OPTRES. Proceedings from thematic workshops. Karlsruhe (Germany) December Supported by: CONTRACT N : EIE/04/073/S

Transcription

1 Proceedings from thematic workshops Supported by: Karlsruhe (Germany) December 26 CONTRACT N : EIE/4/73/S

2 Renewable energies in the EU up to 22 - Current markets, future scenarios and the role of project developers and investors... 3 Renewable Electricity Production in the Internal Energy Market

3 Renewable energies in the EU up to 22 - Current markets, future scenarios and the role of project developers and investors European Bank of Reconstruction and Development London 175 Bishopsgate, London EC2A 2JN; United Kingdom October 12th 26 The workshop "Renewable energies in the EU up to 22 - Current markets, future scenarios and the role of project developers and investors" took place on October 12, 26 at the European Bank of Reconstruction and Development (EBRD) in London. Its objective was to bring together different actors who have a different understanding of the RES-financing issues for a knowledge and viewpoint exchange. About 2 international representatives from the financial sector, project development, supplier, political institutions, renewable association and research institutions seized the chance to discuss about renewable energy financing issue. Main outcomes and arguments Arguments and findings from workshop With regard to the development of RES up to 22, the topic of how to finance the RES development has been addressed. During the workshop findings from a research team with the real world experience of financers and project developers were reflected. One question addressed was, if the financing sector is prepared to supply the money needed for reaching ambitions 22 targets of RES-development. It seems that capital availability does not represent a crucial barrier to RESdevelopment. However, attractiveness for investments is necessary to fork out the money for investments in RES-projects. In this regard, Ernst & Young presented the "Renewable Energy Country Attractiveness Indicator" they developed in order to compare the national suitability for investments in renewable energy projects. Some main drivers for investment in RES were pointed out by representatives from the financing sector including i.g. increasing project size or long-term fuel price contracts for investments in biomass. Another clear trend was that comparatively mature technologies as wind are in the focus of most investors. Thus, less developed technologies seem to face more difficulties with respect to obtaining capital. One probable effect may be a deadlock of the technological development due to missing capital. (Role of manufacturers, need of capital). Another interesting statement from an investor was that there is a trend from long-term power purchase agreements (PPA) towards short-term PPAs. Developers criticised that missing regulations for some technologies may hinder the market development of renewable energies, as for instance a missing regulation law for wind offshore energy in the United Kingdom. The overall conclusion of the workshop was that not the type of support instrument is crucial for encouraging investments in renewable energy projects, but rather a stable and non-bureaucratic regulatory environment. Furthermore there should be a motivation to build a local internationally competitive industry. Finally, the importance of stakeholder integration into the policy making process in order to identify barriers, chances and risks of investments in renewable energy projects was highlighted. 3

4 AGENDA: 9: 9:3 Registration 9:3 9:45 Opening and keynote address - EU Policy on renewable energies Beatriz Yordi, European Commission (DG Energy and Transport) SESSION 1: ANALYSIS OF THE CURRENT MARKETS FOR RENEWABLES IN EU MEMBER STATES 9:45 1:5 Present policies and market situation in the EU Member States Monique Voogt, Ecofys 1:5-1:25 Effectiveness and efficiency of present policies in EU Member States Mario Ragwitz & Anne Held, Fraunhofer ISI 1:25-1:45 Identification of currently most attractive technologies and countries Ben Warren, Ernst & Young: "Key success factors for renewable energy development and financing" 1:45 11:15 Discussion 11:15-11:3 Coffee SESSION 2: ANALYSIS OF FUTURE INVESTMENT NEEDS UNTIL 22 11:3 11:5 of renewables until 22 - Consequences for the investment needs for different RES technologies Gustav Resch, EEG - TU Vienna :3 Framework conditions for RES-investments as seen from the investors viewpoint Shane Woodroffe, Fortisbank Vivek Mittal; Millennium Resource Strategies Limited: "The Impact of Regulation on Investment in the Renewable Energy Market - Experiences, Problems and Opportunities." 12:3 13: Discussion 13: 14: Lunch 4

5 SESSION 3: THE SUCCESSFUL REALISATION OF RES PROJECTS 14: 14:4 Criteria for the (non-) realisation of projects in practise - What are the main barriers, what are the key drivers? Fintan Whelan, Airtricity Carlos Gascó Travesedo, Iberdrola 14:4 15: RES-development in Germany From internal to export market Rainer Hinrichs-Rahlwes, German Renewable Energy Federation (BEE) 15: 15:3 Discussion 15:3 16: Wrap up of the workshop END OF THE WORKSHOP 5

6 List of participants Hǻkon Opsund Ministry of Petroleum and Energy Norway Lars Andersson Ministry of Sustainable Development Sweden Geza Toth Regional Environmental Center for CEE Hungary Josef Bubenik Czech Energy Agency Czech Republic Rainer Hinrichs-Rahlwes BEE (German Renewable Energy Federation) Germany Hannes Agabus Estonian TSO Estonia Mark Draeck IT Power UK United Kingdom Eugene Dillon Department of C.M.-Natural Resources Ireland Charles Purshouse Energy for Sustainable Development (ESD) Ltd. United Kingdom Herbert Brandner EVN AG Austria Bernhard Heyder EnBW Germany Jenny Fridström Svenska Kraftnät Sweden Gemma Reece Ecofys UK Ltd United Kingdom Beatriz Yordi European Commission DG Energy and Transport Belgium Amanda Burton European Wind Energy Association Belgium Speakers: Monique Voogt Ecofys International bv Netherlands Mario Ragwitz Fraunhofer ISI Germany Anne Held Fraunhofer ISI Germany Ben Warren Ernst & Young LLP United Kingdom Gustav Resch TU Vienna Vienna Austria Shane Woodroffe Fortisbank United Kingdom Vivek Mittal Millennium Resource Strategies Ltd. United Kingdom Fintan Whelan Airtricity Ireland Carlos Gasco Travesedo Iberdrola Spain Participants of EBRD: Richard Jones EBRD United Kingdom Gunilla Nilsson EBRD United Kingdom Mike Rand EBRD United Kingdom Gianpiero Nacci EBRD United Kingdom Jan Willem van de Ven EBRD United Kingdom Tony Marsh EBRD United Kingdom 6

7 Presentations 1) Monique Voogt, Ecofys: Present policies and market situation in the EU Member States European renewable energy market The renewable electricity market Present policies and lessons learned Monique Voogt Director Energy and Climate Strategies European renewable energy market European renewable energy market Markets are strongly developing Strong EC framework to support RES-E and RES-F That forced EC Member States to take action Strong supporting policy instruments have been set up But in some cases it developed slower than hoped for and still there are 25 separate markets Other Carbon price; improving competitiveness against fossil-fuelled production Types of support instruments Feed-in tariffs Quota obligation EE FR LA BG CZ DK SI LT PT DE GR ES LU SE UK HU AT CY PL NL PL IT IE SK RO BE Certificate systems Tenders FR UK SI FI MT Fiscal incentives European renewable energy market European renewable energy market A snap-shot on systems Country Germany UK Denmark Belgium Spain System Feed-in Obligation Premium Obligation Feed-in Support level for wind onshore (max. in /MWh) Note: For premium or quota systems, an electricity market price of 4 /MWh is added. Actual tariffs depend on specific conditions such as operating hours, starting year of operation, size of wind park, etc. Tariffs in Germany for instance range from 52.8 to 83.6 /MWh. Requirements from market perspective A project developer or investor is not only interested in a high tariff! Acceptable levels of investor risk Stable policy framework Certainty ROI for 1-15 years ahead Adequate financing conditions Access to the grid Transparent administration 7

8 European renewable energy market European renewable energy market Requirements from social perspective Acceptable costs for society (incl. lowering transaction costs, avoiding windfall profits) No double counting or double payments Stimulation of technological learning Facilitating a long-term required technology mix Major changes in Dutch framework Green Labels Excl hydro; change to prod subs Tax exempt. halved (2x) Financing MEP altered Facilitating new parties to enter the market Supporting other benefits from RES Opening green market; Import certs allowed Start MEP; Exit prod subs. Tariff changes European renewable energy market European renewable energy market Other non-best practices UK NFFO scheme: effectiveness very low due to inability to obtain permits and adventurers NL: continuous policy changes in period Resulted in large investor uncertainty PT: high feed-in tariffs, but tariffs are only set one year ahead IT: support for wide selection of renewables including burning of car tyres BE: extremely long lead times (previously) So what did work? Support throughout the various stages of development. DK: R&D support tax incentives high feed-in tariffs premium system DE: clear and long-term institutional setting provides investor security UK: site leasing for offshore wind farms boosted initiatives UK: RO was defined for 25 years ahead European renewable energy market The way forward Improve national support mechanisms based on bestpractice examples in Europe. Full harmonization of support mechanisms is not necessary nor acceptable in the short term. Start defining a mechanisms that facilitates establishment of an internal RES market. Thank you for your attention! Monique Voogt Director Energy and Climate Strategies M.Voogt@ecofys.nl T: And therewith create a stable RES investment climate 8

9 2) Mario Ragwitz & Anne Held, Fraunhofer ISI: Effectiveness and efficiency of present policies in EU Member States Key questions to be addressed Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th Mario Ragwitz, Anne Held Fraunhofer Institute Systems and Innovation Research (Fh-ISI) Which policies exist in the EU Member States and which countries are on track with the targets of the RES-E Directive? How effective did different policies promote RES-E? How efficient did different policies promote RES-E? Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Evolution of support strategies for wind onshore in the EU-15 Clear majority of EU Member States uses feed-in tariffs as main instrument AT BE DK FI FR DE Feed-in Tariff Quota obligation / TGC Tender Five countries have introduced quota systems based on TGCs GR IE IT LU NL PT ES SE UK Tax incentives / Investment grants Change of support system Adaptation of support system Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Progress towards the RES-E E targets for the EU-25 RES-E share in gross electricity consumption 8% 7% 6% 5% 4% 3% 2% 1% % High level of effectiveness can be found in a limited number of markets Technology specific effectiveness depends on the implemented support scheme AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK CY CZ EE HU LA LT MT PL SK SI EU-target by 21 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 9

10 Measuring the effectiveness of RES-E E support Effectiveness in the sector wind on-shore in the period EU Relative or absolute growth rates are typically used to demonstrate the achievements of countries, however both measures are biased 2. Better measure to judge the performance is the absolute growth as ratio of the additional potential i E n i G n = ADD i G n 1 i POT n i E n Effectiveness indicator for RES technology i for the year n i G n Existing electricity generation potential by RES technology i in year n i ADD POT n Additional generation potential of RES technology i in year n until 22 Average effectiveness indicator Wind on-shore - 12% 1% 8% 6% 4% 2% % AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK EU15 Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness in the sector wind on-shore in the period EU-1 Effectiveness in the sector biogas in the period EU-15 1.% 5% Average effectiveness indicator Wind on-shore -.8%.6%.4%.2% Average effectiveness indicator Biogas - 4% 3% 2% 1% % AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK EU.% CY CZ EE HU LA LT MT PL SK SI EU1-1% Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness in the sector biogas in the period EU-1 Average effectiveness indicator Biogas - 1.%.8%.6%.4%.2%.% CY CZ EE HU LA LT MT PL SK SI E+ Feed-in Quota TGC Tender Tax incentives Investment grants tariff / / Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 First conclusions on effectiveness of RES-E E support Limited effectiveness of theoretically powerful instruments is experienced in a number of markets In feed-in systems typically due to high administrative and grid barriers, e.g. in France, Greece In quota systems typically due to low penalty or high risk level -> measure: set sufficiently ambitious long term targets, increase penalty, introduce minimum tariff, e.g. Belgium Only selected technologies are supported in some markets, e.g. in Finland (tax measure) and in most quota systems -> introduction of technology specification of green certificate, e.g. technology specific certification period in Italy Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 1

11 Comparison of support level and country specific costs 1. Long run marginal costs of different technologies based on Support level versus long run marginal costs clearly shows inefficiencies in some markets C = C CRF C + qel PT z *( 1+ z) ( 1+ z) 1 VARIABLE FIX [ ] = PT = C FUEL CO + H 1 & M + PT: payback time - 15 years Z: interest rate - 6.5% 1* I * CRF H H: Full load hours 2. Support level in different countries normalised to a uniform duration of the instrument given by the lifetime Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Support level vs. costs in the sector wind on-shore shore (23 / 24) in the EU Support level vs. costs in the sector biogas (23 / 24) in the e EU Minimum to average generation costs [ /MWh] Average to maximum support level [ /MWh] Minimum to average generation costs [ /MWh] Average to maximum support level [ /MWh] Minimum to average generation costs [ /MWh] Average to maximum support level [ /MWh] Minimum to average generation costs [ /MWh] Average to maximum support level [ /MWh] AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK CY CZ EE HU LA LT MT PL SK SI AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK CY CZ EE HU LA LT MT PL SK SI Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Comparison of the annuity Analysis of the direct support for wind onshore reflecting further on: Efficiency of support for wind on-shore from the investors perspective in the year 24 the duration of support country specific cost-resource conditions the interest rate in different countries These issues are considered by the annuity if an investment: Not the expected profit but the potential risk determines the effectiveness! i A = (1 (1 + i) n ) Income Expenditure n t t t= 1 (1 + i) A= annuity; i=interest rate; t=year; n=technical lifetime t Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 11

12 Correlating the average annual income with the effectiveness indicator icator Example of wind onshore in 24 Effectiveness indicator 2% 15% 1% AT ES- Fixed Price DE IE ES- Market Option Based on country specific wind conditions Lifetime of certificates as implemented in the system, i.e. 8 years in Italy, Plant LT in Belgium For certificate systems the 24 certificate price was extrapolated 5% BE- BE- SE Wallonia Flanders FR IT UK FI CZ % LT Expected Annuity [ Cent/KWh] Conclusions Feed-in tariffs Quota/TGC Tender Tax incentives/ Investment grants Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 General conclusions The effectiveness of various RES-E support schemes largely depends on the maturity and the credibility of the system. A stable planning is important to create a sound investment climate and to lower social costs as a result of lower risk premium. Administrative barriers can have a significant impact on the effectiveness of an instrument and hamper the effectiveness of generally very powerful policy schemes. Effective instruments for RES-E support are frequently economically efficient as well! Research based on the project OPTRES "Assessment and optimisation of renewable energy support schemes in the European electricity market" Duration: January 25- December 26 (24 months) Project supported by the Intelligent Energy Europe Programme of the European Community Project website: Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 Effectiveness and efficiency of present renewable policies in EU Member States London, October 12th 26 12

13 3) Ben Warren, Ernst & Young: Key success factors for renewable energy development and financing Transaction Advisory Services Renewable Energy Presentation outline Renewable energies in the EU Key success factors for renewable energy development and financing Background to the Ernst & Young Renewable Energy Group Support mechanisms applied in the EU and their varying levels of success The success framework and key success factors Renewable energy financing Update on equity and debt markets Opportunities to maximise value 1 Ernst & Young s Renewable Energy Group Background to Ernst & Young s Renewable Energy Group Long-term players Active in the renewable energy industry since 199 Team consists of over 35 full time professional staff Supported by a network of over 75 advisors experienced in the sector around the globe Experience Wind (onshore and offshore) Hydro Wave and tidal Biomass Biofuels Energy from Waste Integrated services offering Advise clients throughout the project lifecycle: Contracting and procurement Negotiation of offtake arrangements Project financing Refinancing and disposals Provide corporate finance advice: Equity raising (private placements, joint ventures, IPOs) Investor due diligence (commercial, financial and financial model review) Tax and accounting Provide strategy advice and market intelligence 2 3 Ernst & Young Country Attractiveness Indices 2 markets 8 technologies Infrastructure parameters Electricity regulatory risk Grid and planning environment Technology specific parameters PPA Tax Grant Market status Market growth Resource quality Access to finance Supply chain Future market size potential Long-term (1yr+) vs. short-term (2yr) Support mechanisms in the EU

