (Trans European Replacement Reserve Exchange) will create a platform for the sharing of Replacement Reserves between TSOs via P344

• Create new entities that will allow small assets connected to distribution network and demand Side response to provide flexibility

• Solar and wind will likely still find it tough to competeo Thermal assets normally pay

to reduce their generation

TERREing up the rulebook


57


Key take-aways

• None of the alternative revenue streams are easily accessible for assets that are not dispatchable

• Experience from flexibility market makes it clear these markets are complex and highly competitive so not clear if subsidy free has much of a role

• Potential need for Power Purchase Agreement for subsidy free to be flexible enough to optimise the assets in different market, but again not straightforward

• These other forms of revenue could bring in some contracted revenues that improve the ability to bring in debt, although likely to be time limited and minimal

58


Sli.do

Is it economically viable for an onshore wind farm to secure investment on merchant wholesale revenues, capacity market and balancing services?


Small is beautiful

17 October 2018

James Brabben


The FiT scheme cycle

0

200

400

600

800

1000

1200

1400

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

MW

Photovoltaic Wind Anaerobic digestion Hydro Micro CHP

0

5

10

15

20

25

30

35

40

45

50

-

50

100

150

200

250

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

p/kW

h

Num

ber o

f ins

talla

tions

(Tho

usan

ds)

Photovoltaic Wind Hydro Anaerobic digestion Micro CHP Average Solar Tariff

Lift off “Let’s see how this goes”

Manage“We need to control costs”

Cap and manage“We need to control costs…. More!”

Annual capacity uptake

Installations


61


Closure and impacts

FiT

31 March 2019 closure date announced by BEIS. Removal of generation tariffs and export tariffs to new sites

BEIS suggest a guaranteed route to market may be developed… but only if they lower bills

An already distressed supply chain could suffer

a further slow down

Pipeline projects may now be halted or re-assessed

until after BEIS announcements

Separate call for evidence on the future of low-carbon generation

Other technical adjustments announced including metered exports (above 30kW) being brought into levelisation process

62


What now for small-scale developers?

“Go it alone” a.k.a build merchant• What price stability?• What PPA?

Co-locate• What battery price? • Can you arbitrage 500kW?• What degradation rate?

Behind the meter• Through one supplier? • What about TCR impacts?

63


Subsidy free still in the distance

Source: Pixie Energy

64

The cost and value of on-site solar PV (2018 and 2023)


The case for a transitional offtake tariff

2019 2024

• 10-15 year agreements

• Same technologies as FiT but reduced thresholds (500kW for community, 250kW solar and 100kW for others)

• Continued MSC accreditation process

• Opt out of this arrangement – but never back in

• SIP reference price – banded pricing could incentivise deployment of load shifting and storage

• Supplier obligations above 250k – but SIP reference means no levelisation

• All output HH metered

End in 2024: • HH settlement to

have been implemented

• ToU tariffs widespread

• Aggregation and multi-supplier as mainstream

• Commercial storage

• Local flex markets

65


Wider imperatives

“Removing barriers to smart technologies, including storage… enabling smart homes and businesses”

Is further small scale generation a missing link in implementing wider plans?

DSOs

Generation/ wholesale

Networks/ supply Consumers

Peer to peer

HH settlement

StorageMulti-supply

Local servicesRenewables penetration

Flex assets

System services

66


1. FiT scheme has seen higher than expected uptake over its lifetime. But the scheme has been slowly winding down since changes in 2015

2. Scheme closure presents challenges for new developments. Price stability has been potentially removed and an already distressed supply chain needs buildable projects

3. We see the risks and complexities of merchant development, co-location and behind the meter as a barrier to development

4. BEIS’ guaranteed route to market option needs to be explored, as otherwise generation could stall

Key take-aways

67


Sli.do

Do you think the small-scale (below 5MW) renewables market will develop without a guaranteed route to market?


The case for a CfD floor

17 October 2018

Gareth Miller


Over 9GWs of pent up onshore demand in the planning system awaiting support

Need to build/repower 100GWs+ of low carbon capacity to meet 2050

Traditional investment model relies on de-risking volatility to ensure repayment of debt

Utility and corporate PPAs unlikely to provide the “scalable” answer

Why revenue stabilization is needed?