14 Overview of key support mechanisms Voluntary systems Background As part of the Kyoto protocol, the EU committed itself to GHG emissions reductions of 8% by compared to 199 levels EC White Paper set targets for renewable energy to contribute 12% of the total EU energy consumption by 21 Recognising electricity generation is a key component of the wider energy targets, the Renewables Directive - EU Directive (21/77/EC) was adopted Individual member states have now adopted their own targets for electricity generated from renewable sources To achieve these targets, various support mechanisms have emerged in member states Common support mechanisms Voluntary systems Fixed price mechanisms Feed-in tariffs Premium price systems Quota based mechanisms Tendering systems Tradable green certificates Each mechanism is designed to internalise the external costs of other forms of generation, in particular emissions and their impact Electricity consumers voluntarily paying a premium price for electricity generated from renewable sources Success of such systems is determined by: Demand consumers effectively forming their own view of external costs, and being willing to pay the premium Supply the availability of generating capacity to fulfil demand Problems with voluntary systems Demand has been historically low Financing and construction of new capacity difficult Uncertain income streams Access to the market (regulatory barriers) Financial incentives can be used to stimulate demand 6 7 Fixed price mechanisms Fixed price mechanisms Examples Description Examples Key features Success Austria Denmark France Germany Greece Generators receive a fixed price for every unit of power exported, the cost being borne by the tax payer or energy user Widely applied in Europe to date High level of certainty regarding income, however subject to political risk Austria Denmark France Germany Greece Tariff guaranteed for 2 years Scaled tariff for each technology type Wind 55-91/MWh depending on output and whether on or offshore 18,428MW of wind installed by end 25 (1) (1) source: EWEA Luxembourg The Netherlands Portugal Spain Luxembourg The Netherlands Portugal Spain Observations Obligation on grid operators to provide access to grid and equalisation scheme for cost sharing a major benefit Tariff structure and pricing has led to construction of wind farms in poor locations Cost effectiveness could be questioned 8 9 Fixed price mechanisms Premium pricing mechanisms Examples Key features Success Examples Key features Success Austria Denmark France Germany Greece Luxembourg The Netherlands Portugal Spain Tariff guaranteed for 1 years Tariff set at 7-9% of consumer power prices, plus investment grants and tax incentives Wind c 6/MWh Observations 573MW of wind installed by end 25 (1) (1) source: EWEA High tariff levels have not translated into large scale deployment of renewable energy Complex permitting process (requiring the agreement of upto 35 national, regional, district and local institutions) and limited grid capacity have been major barriers Spain Ability to opt for both fixed and premium pricing Premium pricing of c 17/MWh payable in addition to variable electricity prices (1) source: EWEA Observations 1,27MW of wind installed by end 25 (1) High levels of wind deployment, in particular, have been experienced in recent years Given the current levels of installed capacity, system security and grid capacity are becoming increasingly important

15 Tendering systems Tradable green certificates ( TGC ) Examples Description Examples Description Denmark Ireland (AER) UK (NFFO) France Involve host governments allocating a certain volume of capacity, and letting the market determine the appropriate price through a tending process Not used widely in the EU, however recent tenders have been announced in China and Canada At present, Ireland is understood to be changing from its AER tendering procedure, and Denmark is utilising a tendering procedure specifically in respect of offshore wind Despite a poor historic track record, tendering systems can be effective if: suitable sites are identified and granted the relevant permits removing planning risk performance penalties are introduced to ensure winning bidders perform their obligations Belgium Italy Sweden United Kingdom Market based mechanism, involving the setting of an obligation on generators or suppliers to achieve certain levels of renewable energy supply, together with penalties for noncompliance and a separate market for the trading of compliance-related certificates Obligation levels that increase over time stimulate demand for certificates, which then provide a source of income for generators A TGC system works effectively where: long-term PPAs are available to generators there is a liquid market for the TGCs barriers to the deployment of new capacity are overcome Tradable green certificates ( TGC ) Tradable green certificates ( TGC ) Examples Key features Success Examples Key features Success Belgium Italy Sweden United Kingdom Obligation on producers and importers 2% in 22, rising by.35% pa Penalty price 84/MWh Observations 1,717MW of wind installed by end 25 (1) (1) source: EWEA TGC system introduced in 22 hindered by existing renewables capacity satisfying obligation levels Annual increase in obligation levels should stimulate further new capacity (25 saw around 45MW of new wind capacity installed) but target only set to 26 Belgium Italy Sweden United Kingdom Obligation on suppliers to purchase 15% renewables by 215 Buy-out price of 3/MWh (23) plus recycle value Observations 1,353MW of wind installed by end 25 (1) (1) source: EWEA Significant levels of new capacity developed since introduction of the Renewables Obligation, with c45mw of new wind capacity installed in 25 Grid capacity now a major constraint Only a question of state and federal subsidies? Only a question of state and federal subsidies? Support mechanism Voluntary mechanisms Fixed price Premium price Tendering systems Tradable green certificates Advantages No public opposition Can be combined with emissions taxes and other financial incentives to stimulate demand Simple and transparent Long-term security for investors Enables new technology Recognises external costs on top of power prices Encourages competition Market based mechanism should achieve lowest cost compliance Disadvantages Little impact to date Reliant on consumer willingness to pay external costs Challenging for financing Does not encourage competition Can have significant cost implications for tax payer / end user Some political risk Some political risk combined with market risk (power prices) Can be distorted Not proven as effective without planning and performance obligations Ineffective if market illiquid Need long-term security of offtake for financing Supports mature technology only Political and administrative conditions International and national targets Administrative regulations and procedures Planning regime and public support Willingness to pay for renewable energy Investment incentives Job creation and economic growth Success of Renewable Energy Financial support mechanisms Value and term of offtake Credit quality of counterparty Direct investment support Tax incentives and grants Exposure to market risk Competitive energy sources Availability and price of fossil fuels Security of energy supply Regulation of external costs Technology costs Geographic and climate conditions Fuel supply resources Site availability Land area and density of population

16 Update on equity markets Renewable energy financing Market drivers Increasing project size and capital requirements (WTG deposits, grid connection deposits) putting financial pressure on independents UK and overseas trade buyers pursuing onshore and offshore opportunities Financial institutions aggressively pursuing onshore wind and other renewable opportunities Intense competition for investments - Reducing return requirements - Accepting some development risk Is there enough supply (particularly given turbine constraints)? Recent trends Infrastructure funds have been dominant in acquisition of operational assets - Babcock and Brown -Macquarie Bank - Zephyr transaction Private equity investors increasingly prepared to accept development risk - Structured portfolio deals possible - Opportunities to share exit value upside New valuation models being employed to ascertain potential exit value - PE multiple based values (IPOs) - Trade sale values (EBITDA) Very active M&A market Update on debt markets Market drivers Debt liquidity increasing with new banks entering sector Lenders attracted by strong deal flow, and improving sponsor quality Improved understanding of technology (history of operating hours), wind risk and RO regulatory regime Debt available for acquisition finance and project dividend streams Appetite shown for offshore lending Refinancing opportunities exist Construction finance available for new projects Recent trends Banking fees / margins under pressure from new entrants Debt cover ratio requirements reducing Reducing requirement for PPA tail beyond loan tenor Project gearing increasingly determined by cash flows Banks willing to lend to portfolios on P5 rather than P9 forecasts Hedge funds are joining infrastructure funds and PE houses in the market, adding new flexibility to deal structures Operating lease products beginning to emerge that satisfy new tax rules Financing a sustainable future Ben Warren Renewables, Waste and Clean Energy Tel: +44 (1) bwarren@uk.ey.com

17 4) Gustav Resch, EEG - TU Vienn:a of renewables until 22 - Consequences for the investment needs for different RES technologies EU-Workshop of the EIE project OPTRES Renewable energies in the EU up to 22 Current markets, future scenarios and the role of project developers and investors London, 12 October 26 of renewables until 22 of renewables until 22 Authors: Gustav Resch, Thomas Faber, Reinhard Haas all Energy Economics Group, Vienna University of Technology Contact Web: resch@eeg.tuwien.ac.at based on calculations made with the help of the computer model Green-X - Consequences for the investment needs for different RES technologies Content 1. Potentials and cost for RES in Europe of renewables until Background information investigated cases Method of approach / characterisation of the Green-X model Investigated cases 3. Results on the future deployment of RES in the EU25 Results on RES deployment and investment needs National improvement versus harmonisation Concluding remark Electricity & CHPC (1) Potentials and cost for RES of renewables until 22 RES-Electricity options to be considered: E & C E & C E E & C E & C E E E E 1. Biogas 2. Biomass Forestry products, Forestry residues, Agricultural products Agricultural residues Biogenic fraction of waste 3. Geothermal electricity 4. Hydro power Small scale hydro power (<1 MW) Large scale hydro power (>1 MW) 5. Landfill gas 6. Sewage gas 7. Solar Photovoltaics Solar thermal electricity 8. Tidal energy 9. Wave energy 1. Wind Wind on-shore Wind off-shore Definition of the (additional) realisable mid-term potential (up to 22) Electricity generation Historical deployment (1) Potentials and cost for RES Theoretical potential Technical potential Maximal timepath for penetration (Realisable Potential) of renewables until 22 R&D Definition of potential terms Theoretical potential... based on the determination of the energy flow. Technical potential based on technical boundary conditions (i.e. efficiencies of conversion technologies, overall technical limitations as e.g. the available land area to install wind turbines) Realisable potential The realisable potential represents additional the maximal achievable potential realisable assuming that all existing Policy, barriers can be overcome and all potential driving forces are active. Society for 22 Thereby, general parameters as Economic Potential e.g. market growth rates, achieved planning constraints are taken potential into account in a dynamic context i.e. the realisable potential has to refer to a certain year. Photovoltaics,2% Hydro smallscale 8,6% Achieved Potential at the end of 24 Wind onshore 14,2% (1) Potentials and cost for RES Wind Biogas (Solid) offshore 2,6% Biomass,4% 6,7% Biowaste 2,4% Geotherma electricity 1,2% TWh Hydro largescale 63,7% of renewables until 22 Mid-term realisable potential for RES-E E in EU-27 Additional Potential Wind onshore 18,8% Wind offshore 2,8% Tide & Wave 1,1% Solar thermal electricity 2,4% TWh up to 22 Biogas 9,% (Solid) Biomass 26,9% Biowaste 2,3% Geothermal electricity,3% Hydro largescale 63,7% Hydro smallscale Photovoltaics 2,6% 2,% (1) Potentials and cost for RES EU27: ~42% (54%) of gross electricity demand by 22 (24) IE PT ES UK FR NL BE LU CH NO DK DE IT MT SE PL CZ SK AT HU SI HR BA FY MK GR FI EE LA LT RO BL BY MD CY UA TR of renewables until 22 Mid-term realisable potential for RES-E E in EU-27 RU Share of total RES-E potential on gross electricity consumption 22 (BAU scenario-energy and Transport Outlook) > 7% 7-6% 6-5 % 5-4% 4-3% 3-2% 2-1% < 1% 17

18 Solar thermal electricity Hydro small-scale Geothermal electricity (Solid) Biomass co-firing (1) Potentials and cost for RES Wind offshore Wind onshore Tide & Wave Photovoltaics Hydro large-scale Biowaste (Solid) Biomass Biogas Current market price_ cost range (LRMC) PV: 43 to 164 /MWh Costs of electricity (LRMC - Payback time: 15 years) [ /MWh] of renewables until 22 Cost of electricity by RES-E E option Bandwith on European level Wind offshore Wind onshore Tide & Wave Solar thermal electricity Photovoltaics Hydro small-scale Hydro large-scale Geothermal electricity Biowaste (Solid) Biomass (Solid) Biomass co-firing Biogas Current market price_ cost range (LRMC) PV: 34 to 126 /MWh Costs of electricity (LRMC - Payback time: Lifetime) [ /MWh] (2) Background The Green-X model Simulation model for energy policy instruments in the European energy market RES-E, RES-H, RES-T and CHP, conventional power Based on the concept of dynamic cost-resource curves Allowing forecasts up to 22 on national / EU-25 level Base input information Country selection Technology selection Power generation (Access Database) Electricity demand reduction (Access Database) Economic market and policy assessment potential, costs, offer prices Simulation of market interactions RES-E, CHP, DSM power market, EUAs Scenario Information Policy strategies selection Social behaviour Investor/consumer Externalities Framework Conditions (Access Database) of renewables until 22 based on default common payback time (15 years) based on technology-specific lifetime Results Costs and Benefits on a yearly basis (25-22 ) Reference clients: DG RESEARCH, DG TREN, DG ENV,Sustainable Energy Ireland, German Ministry for Environment, European Environmental Agency, etc. (2) Background of renewables until 22 The Green-X approach: Dynamic cost-resource curves Potentials Costs of electricity by RES-E technology (by band) by RES-E technology (by band) by country by country DYNAMIC COST-RESOURCE CURVES by RES-E technology by country by year Dynamic aspects Costs: Dynamic cost assessment Potentials: Dynamic restrictions costs (technological change) (technology diffusion) potential National policy optimisation versus harmonisation Results ofgreen-x model runs recently conducted within the EIE project Investigated cases: (2) Background RES-E deployment [%] Business-as-usual (BAU) Continuation of current national policies up to 22 35% 3% 25% 2% 15% of renewables until 22 Historical development 115 TWh Indicative RES-E Target (21) (improved national Introduction of harmonised policies (215) & harmonised policies) BAU-forecast Improved national policies Technology-specific harmonised FIT scheme 9 TWh Non technology-specific (BAU) harmonised TGC system % NO HARMONISATION HARMONISATION IN 215 Improved national policies Efficient & effective national policies Technologyspecific support Feed-in tariffs - harmonised Non technologyspecific support Quota obligation based on TGCs - harmonised Electricity generation [TWh/year] (3) Results BAU scenario Wind offshore Wind onshore Tide & wave Solar thermal electricity Photovoltaics Hydro large-scale Hydro small-scale Geothermal electricity Biowaste Solid biomass Biogas of renewables until 22 Total electricity generation from RES (EU25) Electricity generation [TWh/year] 12 1 Improved national policies scenario both cases based on purely national support schemes (3) Results Breakdown of electricity generation from new RES-E plant (installed in the period 25 to 22) on EU-25 level BAU scenario Wind offshore 25,9% Wind onshore 4,9% Biogas 6,% Solid biomass 12,5% Tide & wave 1,8% Biowaste 2,4% Solar thermal electricity 2,6% Geothermal electricity,3% Hydro largescale 5,4% Wind offshore 29,9% Wind onshore 32,6% of renewables until 22 Improved national policies scenario Biogas 7,1% 486 TWh 735 TWh Hydro smallscale 1,3% PV 1,% Tide & wave 2,2% Solid biomass 16,1% Solar thermal electricity 1,% Biowaste 2,9% Geothermal electricity,3% Hydro largescale 5,3% Hydro smallscale 1,5% PV 1,1% 18