70


The “zero-subsidy” red-herringEven if computer models say LCOE trending lower than projected wholesale prices over lifetime showing positive NPV, policy support still required…

At same time wholesale power market volatility is increasing

And the direction of captured prices is

down, regardless of commodity value

Pool of investors capable of pricing volatility/merchant risk is very small and cost

of capital high

And lenders not interested in just total, but regular repayments – volatility matters

Comparisons to baseload wholesale prices misleading – captured prices are real

71


Project finance the engine of growth

Source: Based on BNEF data provided by (OECD, 2016)

Global asset financing of new investment in renewable energy

72

https://www.sciencedirect.com/science/article/pii/S0140988317303870#bb0235


In particular for wind and solar

Source: Energy Economics Volume 69, January 2018, “The Importance of Project Finance for Renewable Energy Projects”. 341 projects (73%) out of 468 new power projects 2010-2015.

New power projects in Germany 2010-15, financing proportions

73


Higher returns to equity from raising debt

Banks like stable cashflows resulting from stabilisationpolicies

Some utility balance sheets under pressure

Allows equity to be invested in

multiple projects/recylcing

Volume of pipeline in subsidized markets attractive

Why?

Technology maturation has reduced risks

BanksEquity investors

Drivers

74


Revenue stabilization matters

Source: Energy Economics Volume 69, January 2018, “The Importance of Project Finance for Renewable Energy Projects”. 341 projects (73%) out of 468 new power projects 2010-2015.

German renewable financing sources by scaleGerman energy financing proportions by revenue

stabilisation

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Loan capital and interest is repaid bi-annually

Project cash-flows also tested bi annually

Needs to be both enough projected cash to repay the entire loan, and to comfortably repay fixed installments

So banks will lend less, at higher costs, or not at all

Hard to pin down where/when this will arise before making a loan

Volatility in wholesale prices creates risks of periods in which installments can’t be made

Low risk lenders want projects to regularly reduce loan through repayment

Why stabilisation is needed?

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Can PPAs provide it?

Committing to long term prices a challenge

Less easy/more complex to transact

Interested in scale and shape

Floors not insulated against change in law

Floor prices very low - £10-20/MWh

– and wont support debt to make

projects viable

Ability to fix prices 3-5 years, but not

whole term

Utility Corporate PPAs

And not all PPA providers will offer a floor

Buyers need strong credit rating

Only 400MWs to date signed up in GB (2% of PPA market)

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What is a CfD “floor”?


•When prices are below the floor the generator is topped up

Floor protection

•But when prices are above the floor the generator pays back fully what has been paid out before getting value

•After that there is “upside”

Rebate to the

consumer + Upside

How the “CfD floor” works in principle

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Auctions and contracts

BEIS could cap floor price bids at levels they deem sufficient to drive viable projects

Bidders would bid floor prices into CfD auctions under existing “pay as clear” approach

The CfD contract settlement (and levy forecast) would be changed to accommodate “rebate” model

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Lower strike prices

• Upside means lower floors

• Developers will instead focus on the level of floor necessary to raise viable debt levels

No subsidy

• Low floors will fall under long-run wholesale power prices (c£30/Mwh)

• Rebate model means it is “working capital”

• No impact under low carbon levies

Attracts low cost of capital investors

• Removes revenue volatility

• Floor acts like the ROas guaranteedbankablerevenue

Delivers scale capacity

• Absence of subsidy cost means no financial limit to the scale of capacity that can be supported

Benefits of CfD floor

No material changes to CfD structure

BENEFITS

• Can be auctioned – people just bid floors not two way SPs

• CfD contract changes not extensive

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Focussing on life-time wholesale revenues versus LCOE is a fallacy

What matters is investor assessment of risks and what drives their decisions

Volatility in prices creates challenging risks for debt providers in particular

Debt has been the engine of growth in renewable deployment to date, allowing growth to be achieved at maximum scale and lowest cost

Stabilising price is required in a world of increasing wholesale power volatility

CfD floor structure removes the risk of volatility at zero cost to the consumer – driving the growth in low-cost capacity to meet targets

Key take-aways

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Q&A and conclusions

Ben Hall

17 October 2018


Today’s Cornwall Insight presentersWho Role Contact

Gareth Miller Chief executive 01603 542101 [email protected]

Mike MahoneyHead of Wholesale & Modelling

01603 542143 [email protected]

Ben Hall Head of New Business 01603 542102 [email protected]

Tom Palmer Principal Consultant 01603 542103 [email protected]

James Brabben Head of Training 01603 542141 [email protected]

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Into the unknown: evaluating drivers of low- carbon