19 (3) Results of renewables until 22 Capital expenditure / investment needs for new RES-E plant (installed in the period 25 to 22) on EU-25 level Improved national BAU scenario policies scenario Capital expenditure - Investment needs [M ] Wind offshore Wind onshore Tide & wave Solar thermal electricity Photovoltaics Hydro large-scale Hydro small-scale Geothermal electricity Biowaste Solid biomass Biogas Capital expenditure - Investment needs [M ] Breakdown of investment needs for new RES-E plant (installed in the period 25 to 22) on EU-25 level Wind offshore 27,6% Wind onshore 34,8% (3) Results BAU scenario Biogas 4,9% Tide & wave 2,% Solid biomass 9,3% Biowaste 4,% Solar thermal electricity 4,2% Geothermal electricity,2% Hydro largescale 4,5% Hydro smallscale 1,% PV 7,6% Wind offshore 3,4% Wind onshore 27,8% of renewables until 22 Improved national policies scenario Biogas 6,1% 21 Billion 334 Billion Solid biomass 11,3% Biowaste 4,4% Geothermal electricity,2% Hydro largescale 5,2% Hydro smallscale 1,3% PV 9,5% Tide & wave 2,4% Solar thermal electricity 1,3% Share of initial investment costs (in the year 22) [%] 1% 95% 9% 85% 8% 75% 7% 65% 6% 55% 5% (3) Results of renewables until 22 Reduction of investment cost within the BAU-scenario due to technological learning Year Hydropower Solid biomass CHP Solid biomass Gaseous biomass CHP Gaseous biomass Geothermal electricity Solar thermal electricity Wind energy Tide & Wave Photovoltaics (3) Results Breakdown of electricity generation from new RES-E plant (installed in the period 25 to 22) on EU-25 level Wind offshore Wind onshore Tide & wave Solar thermal electricity Photovoltaics Hydro small-scale Hydro large-scale Geothermal electricity Biowaste Solid biomass Biogas % 5% 1% 15% 2% 25% 3% 35% Share on total generation from new RES-E plant (installed 25 to 22) [%] of renewables until 22 Improved national policies versus Harmonisation Non-technology specific support (quota obligation based on TGCs - harmonised) Technology-specific support (feed-in tariffs - harmonised) Improved national policies (efficient & effective national policies) (Average) financial support for new RES-E plant Unit: /MWh RES of renewables until 22 This indicator shows the dynamic development of necessary financial support for new RES-E installations (on average). Expressed values refer to the corresponding year. The amount represents from an investors point-of-view the average additional premium on top of the power price guaranteed (for a period of 15 years) for a new RES-E installation in a certain year, whilst from a consumer perspective it indicates the required additional expenditure per MWh RES-E for a new RES-E plant compared to a conventional option (characterised by the power price). Financial support (premium to power price) for new RES-E generation [ /MWhRES] _ (3) Results Improved national policies versus Harmonisation Non-technology specific support (quota obligation based on TGCs - harmonised) Technology-specific support (feed-in tariffs - harmonised) Improved national policies (efficient & effective national policies) BAU (continuation of current national policies) 4. Case study: The future deployment of RES-E E in the EU25 Transfer costs for consumer (due to the promotion of RES-E) Unit: M /year or /MWh DEMAND of renewables until 22 Transfer costs for consumer / society (sometimes also called additional / premium costs for consumer / society) are defined as direct premium financial transfer costs from the consumer to the producer due to the RES-E policy compared to the case that consumers would purchase conventional electricity from the power market. Premium per MWh total demand _ - due to the promotion of RES-E _ [ /MWhDEM] Non-technology specific support (quota obligation based on TGCs - harmonised) Technology-specific support (feed-in tariffs - harmonised) Improved national policies (efficient & effective national policies) BAU (continuation of current national policies) Improved national policies versus Harmonisation 19

20 (3) Results TOTAL transfer costs for consumer (due to the promotion of RES-E) Units: M or % (in comparison to a reference case) of renewables until 22 Total or cumulated transfer costs for consumer in 22 summarise both the cumulated consumer burden within the investigated period 25 to 22 as well as the residual costs for the years after 22. Its calculation is done as follows: The required yearly consumer expenditure in the period 25 to 22 as well as the estimated residual expenditures for the following years after 22 are translated into their present value in 22. total transfer costs paid in the period 25 to 22 (estimated) residual transfer costs paid after 22 BAU (continuation of current national policies) Non-technology specific support (quota obligation based on TGCs - harmonised) Technology-specific support (feed-in tariffs - harmonised) Improved national policies (efficient & effective national policies) Improved national policies versus Harmonisation % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1 Cumulative transfer costs for consumer due to the promotion of RES-E [% - compared to improved national policies case] % Concluding remarks of renewables until 22 National policy optimisation versus Harmonisation The results suggest that the most significant efficiency gains can be simply achieved through an optimisation of national RES-E support measures. Further efficiency improvements at a considerably lower level are possible by an EU wide harmonisation of support schemes provided that a common European power market exists. If a harmonised policy is pursued, a technology specific support (e.g. Feedin tariffs, Premium systems) is superior to non-technology specific (e.g. common TGC-system) with respect to cost minimisation. A premature EU-wide harmonisation can hamper the national optimisation process as well as the overcoming of non-economic barriers at Member State level and can lead to significant market distortions if power markets are not fully liberalised. In addition, there is additional benefit from the competition of non-harmonised systems during some time as the promotion schemes can learn mutually from each other. Concluding remarks of renewables until 22 Future deployment of RES-E General remarks: It is notable that for achieving a higher RES-E deployment as in the improved national policies -case, almost all RES-E options have to substantially enter the market. Technology specific remarks: Less public support & acceptance large scale hydro power plants will increase marginally in absolute terms & drop in relative terms. from around 62% in 24 to 35% (BAU-case) or 33% (improved national policies) by 22. The winner : wind energy, both onshore and offshore. 41% (BAU) or 33% (improved national policies) of new RES-E installations wind offshore: 26% (BAU) or 3% (improved national policies) Other significant increases: solid biomass (+13% (BAU) or +16% (improved national policies)) biogas (+6% (BAU) and +7% (improved national policies)). Concluding remarks Investment needs of renewables until 22 Significant investments are necessary to be able to build up the new capacity. While necessary investments into wind onshore and photovoltaics are rather stable over time within both variants investments into solid biomass plants (including biowaste) mainly occur in the first years (25-215) and for wind offshore and new technologies like tidal & wave power or solar thermal electricity mainly after 21. It is obvious that these investments (within the EU and worldwide) stimulate technological learning, leading to lower generation costs in the future. Concluding remarks Investment needs of renewables until 22 Significant investments are necessary to be able to build up the new capacity. While necessary investments into wind onshore and photovoltaic plants are rather stable over time within both variants, investments into solid biomass plants (including biowaste) mainly occur in the first years (25-215) and for wind offshore and new In case of technologies questions / like remarks tidal & wave power or solar thermal electricity resch@eeg.tuwien.ac.at mainly after 21. Phone: It is obvious that these investments (within the EU and worldwide) stimulate technological learning, leading to lower generation costs in the future. Thanks for your attention! 2

21 5) Shane Woodroffe, Fortisbank: Framework conditions for RES-investments as seen from the investors viewpoint Looking back to look forward EU - Workshop October 26 1 Renewable Energies in the EU up to 22 Looking Back to Look Forward Shane Woodroffe Global Energy Group, Fortis EU - Workshop October 26 2 Looking Back to Look Forward Analysis of Future Investment Needs Agenda 1. Introduction to Fortis Bank 2. Technology 3. Commercial Frameworks 4. Sponsors 11 January 27 Designator author 1 11 January 27 Designator author 2 EU - Workshop October 26 3 EU - Workshop October 26 4 Introduction to Fortis Overview of Fortis Exposure to Renewables International finance group - banking, insurance and asset management Representation in over 5 countries with over 55, employees Fortis Energy & Utilities Group Energy is one of the key sectors in Fortis Financing Renewable Energy for 1 years Has lent over 1.5 billion to over 4 projects across 1 countries in Europe and North America Wind Waste Management/ Waste-to-Energy Landfill gas Biomass Emerging Technologies Deal size continues to grow 11 January 27 Designator author 3 11 January 27 Designator author 4 EU - Workshop October 26 5 EU - Workshop October 26 6 Trends Technology Trends Commercial Frameworks Looking Back Looking Forward Looking Back Looking Forward Consolidation of Manufacturers Financial and technical strength Turnkey construction contract approach Limited multi-contract, interface risk Increase in models sizes WTG availability issues Select sufficiently proven models Access to turbines will secure financing Full term, fixed-price PPA Short term PPAs, floor pricing, and with more regulatory risk Declining site availability Offshore wind and marine, the same issues apply 11 January 27 Designator author 5 11 January 27 Designator author 6 21

22 EU - Workshop October 26 7 EU - Workshop October 26 8 Trends Sponsors Conclusion Looking Back Players leaving the market Financial players International players Looking Forward Right commercial framework Right management teams Opportunity for banks Technology will change, but key principles remain Some consolidation but still a growing market Commercial structures will continue to push the boundaries Banks will need to continue pace with these changes 11 January 27 Designator author 7 11 January 27 Designator author 8 EU - Workshop October 26 9 EU Worksop: Renewable Energies in the EU up to 22 Thank You! Shane Woodroffe Energy & Utilities, Fortis Bank shane.woodroffe@fortis.com Tel: +44 () January 27 Designator author 9 22

23 6) Vivek Mittal, Millennium Resource Strategies Limited: The Impact of Regulation on Investment in the Renewable Energy Market - Experiences, Problems and Opportunities. A Spectacular Success Story The Impact of Regulation on Investments in the Renewable Energy Market Experiences, Problems & Opportunities GW Wind Installed Tax Credits / Feed-in Transition Market 12x growth in 1 years! Is the Industry ready for it? EBRD, London 12 October Millennium Resource Strategies Limited Millennium Resource Strategies Limited Impact of Uncertainty Impact of Uncertainty Availability, Access, etc Revenue Term Uncertainty Price / MWh Price / MWh O&M Costs Repex, Access costs years Capital Costs ( m) Target Base Case years Millennium Resource Strategies Limited What impact does this have on the supply chain? Millennium Resource Strategies Limited NPV Construction Budget The Turbine Supply Market Capital Costs ( m) Potential Value Grid Risk Premium / Contingency Finance Foundations / Installation Turbines Assessed Value The turbine supply market has been barely viable even though it has had a decade long growth Regulatory uncertainties have in large part inhibited long term investments in technology and human capital How can we drive down the risk premium? Millennium Resource Strategies Limited NPV Millennium Resource Strategies Limited 23

24 Learning Curve Incentives for Renewables 15% Experience Curve - Wind ('7 /kw) 2,6 Regulatory Focus Full Economic Value 2,4 2,2 2, Is this cost reduction sufficient for transition to market? Energy Security Expor ts Exchequer Ene r gy Security 1,8 1,6 Employment 1,4 Environment Environment 1,2 1, Millennium Resource Strategies Limited Millennium Resource Strategies Limited Policy Objectives to 22 Make a clear case for transition to market Clear rules for transition Move for EU harmonisation De-risk supply chain if revenue support is going to be diluted Millennium Resource Strategies Limited Millennium Resource Strategies Limited Strategy enabling capital Sustainable Resources Sector energy, waste and water Sample deals UK Distributed Generation Southern Europe small hydro development Renewable Energy in India Millennium Resource Strategies Limited Thank You! Vivek Mittal vivek.mital@gmail.com Millennium Resource Strategies Limited 24

25 7) Fintan Whelan, Airtricity: Project Realisation Drivers for Success & Failure Ground to Cover Introduction to Airtricity Pipeline Activity Development Process Components Project Realisation Drivers for Success & Failure Fintan Whelan, Corporate Finance Manager October 26 1 Financing Outlook Emerging Themes Supergrid 2 Airtricity Business Model Target Markets - Airtricity Development Generation Supply WINDFARM DEVELOPMENT Get to build-ready wind farm projects Ireland Onshore Offshore Onshore Offshore UK CONSTRUCTION & ELECTRICITY GENERATION Finance, own & operate wind farms North America China New Markets ELECTRICITY SUPPLY & TRADING Sell electricity to customers New Technologies Current market Possible within business plan period but not in plan Planned within business plan period 3 Build Program Phase I and II Development Process Components Generating MW ,62 Regulatory Environment Land Rights Wind Resource 1 1,115 Planning PPA Grid Q3 5 Q1 6 Q1 7 Q1 8 Q1 9 Money Turbines ROI NI Scotland Offshore US

26 Hurdles Financing Outlook Ireland UK USA Offshore China Debt Equity Regulatory Land Rights Wind Resource Grid Planning PPA Turbines Money Interconnector Grid, PPA, Market Interruption in long term data Lack of access used as a barrier Defined TimeFrame Long term Uncertainty Framework Basis Depends on Regulatory Framework Interruption in long term data Delays in access, high cost Ill-defined process, political, ROCs positive Getting tougher Available, focused on PPA arrangements PTC renewal Texas : OK NY : Hard Lots of Met masts Socialised in Texas NY bad Texas Good Low prices, high security. Move to synthetics. Very Tough Available, focused on PTC Uncertainty New Laws needed Socialised New laws needed in UK IRL : Disaster UK : promising Hardly there at all Political Completely Political No Long Term data Available by law In practice, need to pay directly political Tariff Uncertainty Available for now political Positive for projects in stable Regulatory Environments Difficult but not impossible for Merchant Banks love Feed-in but will live with ROCs Development Debt now possible Turbine Deposit Finance difficult Bundle Financings realising efficiencies Bank v Capital markets a recurring theme. Structures conservative compared to US Appetite is strong Infrastructure and other specialist funds in the lead Some like risk, some like less Offshore will test resolve, though entry during Development a strong differentiator 7 8 Emerging Themes Real intractable is Regulatory Risk Not just Policy but Implementation / Public Administration Joined-Up Thinking / a Process View needed to see sight of success. That includes Turbines. Pay-off for reduced uncertainty for developers is reduced uncertainty for Governments Win/win not Zero Sum. Resistance to Change We must bear in mind, then, that there is nothing more difficult and dangerous, or more doubtful of success, than an attempt to introduce a new order of things in any state. For the innovator has for enemies all those who derived advantages from the old order of things, whilst those who expect to be benefited by the new institutions will be but lukewarm defenders - The Prince, Machiavelli 9 1 EU Super Grid EU Super Grid With the grid spread out over such a large geographic area the issue of variability is effectively dealt with. Studies (Kassel U) have shown that wind spread out over a thousand kilometres has correlation of less than.2. Scenario : dramatic fall in available imported hydrocarbons / threat thereof. Political and Regulatory cooperation at EU level. 1Gw demonstration Project. 22bn Capex. Wind is a continental resource, not just an individual state asset

27 Endgame First they ignore you, then they laugh at you, then they fight you, then you win. - Gandhi 13 27

28 8) Carlos Gascó Travesedo, Iberdrola: Drivers and main barriers for the development of renewable energies Index Drivers and main barriers for the development of renewable energies I. Drivers for the development of renewable energies II. Main barriers for renewable energies III. Renewable energies in the EU up to 22 IV. The key: economic support systems V. Role of project developers and investors EU workshop Renewable energies in the EU up to 22 London, October 12th VI. Iberdrola s renewable strategic plan IBERDROLA RENEWABLE ENERGIES IBERDROLA RENEWABLE ENERGIES 1 Drivers for the development of renewable energies The energy and environmental advantages of renewables have led to the definition of important development targets. Results and targets Economic efficiency: Correlation between economy and energy In the last decade, accumulated real GDP growth reached 3%, and consumption of primary energy, 43%. These figures imply a substantial emissions increase ECONOMIC EFFICIENCY Lowest possible cost Essential for wellbeing and competitiveness ENVIRONMENTAL ISSUES ENERGY SECURITY Climate change (Kyoto agreements) Sustainable use of natural resources EU Green Paper on Energy Security (21) 5% of energy dependency in the EU exceeded. Kyoto Protocol (1997) 5.2% reduction in total emissions by 21 compared to 199 levels. Basic role of renewable energies. EU Renewables Directive(*) 12% consumption of primary energy from renewable sources in 21, equivalent to 22.1% of electric consumption National Plans - Spain - Spanish Electric Power Act 1997: 12% primary energy consumption in 21 - Transposition of Renewables Directive: 29.4% of gross electricity consumption from renewable energies by 21 GDP and Electricity Demand Growth ( ) 3.3% 3.6% Sufficient energy supply, together with limited emissions will create difficulties in economic performance, particularly industrial competitiveness Energy is the fuel of the economy. It is necessary to count on clean and cheap power to finance a sustainable and competitive model in an ever globalized economy (*) The Council of Energy Ministers, on the 23rd April 26, increased the renewable target to 15% for 215 IBERDROLA RENEWABLE ENERGIES 1 Sources: International Energy Agency: World Energy Outlook and internal data IBERDROLA RENEWABLE ENERGIES 4 Environmental issues Climate change and Kyoto commitments Climate change is now one of the world's main problems. CO 2 emissions are rapidly increasing, and Earth's temperature seems to be raising* Under these assumptions, the governments of developed countries began to take the initial measures. Greenhouse emissions must fall by 5,2% until 212 vs. 199 levels: " Kyoto commitment" Environmental issues Climate change: International commitments Climate change panel Río de Janeiro Summit KYOTO Protocol 21 - Marrakesh Summit 22 - Johannesburg Summit 25 - Kyoto Protocol comes into force Kyoto participation map Regional shares of CO 2 emissions, 23 Aviation * Africa Non-OECD 3% Eur ope Lat in America 3% 1% 3% Middle East 4% OECD Former USSR 52% 9% Asia 9% China * Includes international aviation and 16% international marine bunkers European kyoto commitments 27% 25% 15% 13% 4% Finland France Holand Italy Belgium UK Austria Germany Denmark Luxemburg EU % % Portugal Greece Spain Ireland Sweden -6% -6,5%-7,5% -12,5% -13% -8% * There are opinions against this idea IBERDROLA RENEWABLE ENERGIES 1-21% -21% -28% IBERDROLA RENEWABLE ENERGIES 6 28

29 Energy security: growth of demand, power dependency and associated emissions Index Worldwide growth of energy demand in recent years creates geopolitical difficulties Spanish case: because of growing energy demand (well above GDP growth), geographic dependency, already at 78% EU-3 Dependence by energy source Oil Natural gas Coal Total I. Drivers for the development of renewable energies II. Main barriers for renewable energies III. Renewable energies in the EU up to 22 IV. The key: economic support systems V. Role of project developers and investors VI. Iberdrola s renewable strategic plan Causes, in addition, the increase of emissions, at the moment 5% above 199. Source: Green paper Towards a European strategy for the security of energy supply by the European Commission, Nov. 2 IBERDROLA RENEWABLE ENERGIES 7 IBERDROLA RENEWABLE ENERGIES 8 Main barriers for renewables energies (I) Main barriers for renewable energies (II) There are three main barriers to solve in order to reach renewable objectives Generation technology Capacity installed, EU (MW) EU potencial up to 22 (MW) Current situation Main barriers Wind 4, 18, **** Integration in the electrical system and advance in the prediction 1. Economic: an adequate support system is the main factor to develop renewable energies Mini-hydro 12, 2, ** Administrative procedures, rehabilitation of infraestructures and social acceptance needed 2. Technical: interconexions and integrate of renewable in the system Solar photovoltaic 1,8 15, *** Costs reduction needed and silicon availability 3. Administrative: different administrative procedures Solar thermoelectric 3, *** Technological development and experience needed Hybridation required Biomass 5, 16, ** Guarantee of raw material and involve other sectors such as agriculture (Common Agrarian Reform) IBERDROLA RENEWABLE ENERGIES 9 IBERDROLA RENEWABLE ENERGIES 1 Index Wind enegy: EU is the main market I. Drivers for the development of renewable energies II. Main barriers for renewable energies At the end of 25 there were almost 6, MW in operation worldwide, growing at a 3% rate annualy The main global market is the EU. Currently more than 4, MW (67% of total installed). Potential of around 18, MW by 22 III. Renewable energies in the EU up to 22 IV. The key: economic support systems V. Role of project developers and investors VI. Iberdrola s renewable strategic plan MW f 29f Source: BTM Consult, EWEA Trend in the EU Potential: 18, Currently evolution 22 Key drivers Political impulse: stable and sufficient support systems Definition of European and National objectives Increasing demand of turbines means higher investment costs Interconnection between members states needed Efficient integration in the system and markets Increased social awareness Current situation: * * * * * 4/5 IBERDROLA RENEWABLE ENERGIES 11 IBERDROLA RENEWABLE ENERGIES 12 29

30 Mini-hydro: grows at a very slow pace Currently 61, MW in operation worldwide. In Europe 12, MW (2% of the electric demand in the EU) Main markets in the EU: Italy (21%), France (17%) and Spain (16%) Solar Photovoltaic: industry in continuous development At the end of 25, there were almost 1,8 MW in operation in the EU, with objectives of some 7, MW by 21 and estimates of 15, MW in 22 Main market in Germany (83% of total EU installed) Tendencies in EU Key drivers Tendencies in EU Key drivers MW Currently evolution Economically feasible potencial: 2, Source: European Small Hydropower Association (ESHA) Simplification and harmonisation of administrative procedures Rehabilitation of current infraestructures Studies of hydrology and residual flows Political support, educational and information programmes Need for an European R&D strategy Current situation: 2/5 * * * * * MW Currently evolution Potential: 15, Objective: 7, Source: Asociación Europea de Industria Fotovoltaica EPIA y elaboración propia Political impulse: stable and sufficient support systems Costs reduction by technological improvements needed Eventually, lack of raw material (silicon) in the international market Current situation: 3/5 * * * * * IBERDROLA RENEWABLE ENERGIES 13 IBERDROLA RENEWABLE ENERGIES 14 Solar thermoelectric: in phase of takeoff Biomass: great potential but on a stand still Only one experience in commercial operation in the desert of Mojave (California, U.S.A.) of 3 MW High expectations, some 16, MW globally in 22. In the EU almost 3, by 22 MW Tendencies in EU Objective: 5 Potential: 3, EU-25 Spain 21 EU-22 Source: Renewable Energies Plan in Spain 25-21, European Solar Thermal Industry Key drivers Limited experience. Need of support for the first projects Technological and economic uncertainty Costs reduction by technological improvements and scale economies Need of new companies dedicated to the manufacture of components Better information on direct solar radiation Support systems and hybridation with natural gas 3/5 Current situation: * * * * * IBERDROLA RENEWABLE ENERGIES 15 High potencial and ambitious objectives, yet low development At the end of 25, there were aproximately 5, MW in operation in the EU Main markets: Finland, Germany, Sweden, Denmark MW Tendencies in EU , Fuente: Biomass Action Plan y elaboración propia Potential: 16, 22 Key drivers LT guarantee of raw material in favorable quality and price conditions Involve other sectors such as agriculture (Common Agricultural Policy) Sufficient support systems Current situation: * * * * * IBERDROLA RENEWABLE ENERGIES 16 2/5 Index Investment criteria I. Drivers for the development of renewable energies II. Main barriers for renewable energies There are two main factors that drive investments on renewable energies: III. Renewable energies in the EU up to 22 IV. The key: economic support systems V. Role of project developers and investors 1. Natural conditions: each case requires an analysis in order to attain a reasonable energetic and economic model. VI. Iberdrola s renewable strategic plan 2. An adequate support system is the main factor to develop renewable energies. IBERDROLA RENEWABLE ENERGIES 17 IBERDROLA RENEWABLE ENERGIES 18 3

31 Energy generation sources costs Comparison of production costs 25 estimates Generation sources Gas Nuclear Coal Hydroelectric Biomass Wind Solar Thermal Solar PV Fuel Biofuels Gasoline and diesel Cost in cent /KWh Cost in cent /litre Source: EU Commission, DrKW Equity research and ownestimates IBERDROLA RENEWABLE ENERGIES 19 Requirements Without internalising environmental and other costs, renewable generation is more expensive than conventional technologies. As a result, investment requires support systems. An effective support framework must be based on three basic pillars: 1. Predictability: the system must guarantee the remuneration over the life of the asset (long-term perspective, over 2 years asset lifespan. 2. Stability: the legal framework must be based on criteria of non retroactivity. 3. Profitability: defining a sufficiency scenario, providing a reasonable return The choice of the appropriate support model is the KEY IBERDROLA RENEWABLE ENERGIES 2 The countries with the most installed wind capacity are not those with better wind resources, nor are they the largest in terms of surface area MW Installed capacity (Dec. 25) Germany Spain USA Denmark Italy UK Holland France UK has very good wind resources but has little installed wind capacity USA surface area is three times the size of EU-15 surface area, but it has only 25% of its installed wind capacity Germany and Spain do not have the best wind resources but they are world leaders in this industry IBERDROLA RENEWABLE ENERGIES 21 The key for the development of renewables is political will (backed-up by social support), it would allow for an optimal regulatory environment Support for renewables is determined by: Network access Guaranteed purchase of all production Economic support Common policy in EU countries Different systems, different results IBERDROLA RENEWABLE ENERGIES 22 Feed-in tariffs are more effective Index Green certificate systems now present significantly higher cost levels than feed-in tariffs. This is explained by the higher risk premium demanded by investors, administrative costs, together with an immature green certificate market. I. Drivers for the development of renewable energies II. Main barriers for renewable energies Denmark Germany Spain According to official EU data*, the countries with most effective support are Denmark, Spain and Germany; all based on feedin tariffs III. Renewable energies in the EU up to 22 IV. The key: economic support systems V. Role of project developers and investors VI. Iberdrola s renewable strategic plan This type of system is the one which has the best development with respect to green certificates Effectiveness indicator for wind energy in the period * Source: Communication from the Commission: The support of electricity from renewable energy sources, Dec 25 IBERDROLA RENEWABLE ENERGIES 23 IBERDROLA RENEWABLE ENERGIES 24 31

32 Utilities role Countries s strategy Environment: lower emissions and Kyoto Protocol commitment Security of supply: diminish energy dependency from fossil fuels Social and economic benefits: industrial development, employment creation and local advantages Utilities s strategy Commercial oportunity Transfer of technology Business diversification Previous expirience in electricity generation and operation Technical and economic avantages and capacity Utilities in the renewable business: a new scenario Generally speaking, utilities show high levels of efficiency & effectiveness Regulation: capability to contribute its expertise as a utility to regulators in the definition of technical & economic frameworks. Engineering: wide experience in wind measurements, locations, development & construction and operation of renewable assets. Grid connections: analysis & infrastructure construction. Investment policy: Largest turbine purchasers, which allows to ensure the supply at the most competitive prices Enhanced financial capabilities Asset operation: Higher revenues: know-how of regulatory frameworks & expertise in generation management Costs efficiency IBERDROLA RENEWABLE ENERGIES 25 IBERDROLA RENEWABLE ENERGIES 26 Index Growth & internalization: Iberdrola presence in main markets RE Country Attractiveness Index in RE for Near-Term (1) I. Drivers for the development of renewable energies Ranking Country Index Iberdrola Presence II. Main barriers for renewable energies 1 USA 86 III. Renewable energies in the EU up to 22 IV. The key: economic support systems Spain India Germany V. Role of project developers and investors 5 UK 53 VI. Iberdrola s renewable strategic plan 6 7 Italy France Canada 5 9 China 5 1 Portugal Greece 43 (1) Renewable Energy Country Attractiveness Index for Near-term (Ernst&Young). Spring 26 Ranking 26 IBERDROLA RENEWABLE ENERGIES 27 IBERDROLA RENEWABLE ENERGIES 28 Renewables International expansion International expansion as growth driver New renewables strategic plan % Growth in installed capacity Mexico Brazil USA. UK France Spain Portugal Ucrania Germany Poland Grecee Italy China Power installed evolution (MW) > % 1,447 3, ,74 3,258 Other technologies Mini hydro Wind (international) Wind (national) IBERDROLA RENEWABLE ENERGIES with an average growth of 8 MW annually IBERDROLA RENEWABLE ENERGIES 3 32

33 New renewables strategic plan Projects under development Renewables: main growth vector in the company Project portfolio: 18, MW under development EBITDA 5-9 CAGR > 15% MW Spain Under development 6,142 Validated resource 5,427 Grid connection rights and under construction 2,89 Investment 7-9 Installed capacity 5-9 3,3 MM Eur 3,2 MW Wind International (Wind) 5,288 11,777 4,946 Mini-hydro Other technologies ,581 1, ,23 Production 5-9 x2 GWh IBERDROLA RENEWABLE ENERGIES 31 TOTAL 17,92 11,8 3,292 more than 7, MW in operation by 29 IBERDROLA RENEWABLE ENERGIES 32 Drivers and main barriers for the development of renewable energies EU workshop Renewable energies in the EU up to 22 London, October 12th IBERDROLA RENEWABLE ENERGIES 33

34 9) Rainer Hinrichs-Rahlwes, German Renewable Energy Federation (BEE)RES-development in Germany From internal to export market BEE BEE German Renewable Energy Federation BEE RES-development in Germany From internal to export market RE in the EU up to 22 Workshop London, Oct 12, 26 Rainer Hinrichs-Rahlwes Advisor European and International Affairs German Renewable Energy Federation (BEE e.v) Umbrella organisation of the RES-associations since 1991 Task and mission: Political consulting stable and reliable framework conditions for RES 26 Member associations: hydro, wind, solar, biomass, and geothermal energy. Representing > 3, members, including > 5, enterprises. Parliamentary board: all Bundestag-Parties represented link to politics. Energy Consumption - Germany BEE Turnover of the German RE-Industry (25) BEE Mtoe ,4% 24,7% 12,2% 24,4% 34,3% 6,4% 32,1% 5,7% 18,1% 37,7% Renewable Energy Gas Nuclear Energy Coal Oil Total: 16,1 bn. Wind 4,5 Mio. Euro Biomass 5,85 Mio. Euro Hydro 1,17 Mio. Euro Geothermal Solar 28 Mio. Euro 4,25 Mio. Euro Primary Energy Final Energy Source: ZSW Jahrbuch Erneuerbare Energien 25 BEE BEE RE promotion: The German Policy Mix Renewable Energy Law (EEG) Feed-in tariffs Electricity Sector Heating and Electricity Sector Fuel sector Renewable Energy Law EEG - (since 2): - Priority for RE - Fixed feed-in tariffs, guaranteed for 2 years - High efficiency Market Incentive Programme: - Financed through ecological tax reform - supports heating and/or electricity from RES - Until 25: 421, solar collectors and > 6, small biomass boilers were supported - supplementary loans for larger plants - tax exemption from 1992 (biodiesel)/24 (all biofuels) - since August 26: partial taxation - quota system from 27 Hydro Power Biomass / Biogas Geothermal energy Wind energy onshore Wind energy offshore Photovoltaics Feed-in tariffs in ct (EUR)

35 EEG cost efficiency BEE RE share in Power Generation BEE Differentiation according to technologies 4 Differentiation according to size Differentiation according to development status Declining remuneration annually % 1% 2% > 3% Differentiation according to site Renewable Electricity production in Germany BEE Investments in Renewable power production capacities until 22 BEE 5 bn bn. 3 bn. 2 bn. 1 bn. kwh Photovoltaics Biomass Wind Hydropower Increase of renewable electricity production from 2.7 % (199) to >1 % (25) 17, jobs 16 billion high-tech industry bn. EUR Source: BEE Hydro Geothermal Bio-Energy PV Wind RE share in Heating and Cooling BEE Investments in RE-capacities for Heating and Cooling until 22 BEE bn % 1% 5,4% 2% Bio-Energy Geothermal Solarthermal Quellen: BEE, EREC 35

36 Share of Renewable Energy in German Fuel Consumption (Road Transport) BEE Exports will increase BEE (mainly based on domestic production capacities) 25 2% 2 In the Renewable power generation sector Germany s world-market share will decline from 15% in 25 to 2% in % 8% 4 % Growing world market will result in increasing exports of technologies and services from Germany,5%,5% Source: AGEE-Stat presentation, January 26 (Working Group on Renewable Energy Statistics) Exports from German RE-Industry in billion EUR per year BEE RE Industry: Volume of exports BEE Million EUR 1 5 Exports in 25 in bn.,2,5,5 Wind Hydro Solar Bio-Energy Geothermal,5 2, , Wind Hydro Solar Bio-energy Geothermal (prediction) Source: SOKO-Bielefeld Company Survey (3/26) RE Industry: Volume of exports and export quota BEE Windpower: Development exports BEE bn. EUR 25 5% 17 bn. EUR 212 7% 8 bn. EUR 22 8 % Export Volume (bn. EUR) Export Quota (%) MW Exported capacity from German producers Share of exports (%) % Development of the German wind energy export since 199 related to the absolute annual installation values in Germany. 36

37 Windpower: Development exports BEE Windpower: Exports and world market share BEE Biogas: Turnover and exports Exported capacity from German producers Installed capacity (MW) per year in GER BEE Solar 58% 6% 59% 23 5% 24 38% 25 71% Volume of exports 25: 2.4 bn EUR 212 (est): 6. bn. EUR Germany's world market share Share of Exports (in relation to total turnover) World market volume doubles every three years! Germany s share declines, but export quota increases! 2 Source: DEWI, BWE BEE World-market grows by 25% in Turnover GER Turnover from exports 1 German production will grow twice as fast as in competitors markets 1 Turnover in Mio. EUR Year Share of exports in % of turnover ,2 4, On new markets, German companies benefit from first-moveradvantage (GR, F, I, E now have feed-in-tariffs for PV) Source: FV Biogas Effects on the job market BEE BEE BEE Increasing share of the industry s jobs due to export Utilisation of RE in Germany Export of Renewable Energy Technology contact BEE Bundesverband Erneuerbare Energie e.v. Teichweg 6 D-331 Paderborn fon +49 () fax +49 () mailto: info@bee-ev.de ev.de or rainer.hinrichs@bee-ev.de ev.de ev.de 37

38 Renewable Electricity Production in the Internal Energy Market December 12th 26 IDA - Ingeniørforeningen i Danmark Kalvebod Brygge Copenhagen V Denmark December 12th 26 At the workshop, the following issues were addressed and discussed: Long term visions the path to the future Status and progress of renewables in the internal market Costs and potentials of renewable energy sources Interactions between RES-E support instruments and other policies Impacts of wind power on spot market and prices. Session I consisted of four presentations on RES-E deployment in the Internal Electricity Market: Status of the Internal Market, Success Factors in Different Markets for RES-E (Reinhard Haas, EEG-TU Vienna) Interaction Between RES-E Support Instruments and Other Policies (Stine Grenaa Jensen, Risø) Impacts of Wind Power on Power Spot Prices (Poul Erik Morthorst, Risø) Impact of Wind Power on the Spot Market (Gitte Agersbæk, Energinet.dk) The presentations were followed by lively discussions focusing on the following issues: - Imperfect competition on the conventional power markets as a consequence of increasing merger activities - Importance of producer surplus reduction and redistribution of surplus to consumers - Spot market price as a reference price for long-term bilateral contracts - Impact of uncertainty regarding support schemes on future investment behaviour - Relationship between the spot market and the balancing market - Intermittency of wind, wind power predictions and impact of imbalances on contract fulfilment - Decrease in spot prices with increased wind power vs. higher price volatility on the spot market - How CO 2 prices are passed on to the spot price - Key lessons to be learnt from the Danish example Session II consisted of the following two presentations: Progress of Renewables, Green Electricity Prices and Policy Instruments (Mario Ragwitz, Fraunhofer ISI) the EU Development of Renewables Until 22 (Carlo Obersteiner, EEG TU Vienna) The subsequent discussion dealt in particular with the following issues: - Benefits and drawbacks of feed-in tariffs and tradable green certificates - Combination, co-existence and transition from one support scheme to another - Estimation of deployment potentials for RES-E - Assumptions on learning rates for renewable technologies Session III consisted of the three presentations on grid integration of renewable energy sources: Guiding a Least-Cost Grid Integration of RES-Electricity in an extended Europe (Carlo Obersteiner, EEG TU Vienna) 38

39 Synthesis of results on a Comparison of Different RES-E Grid Integration Case Studies in EU Member States (Lars Henrik Nielsen, Risø) Modeling Least-Cost RES-E Grid Integration based on the Simulation Software GreenNet (Carlo Obersteiner, EEG TU Vienna) The discussion of Session III treated, amongst others, the following issues: - Different connection charges methodologies - Impact of charging approach on siting of RES-E - Utilization of the GreenNet model - Discussion of other studies/models and their application AGENDA 9: - 9:3 Registration Opening 9:3-1: General Overview of the OPTRES Project Mario Ragwitz, Fraunhofer ISI SESSION I RENEWABLE ENERGY SOURCES AND THE INTERNAL MARKET 1: - 1:3 Status of the internal market success factors in different markets for RES-E Reinhard Haas EEG TU Vienna 1:3-11: Interaction Between RES-E Support Instruments & Other Policies Stine Grenaa Jensen Risø National Laboratory How should we develop regionalised support schemes for RES-E in the European Union? 11: - 11:15 Discussion Mario Ragwitz, Fraunhofer ISI 11:15-11:3 Coffee Break 11:3-11:5 Wind Power and Prices Poul Erik Morthorst Risø National Laboratory it has a signifi- When we have plenty of wind power in the energy system cant impact on power pool prices 11:5-12:15 Impact of Wind Power on the Spot Market Gitte Agersbæk Energinet.dk Influence of wind power deployment on the power market 12:15-12:3 Discussion Stephanie Ropenus, Risø National Laboratory 12:3-13:3 Lunch Break 39

40 SESSION II RENEWABLE ENERGY IN THE EU RESULTS OF THE OPTRES PROJECT 13:3-14: Progress of Renewables Green Electricity Prices & Policy Instruments Mario Ragwitz Fraunhofer ISI Which progress have renewable energy sources had so far? Evaluation of promotion schemes Dissemination of OPTRES Work Packages 1 & 2 14: - 14:3 Costs and Potentials of Renewable Energy Sources Carlo Obersteiner EEG TU Vienna Assessment of renewable energy sources project costs & potentials with emphasis on biomass Dissemination of OPTRES Work Package 3 14:3-14:45 Discussion Poul Erik Morthorst, Risø National Laboratory 14:45-15:15 Coffee Break SESSION III GRID INTEGRATION OF RES-E RESULTS OF THE PROJECT GREENNET-EU27 15:15-15:45 Synthesis of results on a comparison of different RES-E grid integration case studies in EU Member States Lars Henrik Nielsen, Risø National Laboratory Disaggregated cost allocation of RES-E grid integration Comparison of selected case studies on RES-E grid integration and derivation of best-practise criteria under different constraints 15:45-16:15 Recommendations for least-cost RES-E grid integration based on results of the simulation software GreenNet Carlo Obersteiner EEG - TU Vienna Results on least-cost RES-E grid integration scenarios up to 22 based on the software tool GreenNet How can grid regulation policy support large-scale RES-E grid integration? 16:15-16:3 Discussion Poul Erik Morthorst, Risø National Laboratory 16:3 Closing of Workshop 4

41 List of participants Gitte Agersbæk Energinet.dk Denmark Rogier Coenraads Ecofys Netherlands The Netherlands Svend W. Enevoldsen Ecology Management ApS Denmark Lise Lotte Pade Hansen Risø National Laboratory Denmark Reinhard Haas EEG - TU Vienna Austria Stine Grenaa Jensen Risø National Laboratory Denmark Lykke Mulvad Jeppesen Institut for Miljøvurdering IMV Denmark Henrik Lawaetz Danish Energy Authority Denmark Christian van Maarschalkerweerd Risø National Laboratory Denmark David McKinnon RUC Denmark Rune Moesgaard Danish Wind Industry Association Denmark Poul Erik Morthorst Risø National Laboratory Denmark Jesper Munksgaard AKF Denmark Ebbe Münster PlanEnergi Denmark Marie Münster Risø National Laboratory Denmark Lars Henrik Nielsen Risø National Laboratory Denmark Carlo Obersteiner EEG - TU Vienna Austria Ole Jess Olsen RUC Denmark Mario Ragwitz Frauenhofer ISI Germany Gemma Reece Ecofys UK United Kingdom Stephanie Ropenus Risø National Laboratory Denmark Felipe Sanchez RUC Denmark Camilla Schaumburg-Müller DTU Denmark Niels Schroeder RUC Denmark 41

42 Presentations 1) Reinhard Haas EEG TU Vienna: Status of the internal market success factors in different markets for RES-E Status of the internal market, success factors in different markets for RES-E Reinhard Haas, Mario Ragwitz, Gustav Resch, Thomas Faber, Anne Held Energy Economics Group, Vienna University of Technology & ISI Karlsruhe Copenhagen, 12th November 26 SURVEY 1. Current state of competition 2. Wholesale price development 3. Promotion of RES-E 4. The issue of transfer costs 5. Success criteria for policies 6. Effects of wind on prices 7. Conclusions 1. CURRENT STATE OF COMPETITION Competition: expectations of EC -> very simplified assumptions on strategic behaviour of generators / grid operators! General lack of competition: in generation and supply in every country and sub-market In wholesale markets: strong suspictions regarding exertion of market power in every sub-market EUROPEAN ELECTRICITY SUB-MARKETS UK and 1. Ireland UK Ireland 2. Nordic2. countries Nordic 3. Iberiancountries market t 4. Italy 3. Iberian market 5. Western 4. Italy Europe 6. Eastern 5. Europe Western Europe 7. South-Eastern 6. Europe Europe7. South-Eastern Europe NUMBER OF LARGE GENERATORS IN EU EXCESS CAPACITIES Central Europe HEW VEW Fortum VEAG EnBW 22 Gross capacity Pow er Gen Iberdrola National Power British Energy Endesa Elektrabel Bayernwerk Vattenfall PreussenElektra RWE ENEL EdF Largest European generators 1999 Fortum Iberdrola National Pow e r British Energy Endesa Elektrabel ENEL Vattenfall RWE/VEW E-ON EdF/EnBW Largest European generators 23 Major mergers and aquisitions MW Net capacity Load TWh TWh 17 11!

43 GW EUR/MWh Eastern Europe EASTERN EUROPE: LOAD VS CAPACITY TRENDS Net capacity Load Gross capacity Are electricity prices converging? Spot market prices: annual average Nordpool Austria Germany France Poland Spain Italy Netherlands UK [ /MWh] Jän.99 Mai.99 Sep Wholesale price development Jän. Mai. Sep. Jän.1 Mai.1 Sep.1 Jän.2 Mai.2 Sep.2 Jän.3 Mai.3 Sep.3 Jän.4 Mai.4 Sep.4 Jän.5 Mai.5 Sep.5 Jän.6 Spain Elspot Germany Poland Italy Netherlands UK WHOLESALE PRICE DIFFERENCES AND GRID BOTTLENECKS IN EUROPE Average wholesale electricity price 25 [ /MWh] Bottleneck s Market separation Current attempts to intensify competition are quite different: Italy and France: Intensify auction of virtual capacity Germany: new regtulatory authority installed, to facilitate access to the grid for IPP s and other new players; Spain: White paper suggest divestment of generation capacities Eastern Europe: competition is to be encouraged by transboundary trade To bring about effective competition it is necessary to conduct European-wide correct unbundling to avoid market power over the grid to ensure prevailance of excess capacities resp. demand-side measures avoid further mergers and cartelisation, divest capacities, provide incentives for new generators? harmonise (transboundary) conditions for access to the grid; 43

44 3 PROMOTION OF RES-E CORE MOTIVATION: Policy targets for an INCREASE of RES-E! (e.g. RES-E directive of the EC to increase the share of RES-E from 12% to 22% until 21) MAJOR PROBLEM: Correct design of policy with respect to: renewable targets Financial incentives Credibility for investors Transfer costs! Which instrument fits best? Should RES-E technologies be promoted on broad scale? Should the system be implemented on a national or international level? Source: GREEN-X What is the problem? Should an ambitious RES-E target be met in the short and long-term? Answer depends on POLICY OBJECTIVE Is international burden sharing for consumer an important goal? Who should benefit from the system most? 4 THE ISSUE OF TRANSFER COSTS Should a trading system be built up? How should the premium costs / burden for consumer be distributed over time? Quota-based TGC systems as well as Feed-in tariff systems create an artificial market and cause transfer costs (additional costs) Method of approach Why is it important to minimize these additional costs? These additional costs have finally to be paid by the final customers (regardless which promotion scheme is chosen) Minimise additional costs for consumers = Producer Surplus + Generation costs - Revenues electricity market Price, costs [Euro/MWh] price of certificate p MC p ele? Producer surplus (PS) Producer surplus (PS) Generation Costs (GC) MC (Static cost curve) MC... marginal generation costs pele... market price for (conventional) electricity pmc... Marginal price for green electricity (due to quota obligation) quantity Quota Q [MWh] 44

45 The lower the costs are which have finally to be paid by final customers the higher will be public acceptance the larger will be the amount of additional electricity generated from RES. An example from the conventional electricity market: in several countries (e.g. Germany, Belgium) customers are fed up with the high profits the large incumbent utilities make in the free market they request a re-regulation regulation of electricity prices! EU-Project Green-X DG Research Web: The simulation tool Green-X The toolbox Green-X Base input Scenario Economic information Information market and policy Country assessment Policy selection potential, costs, strategies offer prices selection Technology selection Social behaviour Investor/consumer Power Externalities generation Simulation of (Access Database) market interactions General framework Electricity RES-E, CHP, DSM conditions demand reduction power market (Access Database) (Access Database) Results Costs and Benefits on a yearly basis (2-22 ) GREEN-X allows to simulate various policy strategies for the promotion of RES-E in a dynamic framework on a national or international level (considering DS-effects) (Current: EU-25, end 26: EU28, future: EU 39???) kwh_new/capita/yr 5 SUCCESS: COMPARISON OF STRATEGIES Effectiveness: AT DE ES IT UK BE SE SE BE UK IT ES DE AT Costs: c/kwh (2-24) Costs (c/kwh) EFFECTIVENESS Effectiveness VS COSTS vs Costs IT UK BE Tradable certificates _ AT + DE Feed-in tariffs ES SE kwh/cap/yr 45

46 SE BE UK IT ES DE AT Costs of promoted kwh vs costs of new kwh Costs of promoted RES-E versus costs of "new" RES-E Costs of promoted RES-E (all plants) Costs of promoted RES-E (new installed plants) p F8 p F1 p F15 prices, costs [EURO/MWh] higher efficiency expected producer surplus [EURO/MWh] SUCCESS CRITERIA FOR FIT s 1 Use a stepped FIT and calculate starting values carefully reference plant (1% efficiency) lower efficiency marginal generation costs guaranteed feed-in tariff producer surplus (profit) gain for public / consumer due to stepped feed-in tariff efficiency indicator (e.g. for wind turbines: - electricity generation by installed kw) 2 Decrease over time, link to conv. electr. market prices [ Cent/kWh] Electricity generation compared to reference plant (efficiency) efficiency indicator (e.g. for wind turbines: - electricity generation by installed kw) revenues, costs MAJOR PITFALL OF FITs: The example of wind revenues costs Profits increase! time EURO/ kwh P qu SUCCESS CRITERIA FOR QUOTA-BASED TGC s 1 Penalty >> MC Market price kwh Marginal Costs Q Qu 2 Ensure longterm planning horizon! 3 Focus on new plants (avoid windfall profits) 4 Allow banking 6 IMPACT OF WIND ON ELECTRICITY PRICES: MC APPROACH 7 ECONOMETRIC APPROACH 6 5 Coefficient of regression analysis: -.3(t=2.51) [EUR/MWh] 4 3-5% SRMC incl. wind SRMC excl. wind Plus 1 % wind minus.3 % in electricity prices! 2 1 Currently: about 15% wind: minus 4.5 % in electricity prices!

47 Price in /MWh WEIGHTED SPOT MARKET PRICES APPROACH Value of wind power vs. spot market price Average base price Value of forcasted wind power 1 Impact of price correlation on value of wind power Value reduction compared to base price Revenue loss in /MWh Average values: Base: EUR/MWh w/ wind: EUR/MWh Delta: 2.74 EUR/MWh about minus 5% COMPETITION? conventional electricity market: To maximize profits utilities merge to avoid competition hard to imagine that a European-wide TGC market will work disconnected from these large incumbents TGC markets: Why should competition work if it does not in the conventional electricity market? Utilities/generators are in favour of TGC because they can make much more money CONCLUSIONS (1) We are far away from an optimal solution but we are on the way! Careful design of strategies: by far the most important success criteria! There should be a clear focus on NEW capacities! To ensure significant RES-E deployment in the long-term, it is essential to promote a broad portfolio of different technologies Ensure credibility of the system! Avoid stopand-go approaches In the long run? Re-regulation? Priority production from renewables should prevail electricity prices, RES-E-costs DYNAMICS OF PRICES AND COSTS: RES-E-costs conventional electricity prices Support must decrease! time For FIT/premium: Consider learning by a dynamic component! 8. CONCLUSIONS (2) Currently, a well-designed (dynamic) FIT system provides a certain deployment of RES-e fastest and at lowest costs for society Instead of harmonisation: Stimulate/Foster IMPROVE competition between THE promotion CURRENT schemes/between countries: Which system/where provides new RES-E with highest SYSTEMS! benefits for society? Exchange lessons learned: Improving strategy design must build on learning from each other: e.g. Feed-in-cooperation DE and ES -> Why not a Club of TGC countries (learning from SE)? 8. CONCLUSIONS (3) However, for sustainable policy -> parallel focus on demand-side conservation of high priority! 47

48 INTERESTED IN FURTHER INFORMATION? Download reports from: www. eeg. tuwien. ac. at www. green-x. at www. optres. fhg. de to: tuwien. ac.at 48

49 2) Stine Grenaa Jensen, Risø National Laboratory: Interaction Between RES-E Support Instruments & Other Policies Interaction Between RES-E Support Instruments & Other Policies How should we develop regionalised support schemes for RES-E in the European Union? Stine Grenaa Jensen, Risø National Laboratory Future Support Systems and the Internal Market in EU With regard to RES-E, what do we want to achieve in the EU? An economic and resource efficient location of wind turbines A replacement of the most inefficient power plants A reduction of CO 2 -emissions achieved in the most effective and efficient Coordination and regionalisation The way forward for RES-E support in the EU Interactions of Power markets and RES support schemes How can we get the most efficient transition to a coordinated RES-E development in EU? Remembering that the power is an underlying commodity for the support schemes, giving the support scheme an indirect dependency on the design of the power system. Dialogue, equality and trust are keywords in our relations with our employees and all our collaboration partners OPTRES - WORKSHOP & DISSEMINATION SEMINAR Four Different Cases Ways to Go: The almost ideal The troublesome Power Market National Regional RES-E National Case A Case B Support Scheme Regional Case C Case D Two Illustrative Countries Country A Good conditions for wind power The conventional power production is efficient, with high energyefficiency, low production costs and low CO2-emissions Country B Medium conditions for wind power The conventional power production is less efficient, characterised by older power plants with low energy-efficiency, high production costs and high CO2-emissions. OPTRES - WORKSHOP & DISSEMINATION SEMINAR OPTRES - WORKSHOP & DISSEMINATION SEMINAR Feed-in Tariff Almost Ideal Case Conclusions Almost Ideal Case Wind Power is sited in the most efficient way Country A high wind Common Power fund Country B low wind Common Power Market OPTRES - WORKSHOP & DISSEMINATION SEMINAR Power Price Feed-in tariff Wind Deployment Consumer Price Regulation costs A B Consequences for the Power Market The most inefficient plants will be replaced by wind power The more different the two countries are the more beneficial will a common feed-in tariff be Effective reduction of CO 2, but where the reduction takes place (Country A or B) will depend on the marginal conditions at the power market Burden sharing of regulation costs is a problem Comparison to a Green Certificate System The burden sharing is implicitly given by the TGC-quotas in each country thus there is no need for a common fund as in the feedin system OPTRES - WORKSHOP & DISSEMINATION SEMINAR 49

50 Feed-in Tariff - Troublesome Case Conclusions Feed-in Tariff - Troublesome Case Consequences for Wind Power and the Power Market Wind power will be sited at the most resource efficient places But wind power will not replace the most inefficient power plants Reduction of CO 2 will take place, where the power plants are replaced - CO 2 reduction in the region will not be efficient implying higher CO 2 prices Burden sharing of regulation costs is also a problem in this case Country A high wind Common fund Power Price Feed-in tariff Wind Deployment Consumer Price Regulation costs A B If we want to move towards a common power market, a common feed-in tariff does bias the development of the conventional power system Country B low wind Separate Power Markets OPTRES - WORKSHOP & DISSEMINATION SEMINAR OPTRES - WORKSHOP & DISSEMINATION SEMINAR Green Certificates - Troublesome Case Country A high wind Country B low wind Separate Power Markets OPTRES - WORKSHOP & DISSEMINATION SEMINAR Power Price Green Certificate Price wind power Wind Deployment Consumer Price Regulation costs A B Conclusions Green Certificates - Troublesome Case Consequences for wind power and the Power Market Wind power will be sited at the most economic efficient places at the given conditions, but the wind resources will not be used best possible Wind power will not replace the most inefficient power plants, but better than in the feed-in case CO 2 reduction in the region will not be efficient implying higher prices for CO 2 allowances Burden sharing of regulation costs is also a problem in this case The Green Certificates system is economically optimal at the given market conditions.. but Short term solution - If we want to move towards a common power market, a common TGC system does bias both the development of wind power and the conventional power system OPTRES - WORKSHOP & DISSEMINATION SEMINAR Conclusions A common and efficiently working power market is a prerequisite for an efficient common support system The more different the countries participating in a common system are, the more benefits are gained by developing a common system No common power market implies a more difficult path to a harmonized support scheme in the EU Feed-in gives the right signals to RES-development but biases the conventional part of the power market Green Certificates ensures an economic optimal placement of RES, but it is a barrier towards a common power market BUT determination of which RES-E support systems EU aim at, gives better conditions for establishing a common power market!! OPTRES - WORKSHOP & DISSEMINATION SEMINAR 5

51 3) Wind Power and Prices, Poul Erik Morthorst, Risø National Laboratory Impacts of Wind Power on Power Spot Prices Wind Power and Spot Prices We know that Wind Power does affect the Spot Price but how much?.. and can we somehow calculate the consequences? Research Specialist Poul Erik Morthorst Risø National Laboratory Small amounts of Wind Power Large amounts of Wind Power Supply Supply /MWh Price Demand CHP plants Gasturbines Condensing plants /MWh Price Demand CHP plants Gasturbines Condensing plants Wind and Nuclear Wind and Nuclear MWh MWh Time of day is important Drivers for Power Prices Oil price /MWh Price Wind and Nuclear Demand Supply Peak Night Day Gasturbines CHP plants Condensing plants /MWh Power price at Nord Pool /t CO2 3, , 2, 15, 1, $/bbl EU CO2 allowance price , MWh,

52 Drivers for Power Prices /MWh Power price at Nord Pool /t CO2 3, , 2, 15, 1, $/bbl Oil price EU CO2 allowance price many issues impact the spot price Journal and seasonal variations in electricity consumption Precipitation hydro power Oil-, gas- and CO2-prices Trends less capacity Noise 5,, Decomposing structural analysis Example of calculation Calculations performed for 8 7 Hour of the day (24 steps) Month of the year (max. 12 steps) comparable month are merged Five categories of wind power 15 MW equals No wind reference four more categories from low wind to storm, the lastmentioned covers more than 15 MW DKK/MWh Lower spot price because of wind power production Hour of the day No wind Nice wind Impact at the Western-Denmark power market December 25 The reference December 25 DKK/MWh MW 15-5 MW 5-1 MW 1-15 MW > 15 MW DKK/MWh Hour of the day -15 MW 15-5 MW 5-1 MW 1-15 MW > 15 MW Hour of the day 52

53 January is reasonable convincing too.. January 25 Not so much impact in Summertime January 25 December December DKK/MWh Hour of the day DKK/MWh MW MW 5-1 MW 1-15 MW > 15 MW Hour of the day -15 MW 15-5 MW 5-1 MW 1-15 MW > 15 MW DKK/MWh Hour of the day DKK/MWh MW MW 5-1 MW August MW > MW Hour of the day DKK/MWh -15 MW 15-5 MW 5-1 MW 1-15 MW > 15 MW -15 MW 15-5 MW 5-1 MW 1-15 MW > 15 MW Hour of the day Not all month are equally pretty DKK/MWh DKK/MWh December Oktober MW MW Hour of the 5-1 daymw 1-15 MW > 15 MW Hour of the day DKK/MWh January MW MW 5-1 MW August MW > MW Hour of the day Hour of the day DKK/MWh -15 MW 15-5 MW 5-1 MW 1-15 MW > 15 MW -15 MW 15-5 MW 5-1 MW 1-15 MW > 15 MW Consequences in 25 for power consumers in Western-Denmark Million Savings > 15 MW > 5 MW % > 15 MW > 5 MW Consequences in 25 for power consumers in Western-Denmark Lower consequences in Million % > 15 MW > 5 MW 8 6 % lower spot power price Mill > 15 MW > 5 MW % > 15 MW > 5 MW > 15 MW > 5 MW 53

54 Observe that... Seen from the viewpoint of society only a smaller part of these savings are real cost reductions Redistribution from power producers to power consumers Real cost savings only for the marginal producing units Wind power production may reduce the possibilities for misuse of market power Conclusions Wind power has a significant influence on power spot prices Power consumers in Western-Denmark has witnessed a lower spot price 12-14% reduction in 25 Approximately 5% in 24 It has not been possible to decompose all relevant impacting factors Trade with Germany also influences power prices 54

55 4) Impact of Wind Power on the Spot Market, Gitte Agersbaek, Energinet.dk Development since the late 7 s Impact of Wind Power on the Spot Market By: Gitte Agersbæk Energinet.dk Conventional Power Plants CHP Wind Turbines Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Electricity production by type of Technology Electricity production by type of Technology 25 GWh Waste Biogas Straw and Wood Hydro Power Wind Power GWh Conventional Power Other Renewables Hydro Power and PV Wind Power West East Source: Danish Energy Authority Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 55

56 OPTRES Wind Contribution in DK-west and DK-east Wind Contribution in Denmark West East Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Demand, Wind Power and the Residual Market Western Denmark Novtember 26 Production Cost in the Residual Market Produktion og forbrug, MWh/h 4 Wind Prediction MWh/h Residual Market A Producer in the Residual Market will experience a growing price per unit (DKK/MWh) due to less operation hours to pay the fixed costs Will be compensated partly by the transition to a system with peak load units with low fixed costs 15 On the assumption that: 25 - Security of Supply will remain the same 1 - We look into an isolated system Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Wind Forecast and Day-Ahead Price February 24 Production Cost in the Residual Market 18 A Producer in the Residual Market will experience a growing price per unit (DKK/MWh) due to less operation hours to pay the fixed costs MW 16 DKK/MWh Wind Prediction Day-Ahead price 14 On the assumption that: Security of Supply will remain the same Will be compensated partly by the transition to a system with peak load units with low fixed costs We look into an isolated system Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th % of consumption 1

57 Wind Prediction and Day-Ahead Price February 26 Wind Forecast and Day-Ahead Price November MW DKK MWh/h Wind Power Day-Ahead price DKK/MWh Wind Prediction Day-Ahead Price Hours Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Wind Production is the largest contributing cause of imbalances More than half of the imbalances are caused by Wind Power Wind prediction errors set the trend of the system imbalance in approx. 7 % of all hours. Downward regulation Upward regulation 13,% 1,1%,2% 5,% 1,1% 1,6% Wind Deviation and Addition/Deduction to Day- Ahead Price November 26 in Western Denmark MHh/h Wind Deviation in Day-Ahead Market Addition/Deduction to Day-Ahead Price DKK ,% 38,% ,3% 56,7% Units > 1 MW (incl. Horns Rev) Controllable units < 1 MW Non-controllable units < 1 MW Wind (excl. Horns Rev) Consumption -12 Hours -12 Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Conclusions Wind power do influence the day-ahead price High penetration of wind power gives volatile pricing Deviation in Wind power prediction set the direction in the real time market Deviation in Wind power prediction do influence the price in the real time market Thank you for your attention! Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 Renewable Electricity Production in the Internal Energy Market, Copenhagen, December 12th 26 57

58 5) Progress of Renewables Green Electricity Prices & Policy instruments, Mario Ragwitz, Fraunhofer ISI Outline Effectiveness and efficiency of present RES-E support policies in EU Member States O P T R E S Mario Ragwitz, Anne Held Fraunhofer Institute Systems and Innovation Research (Fh-ISI) Key questions Policy background Effectiveness and efficiency of RES-E E support Conclusions Future design options for RES-E E support OPTRES Dissemination Workshop Copenhagen, December 12th 26 Key questions to be addressed OPTRES Dissemination Workshop Copenhagen, December 12th 26 Policy background Support schemes for RES-E 1. Feed-in tariffs (FIT) Which policies exist in the EU Member States and which countries are on track with the targets of the RES-E Directive? How effective did different policies promote RES-E? E? How efficient did different policies promote RES-E? E? Renewable electricity can be fed into the grid at a guaranteed tariff for a determined period of time The electricity output depends on the support level price-based FITs may also consist of premium tariffs paid in addition to the market price (e.g. in Spain) stronger market orientation 2. Quota obligation with tradable green certificates (TGC) Determination of quota target Renewable electricity is sold at the market electricity price Additional revenue from selling TGCs Certificate price depends on predefined quota target and is determined on the market quantity-based OPTRES Dissemination Workshop Copenhagen, December 12th 26 Policy background Support schemes for RES-E 3. Tender procedures A predefined target of additional capacity or generation is set In a bidding round projects with the lowest generation costs can obtain financial support i.e. in form of long-term feed-in tariffs quantity-based 4. Fiscal incentives/investment grants Tax incentive: Reduction or exemption of tax payment price-based Investment grants: Reduction of capital costs price-based Classification of policy measures Price-based mechanisms Feed-in tariff Fiscal incentives Investment grants OPTRES Dissemination Workshop Copenhagen, December 12th 26 Quantity-based mechanisms Quota/TGC Tender schemes OPTRES Dissemination Workshop Copenhagen, December 12th 26 Policy background Actual situation in the EU Clear majority of EU Member States uses feed-in tariffs as main instrument Five countries have introduced quota systems based on TGCs OPTRES Dissemination Workshop Copenhagen, December 12th 26 58

59 Policy Background Evolution of support strategies for wind onshore in the EU-15 AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK Feed-in Tariff Quota obligation / TGC Tender Tax incentives / Investment grants Change of support system Adaptation of support system Policy background Progress towards the RES-E E targets for the EU-25 RES-E share in gross electricity consumption 8% 7% 6% 5% 4% 3% 2% 1% % AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK CY CZ EE HU LA LT EU-target by 21 MT PL SK SI OPTRES Dissemination Workshop Copenhagen, December 12th 26 Effectiveness and efficiency of RES-E E support OPTRES Dissemination Workshop Copenhagen, December 12th 26 Measuring the effectiveness of RES-E E support High level of effectiveness can be found in a limited number of markets Technology specific effectiveness depends on the implemented support scheme 1. Relative or absolute growth rates are typically used to demonstrate the achievements of countries, however both measures are biased 2. Better measure to judge the performance is the absolute growth as ratio of the additional potential E i n i G n G = ADD POT i n 1 i n i E n Effectiveness indicator for RES technology i for the year n i G n Existing electricity generation potential by RES technology i in year n i ADD POT n Additional generation potential of RES technology i in year n until 22 OPTRES Dissemination Workshop Copenhagen, December 12th 26 Effectiveness for wind on-shore in the period EU-15 OPTRES Dissemination Workshop Copenhagen, December 12th 26 Effectiveness for wind on-shore in the period EU-1 12% 1.% Average effectiveness indicator Wind on-shore - 1% 8% 6% 4% 2% Average effectiveness indicator Wind on-shore -.8%.6%.4%.2% % AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK EU15.% CY CZ EE HU LA LT MT PL SK SI EU1 Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants OPTRES Dissemination Workshop Copenhagen, December 12th 26 OPTRES Dissemination Workshop Copenhagen, December 12th 26 59

60 Effectiveness in the sector biogas in the period EU-15 5% Effectiveness in the sector biogas in the period EU-1 1.% Average effectiveness indicator Biogas - 4% 3% 2% 1% % AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK EU Average effectiveness indicator Biogas -.8%.6%.4%.2%.% -1% CY CZ EE HU LA LT MT PL SK SI E+ Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants OPTRES Dissemination Workshop Copenhagen, December 12th 26 First conclusions on effectiveness of RES-E E support OPTRES Dissemination Workshop Copenhagen, December 12th 26 Support level and country specific costs Limited effectiveness of theoretically powerful instruments is experienced in a number of markets In feed-in systems typically due to high administrative and grid barriers, e.g. in France, Greece 1. Long run marginal costs of different technologies based on C = C C + q = C C O&M + 1 H FIX VARIABLE FUEL + el 1 *I* CRF H In quota systems typically due to low penalty or high risk level -> measure: set sufficiently ambitious long term targets, increase penalty, introduce minimum tariff, e.g. Belgium Only selected technologies are supported in some markets, e.g. in Finland (tax measure) and in most quota systems CRF = z * ( 1 + z) PT ( 1 + z) PT [ 1] PT: payback time - 15 years Z: interest rate - 6.5% H: Full load hours Introduction of technology specification of green certificate, e.g. technology specific certification period in Italy 2. Support level in different countries levelised to a uniform duration of the instrument given by the lifetime OPTRES Dissemination Workshop Copenhagen, December 12th 26 Support level vs. costs for wind on-shore in the EU (3 / 4) OPTRES Dissemination Workshop Copenhagen, December 12th 26 Support level vs. costs for biogas in the EU (3 / 4) Minimum to average generation costs [ /MWh] Average to maximum support level [ /MWh] Minimum to average generation costs [ /MWh] Average to maximum support level [ /MWh] Minimum to average generation costs [ /MWh] Average to maximum support level [ /MWh] Minimum to average generation costs [ /MWh] Average to maximum support level [ /MWh] AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK CY CZ EE HU LA LT MT PL SK SI AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK CY CZ EE HU LA LT MT PL SK SI OPTRES Dissemination Workshop Copenhagen, December 12th 26 OPTRES Dissemination Workshop Copenhagen, December 12th 26 6

61 The investor's perspective of RES-E E support Calculating the levelised profit Correlating the levelised profit with the effectiveness indicator Example of wind onshore in 24 Analysis of the direct support for wind onshore reflecting further on: the duration of support country specific cost-resource conditions the interest rate in different countries These issues are considered by the annuity of an investment: i A = (1 (1+ i) n ) n t= 1 Cash Inflows Cash Outflows t (1+ i) A= annuity; i=interest rate; t=year; n=technical lifetime t t Effectiveness indicator 2% 15% 1% AT ES- Fixed Price DE IE ES- Market Option 5% BE- BE- SE Wallonia Flanders FR IT UK FI CZ % LT Expected Annuity [ Cent/KWh] Feed-in tariffs Quota/TGC Tender Based on country specific wind conditions Lifetime of certificates as implemented in the system, i.e. 8 years in Italy, Plant LT in Belgium For certificate systems the 24 certificate price was extrapolated Tax incentives/ Investment grants OPTRES Dissemination Workshop Copenhagen, December 12th 26 Conclusions OPTRES Dissemination Workshop Copenhagen, December 12th 26 Way forward general design criteria Not the expected profit but the potential risk determines the effectiveness! The effectiveness of various RES-E support schemes largely depends on the maturity and the credibility of the system. A stable planning is important to create a sound investment climate and to lower social costs as a result of lower risk premium. Administrative barriers can have a significant impact on the effectiveness of an instrument and hamper the effectiveness of generally very powerful policy schemes. Effective instruments for RES-E support are frequently economically efficient as well! Ensure effectiveness, reduce risks to investors, minimise cost for consumers Set long term, sufficiently ambitious but realistic targets Policy stability, no stop and go policy! Existing capacities and new capacities should not be mixed Duration of support for new capacities should be restricted Remove non economic barriers, administrative, legal, grid, Compatibility with other policies (climate policy, agricultural policy, demandside measures); OPTRES Dissemination Workshop Copenhagen, December 12th 26 Way forward design criteria quota systems OPTRES Dissemination Workshop Copenhagen, December 12th 26 Way forward design criteria feed-in systems Set correct penalty (higher than marginal production costs at quota level) Guaranteed minimum tariff should be implemented in immature markets Ensure a sufficient market size in order to guarantee liquidity and to increase competition (try to form an international system) In case of an ambitious quota, costs for society (windfall profits) can be reduced through: additional technology specific support, e.g. tax relief, investment incentives, soft loan (this can be a problem in international systems) or by technology dependent length of certification period (e.g. 8 years wind onshore, 12 years wind offshore) Use technology specific tariffs Apply a stepped tariff scheme (where appropriate) Tariffs should decrease over time for new installations in order to account for technology learning Options to participate in liberalised power markets could facilitate the integration into the market Implement a forecast obligation in order facilitate the integration of electricity using fluctuating RES into the grid OPTRES Dissemination Workshop Copenhagen, December 12th 26 OPTRES Dissemination Workshop Copenhagen, December 12th 26 61

62 Thank you for your attention!!! Mario Ragwitz, Anne Held OPTRES Dissemination Workshop Copenhagen, December 12th 26 62

63 6) Costs and Potentials of Renewable Energy Sources, Carlo Obersteiner, TU Vienna Workshop of the EIE project OPTRES Copenhagen, 12 th of December 26 of renewables until 22 of renewables until 22 Authors: Carlo Obersteiner, Gustav Resch, Thomas Faber, Reinhard Haas all Energy Economics Group, Vienna University of Technology Contact Web: based on calculations made with the help of the computer model Green-X - Comparison of different policy options Content 1. Potentials and costs of RES-E of renewables until Background information investigated cases Short characterisation of the Green-X model Investigated cases 3. Results on the future deployment of RES in the EU25 Results on RES deployment, investment needs, CO2 avoidance National improvement versus harmonisation Concluding remark Definition of the (additional) realisable mid-term potential (up to 22) Electricity generation Historical deployment (1) Background data: Potentials and cost for RES Theoretical potential Technical potential Maximal timepath for penetration (Realisable Potential) of renewables until 22 R&D Definition of potential terms Theoretical potential... based on the determination of the energy flow. Technical potential based on technical boundary conditions (i.e. efficiencies of conversion technologies, overall technical limitations as e.g. the available land area to install wind turbines) Realisable potential The realisable potential represents additional the maximal achievable potential realisable assuming that all existing Policy, barriers can be overcome and all potential driving forces are active. Society for 22 Thereby, general parameters as Economic Potential e.g. market growth rates, achieved planning constraints are taken potential into account in a dynamic context i.e. the realisable potential has to refer to a certain year. RES-E - Electricity generation potential [TWh]_ (1) Background data: Potentials and cost for RES EU 27: of renewables until 22 Mid-term realisable potential for RES-E E in the EU25 achieved potential TWh additional potential TWh Additional potential 22 Achieved potential 24 AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK CY CZ EE HU LA LT MT PL SK SI BG RO Photovoltaics,2% Hydro smallscale 8,6% Achieved Potential at the end of 24 Wind onshore 14,2% (1) Potentials and cost for RES Wind Biogas (Solid) offshore 2,6% Biomass,4% 6,7% Biowaste 2,4% Geotherma electricity 1,2% TWh Hydro largescale 63,7% of renewables until 22 Mid-term realisable potential for RES-E E in EU-25 Additional Potential Wind onshore 18,8% Wind offshore 2,8% Tide & Wave 1,1% Solar thermal electricity 2,4% TWh up to 22 Biogas 9,% (Solid) Biomass 26,9% Biowaste 2,3% Geothermal electricity,3% Hydro largescale 63,7% Hydro smallscale Photovoltaics 2,6% 2,% Solid biomass - potential in terms of primary energy [Mtoe/year] (1) Background data: Potentials and cost for RES Total EU25 Forestry imports Biodegradable waste Forestry residues Forestry products Agricultural residues Agricultural products of renewables until 22 Mid-term realisable potential for RES-E E in the EU25 Biomass as a major contributor in all energy sectors! Approach: Starting with primary energy, competition well reflected 63

64 Wind offshore Wind onshore Tide & Wave Solar thermal electricity Photovoltaics Hydro small-scale Hydro large-scale Geothermal electricity Biowaste (Solid) Biomass (Solid) Biomass co-firing (1) Background data: Potentials and cost for RES Biogas Current market price_ cost range (LRMC) PV: 43 to 164 /MWh Costs of electricity (LRMC - Payback time: 15 years) [ /MWh] of renewables until 22 Cost of electricity by RES-E E option Bandwith on European level Wind offshore Wind onshore Tide & Wave Solar thermal electricity Photovoltaics Hydro small-scale Hydro large-scale Geothermal electricity Biowaste (Solid) Biomass (Solid) Biomass co-firing Biogas Current market price_ cost range (LRMC) PV: 34 to 126 /MWh Costs of electricity (LRMC - Payback time: Lifetime) [ /MWh] (2) Background The Green-X model Simulation model for energy policy instruments in the European energy market RES-E, RES-H, RES-T and CHP, conventional power Based on the concept of dynamic cost-resource curves Allowing forecasts up to 22 on national / EU-25 level Base input information Country selection Technology selection Power generation (Access Database) Electricity demand reduction (Access Database) Economic market and policy assessment potential, costs, offer prices Simulation of market interactions RES-E, CHP, DSM power market, EUAs Scenario Information Policy strategies selection Social behaviour Investor/consumer Externalities Framework Conditions (Access Database) of renewables until 22 based on default common payback time (15 years) based on technology-specific lifetime Results Costs and Benefits on a yearly basis (25-22 ) Reference clients: DG RESEARCH, DG TREN, DG ENV,Sustainable Energy Ireland, German Ministry for Environment, European Environmental Agency, etc. National policy optimisation versus harmonisation Results ofgreen-x model runs recently conducted within the EIE project Investigated cases: (2) Background RES-E deployment [%] Business-as-usual (BAU) Continuation of current national policies up to 22 35% 3% 25% 2% 15% of renewables until TWh Historical development (improved national Indicative RES-E Target (21) & harmonised Introduction of harmonised policies (215) policies) BAU-forecast Strengthened national policies Technology-specific harmonised FIT scheme Non technology-specific harmonised TGC system 951 TWh (BAU) % NO HARMONISATION HARMONISATION IN 215 Improved national policies Efficient & effective national policies Technologyspecific support Feed-in tariffs - harmonised Non technologyspecific support Quota obligation based on TGCs - harmonised (3) Results BAU scenario of renewables until 22 Total electricity generation from RES (EU25) RES-E - electricity generation [TWh/year] Wind offshore Wind onshore 1 Tide & wave Solar thermal electricity 8 Photovoltaics Hydro small-scale 6 Hydro large-scale Geothermal electricity 4 Biowaste Solid biomass 2 Biogas Total stock (end of 24) Improved national policies scenario both cases based on purely national support schemes (3) Results Breakdown of electricity generation from new RES-E plant (installed in the period 25 to 22) on EU-25 level BAU scenario of renewables until 22 Improved national policies scenario (3) Results Breakdown of investment needs for new RES-E plant (installed in the period 25 to 22) on EU-25 level BAU scenario of renewables until 22 Improved national policies scenario Breakdown of electricity generation by 22 from new RES-E plant (installed 25 to 22) Breakdown of electricity generation by 22 from new RES-E plant (installed 25 to 22) Breakdown of cumulative investment needs for new RES-E plant (installed 25 to 22) Breakdown of cumulative investment needs for new RES-E plant (installed 25 to 22) Wind offshore Biogas 9,7% 7,6% Solid biomass 22,7% Biowaste 3,8% Geothermal Total: 52TWh/year electricity,2% Wind Hydro largescale onshore 42,% 5,9% Hydro smallscale Tide & wave 1,8% Solar thermal 1,4% electricity Photovoltaics 2,8% 2,2% Biogas Wind 8,7% offshore 22,8% Solid biomass 22,7% Biowaste 2,7% Geothermal Total: 725 TWh/year electricity,3% Hydro largescale 4,4% Wind Hydro smallscale onshore 31,5% 2,3% Solar thermal Tide & wave electricity Photovoltaics 1,5%,8% 2,2% Wind offshore Biogas 9,4% 6,1% Solid biomass 12,7% Total: 234 Bill. Wind onshore 35,3% Tide & wave Solar thermal 1,4% electricity 4,4% Biowaste 5,6% Geothermal electricity,2% Hydro largescale 4,9% Hydro smallscale 1,4% Photovoltaics 18,5% Wind offshore 22,5% Wind onshore 26,5% Tide & wave 1,6% Total: 33 Bill. Biogas 7,6% Solid biomass 11,8% Solar thermal electricity 1,% Biowaste 4,1% Geothermal electricity,2% Hydro largescale 3,7% Hydro smallscale 2,3% Photovoltaics 18,6% 64

65 (3) Results of renewables until 22 Reduction of investment cost within the BAU-scenario due to technological learning Cost reduction - share of initial investment costs (as in the year 25) [%] 1% 95% 9% 85% 8% 75% 7% 65% 6% 55% 5% Resulting cost reduction for RES-E technologies (3) Results Transfer costs for consumer (due to the promotion of RES-E) Unit: M /year or /MWh DEMAND Hydropower Geothermal electricity Solid biomass - cofiring & large-scale plant Solid biomass - smallscale CHP Gaseous biomass Gaseous biomass CHP Wind energy Tidal & wave Solar thermal electricity Photovoltaics of renewables until 22 Transfer costs for consumer / society (sometimes also called additional / premium costs for consumer / society) are defined as direct premium financial transfer costs from the consumer to the producer due to the RES-E policy compared to the case that consumers would purchase conventional electricity from the power market. BAU scenario Improved national policies versus BAU (3) Results of renewables until 22 (Average) financial support for new RES-E plant Unit: /MWh RES This indicator shows the dynamic development of necessary financial support for new RES-E installations (on average). The amount represents from an investors point-of-view the average additional premium on top of the power price guaranteed (for a period of 15 years) for a new RES-E installation in a certain year, whilst from a consumer perspective it indicates the required additional expenditure per MWh RES-E for a new RES-E plant compared to a conventional option (characterised by the power price). Financial support (premium to power price) for new RES-E plant [ /MWh RES] Improved national policies versus BAU 7 Wind offshore Wind onshore Tide & wave 59 4 Solar thermal electricity 5 77 Photovoltaics 4 Hydro small-scale Hydro large-scale Geothermal electricity Biowaste 37 Improved policies Solid biomass 48 improving national policies: BAU - continuation of current national Biogas 51 higher RES-E policies deployment with less specific support! Weighted average (25 to 22) of financial support (premium to power price) for new RES-E plant [ /MWh RES] (3) Results Transfer costs for consumer (due to the promotion of RES-E) Unit: M /year or /MWh DEMAND of renewables until 22 Transfer costs for consumer / society (sometimes also called additional / premium costs for consumer / society) are defined as direct premium financial transfer costs from the consumer to the producer due to the RES-E policy compared to the case that consumers would purchase conventional electricity from the power market. Improved national policies versus BAU Yearly transfer cost for society due to RES policy [Billion /year] Biowaste Solid biomass improving national policies: 5 Biogas Total stock (end of 24) higher transfer cost in absolute terms! Wind offshore 25 Wind onshore Tide & wave Solar thermal electricity 2 Photovoltaics Hydro small-scale 15 Hydro large-scale Geothermal electricity 1 higher RES deployment requires Yearly transfer cost for society due to RES policy (premium per MWh gross demand) [ /MWh DEM] Improved national policies BAU - continuation of current national RES-E policies (3) Results of renewables until 22 (3) Results (Average) financial support for new RES-E plant Unit: /MWh RES represents the average additional premium on top of the power price guaranteed (for a period of 15 years) for a new RES-E installation in a certain year of renewables until 22 Improved national policies versus Harmonisation Improved national policies versus Harmonisation Financial support (premium to power price) for new RES-E plant [ /MWh RES] Harmonised non technology-specific support (from 215 on) Harmonised technology-specific support with less novel technologies (from 215 on) Harmonised technology-specific support (from 215 on) Improved national policies Wind offshore Wind onshore Tide & wave Solar thermal electricity Photovoltaics Hydro small-scale Hydro large-scale Geothermal electricity Biowaste Solid biomass Biogas Weighted average (215 to 22) of financial support (premium to power price) for new RES-E plant [ /MWh RES] 65

66 (3) Results TOTAL transfer costs for consumer (due to the promotion of RES-E) Units: M or % (in comparison to a reference case) of renewables until 22 Total or cumulated transfer costs for consumer in 22 summarise both the cumulated consumer burden within the investigated period 25 to 22 as well as the residual costs for the years after 22. Its calculation is done as follows: The required yearly consumer expenditure in the period 25 to 22 as well as the estimated residual expenditures for the following years after 22 are translated into their present value in 25. Harmonised non technology-specific support (from 215 on) Harmonised technology-specific support with less novel technologies (from 215 on) Harmonised technology-specific support (from 215 on) 2,4 21,8 Improved national policies versus Harmonisation 36,6 (3) Results of renewables until 22 Avoided fossil* energy due to new RES-E plant (installed in the period 25 to 22) on EU-25 level Breakdown of avoided fossil fuels by 22 (in energetic terms) due to new RES-E plant (installed 25 to 22) Avoided gas 47% Total: 142 Mtoe/year Improved national policies scenario Avoided hard coal 37% Breakdown of avoided fossil fuels by 22 (in monetary terms) due to new RES-E plant (installed 25 to 22) Total: 33,7 Bill. /year Avoided hard coal 18% Avoided lignite 4% Improved national policies BAU - continuation of current national RES-E policies 25,8 32,6 Avoided lignite 8% Avoided gas 62% Avoided oil 16% Cumulated* transfer cost for society due to RES policy for new RES-E plant (installed 25 to 22) as premium per MWh corresponding RES-E generation [ /MWh RES] *i.e. cumulated present value (25) of yearly transfer cost Expressed in specific terms, divided by their induced cumulative (15 years) RES-E generation (3) Results of renewables until 22 Avoided CO 2 emissions due to new RES-E plant (installed in the period 25 to 22) on EU-25 level Avoided CO2 emissions [Mt CO2/year] Improved national policies scenario New RES-E: ~44 Mt CO 2 avoided (BAU: ~29 Mt CO 2 avoided) Assumed fuel avoidance based on projected (PRIMES) average country-specific thermal efficiencies and corresponding CO2 intensities) NEW RES-E (25 to 22) RES-E stock (end of 24) Avoided oil 8% *Fossil based electricity represents the marginal option in power markets. Assumed fuel avoidance based on projected (PRIMES) average country-specific thermal efficiencies (and CO2 intensities) Concluding remarks of renewables until 22 National policy optimisation versus Harmonisation The results suggest that the most significant efficiency gains can be simply achieved through an optimisation of national RES-E support measures. Further efficiency improvements at a considerably lower level are possible by an EU wide harmonisation of support schemes provided that a common European power market exists. If a harmonised policy is pursued, a technology specific support (e.g. Feedin tariffs, Premium systems) is superior to non-technology specific (e.g. common TGC-system) with respect to cost minimisation. A premature EU-wide harmonisation can hamper the national optimisation process as well as the overcoming of non-economic barriers at Member State level and can lead to significant market distortions if power markets are not fully liberalised. In addition, there is additional benefit from the competition of non-harmonised systems during some time as the promotion schemes can learn mutually from each other. Concluding remarks of renewables until 22 National policy optimisation versus Harmonisation The results suggest that the most significant efficiency gains can be simply achieved through an optimisation of national RES-E support measures. Further efficiency improvements at a considerably lower level attention! are possible by an EU wide harmonisation of support schemes provided that a common European power market exists. If a harmonised policy is pursued, a technology specific support (e.g. Feedin of tariffs, questions Premium / systems) remarks is superior to non-technology specific (e.g. In case common TGC-system) with respect to cost minimisation.? obersteiner@eeg.tuwien.ac.at A premature EU-wide harmonisation can? Phone: hamper the national optimisation process as well as the overcoming of non-economic barriers at Member State level and can lead to significant market distortions if power markets are not fully liberalised. In addition, there is additional benefit from the competition of non-harmonised systems during some time as the promotion schemes can learn mutually from each other. Thanks for your 66

67 7) Synthesis of results on a comparison of different RES-E grid integration case studies in EU Member States, Lars Henrik Nielsen, Risø National Laboratory GreenNet-EU27, Copenhagen Synthesis of results on a comparison of different RES-E grid integration case studies in EU Member States Dissemination Workshop, Copenhagen Case studies on RES-E grid integration Conditions and Costs for RES-E Grid Integration Outline: Conditions and Costs for RES-E Grid Integration Operational costs induced by fluctuating wind power production Risø s mission is to promote environmentally responsible technological development that creates value in the areas of energy, industrial technology and bioproduction through research, innovation and consultancy. Wolfgang Prüggler, Hans Auer*, Carlo Obersteiner Energy Economics Group (EEG) & Dr.-Ing. Derk J. Swider** Institute of Energy Economics and the Rational Use of Energy (IER) * Coordinator of the GreenNet-EU27 project, financially supported by the European Commission (Contract No. EIE/4/49/S ) ** Coordinator of WP2 and WP5 of the GreenNet-EU27 project Legal Disclaimer: The sole responsibility for the content of this work lies with the authors. It does not represent the opinion of the European Communities. The European Commission is not responsible for any use that may be made of the information contained therein. Dissemination Workshop, Copenhagen Case studies on RES-E grid integration Country specific case studies Dissemination Workshop, Copenhagen Case studies on RES-E grid integration RES-E supporting schemes For different European countries the questions What conditions apply for RES-E grid integration? Who has to pay for any additional costs? are answered based on literature reviews and stakeholder interviews. Wind power Country Onshore Offshore Biomass Photovoltaic Germany The Netherlands The United Kingdom Sweden Austria Lithuania Slovenia Country Supporting Scheme Feed-in tariff Quota / TGC Incentives Germany The Netherlands The United Kingdom Sweden Austria* Lithuania Slovenia * The supporting scheme is currently under revision. The most important change will be a cap on the financial support for the various RES-E generation technologies. Most of the countries decided to use the feed-in tariff as a supporting scheme for the development of RES-E. The implementation of these schemes is different from country to country which may effect the RES-E development. Dissemination Workshop, Copenhagen Case studies on RES-E grid integration Dissemination Workshop, Copenhagen Case studies on RES-E grid integration RES-E grid connection RES-E cost allocation Distribution grid Transmission grid (taken from WP6 presentation) 67

68 Dissemination Workshop, Copenhagen Case studies on RES-E grid integration DEEP cost allocation Grid reinforcement Dissemination Workshop, Copenhagen Case studies on RES-E grid integration Shallow cost allocation Grid reinforcements paid by TSO Onshore switch field Onshore switch field Deep grid conncetion cost allocation Offshore platform Wind farm B: Internal grid Offshore platform Wind farm A: Internal grid Present Interface Shallow grid connection cost allocation Wind farm A: Internal grid Wind farm B: Internal grid Dissemination Workshop, Copenhagen Case studies on RES-E grid integration Super-Shallow cost allocation Onshore switch field Offshore platform Wind farm A: Internal grid New Interface Wind farm B: Internal grid Super - Shallow grid connection cost allocation (e.g. Danish system) Dissemination Workshop, Copenhagen Case studies on RES-E grid integration RES-E grid integration costs (I) Grid integration costs ( /kw) are often not specified separately or it is not always clear what they comprise. Grid integration costs ( /kw) are always site specific; influencing factors are most importantly distance, trajectory, etc. Country Wind power Biomass Photovoltaic Onshore Offshore Min Max Min Max Min Max Min Max Germany The Netherlands * > 1 The United Kingdom * Sweden 85* Austria 21* * - - Lithuania 34* Slovenia * * One case study only. Dissemination Workshop, Copenhagen Case studies on RES-E grid integration RES-E grid integration costs (II) Dissemination Workshop, Copenhagen Case studies on RES-E grid integration GreenNet EU27 Model implementation Distance to shore Photovoltaik 4,8 < 15 km < 3 km < 5 km > 5 km Biomass CHP 2,9 3,5 Wind Offshore 9 26,4 Wind Onshore 3,6 13, Share of grid integration cost on total investments (%) 16 /kw 265 /kw 385 /kw 515 /kw Grid connection cost category groups 68

69 Dissemination Workshop, Copenhagen Case studies on RES-E grid integration Recommendations Large-scale RES-E grid integration expects a clear definition of the demarcation lines between RES-E power plant, grid infrastructure and system operation cannot take place on the expense of other market actors like grid operators. Therefore create mechanisms in grid regulation policies able to identify and remunerate investments caused by RES-E grid integration. try to have the major part of the grid integration costs, especially deep costs, covered by the grid operator (remunerate to society). Then barriers for new RES-E deployment are reduced and ambitious goals can be met with minimal (extra) costs for society. Operational costs induced by fluctuating wind power production in Germany and Scandinavia Analysis using: The Wilmar model Wind Power Integration in Liberalised Electricity Markets Stochastic Linear Optimisation Model Main focus: Market Integration of Wind Power Risø s mission is to promote environmentally responsible technological development that creates value in the areas of energy, industrial technology and bioproduction through research, innovation and consultancy. Outline of presentation Operational costs induced by fluctuating wind power production in Germany and Scandinavia Peter Meibom, Christoph Weber, Rüdiger Barth, Heike Brand 1. Calculation of integration costs / Approach 2. The Wilmar Planning tool / in short 3. Results Risø s mission is to promote environmentally responsible technological development that creates value in the areas of energy, industrial technology and bioproduction through research, innovation and consultancy. Approach / Calculation of integration costs Calculation of integration costs The costs of integrating wind power are calculated by comparing variable system costs in two power system configurations: - with wind power production - with an alternative power production having conventional properties (predictable, less variable) The choice of alternative power production is not straight forward and will influence the resulting integration costs! Our choice: three model runs: - with stochastic wind power production forecasts - with perfect prediction but still fluctuating wind power production - with constant wind power production Approach divide operational integration costs into two components: - costs related to partial predictability - costs related to variability 69

70 Wilmar model: Analytical tool covering Wind stochastics: System-wide stochastic optimisation model with wind power as stochastic input parameter (incl. correlations in time and spatially) Markets: A day-ahead market for physical delivery of electricity (e.g. NordPool and EEX). An intra-day market for handling deviations between expected production and consumption (real time regulation) A day-ahead market for reserve power (frequency activated or load-flow activated). A market for district heating and process heat. Calculates: Optimal unit dispatch and prices on these markets (robust towards wind power production forecast errors) Time resolution: p.t. 1h time steps covering one year Overview of the Planning Tool Subdivision of the considered countries into model regions to consider: - Spatial concentration of the installed wind power - Spatial distribution of the electrical demand - Bottlenecks in the transmission grid Overview of analysed scenarios (1) Consideration of Germany and Scandinavian countries. Considered time period: Five selected weeks representing the variation between weeks in wind power production, electricity demand and heat demand determined by using a scenario reduction algorithm Time-series are based on the year 21. Base power system configuration for 21: - Already decided power plant investments are included in 21 (e.g. Finnish nuclear power) - Already announced decommissioning of power plants are included - New transmission lines: Storebælt 6 MW (DK_W DK_E), Fennoskan 2 (SE_M FI), New line between North-western and North-eastern Germany (DE-NW - DE_NE) Overview of analysed scenarios (2) Base: - For all countries, forecasted wind power capacities for 21 are considered. 1 %: - For Denmark and Germany: Forecasted wind power capacities for 215 (equal to cover ca. 29 % and ca. 11 % of the annual electricity demand, respectively). - For Finland, Norway and Sweden: Wind power capacities equal to cover 1 % of the annual electricity demand. 2 %: - For Denmark and Germany: Forecasted wind power capacities for 215 (equal to cover ca. 29 % and ca. 11 % of the annual electricity demand, respectively). - For Finland, Norway and Sweden: Wind power capacities equal to cover 2 % of the annual electricity demand. Overview of analysed scenarios (3) Wind power capacities for the different scenarios: Results (1) Increase in system operation costs per MWh wind power production: Wind power capacity [MW] DE_CS DE_NE DE_NW DK_E DK_W FI_R NO_M NO_N Base 1% 2% NO_S SE_M SE_N SE_S Euro/MWh Wind Base 1% 2% Costs partial predictability Costs variability 7

71 Results (2) Increase in system operation costs per MWh wind power production per country: 3 Results (3) Ratio between the average wind power production in each wind case and the sum of the transmission capacity to other countries included in the model and the average power demand: Impact ratio Euro/MWh Wind Germany Denmark Finland Norway Sweden Base 1% 2% Country Denmark Finland Germany Norway Sweden Transmission capacity to other model regions [MW] Base % % Conclusions Risø National Laboratory The wind power integration costs are lower in hydro dominated countries (especially Norway) compared to thermal production dominated countries (Germany, Denmark). The wind power integration costs increases when a neighboring country gets more wind power. Germany has the highest integration costs although their impact ratio is among the lowest. The reason is that the wind power capacity in Germany is very unevenly distributed with the model region Northwestern Germany (DE_NW) having a wind impact ration of.31 in wind case 1% and 2%. Denmark has the highest share of wind power among the countries, but also excellent transmission possibilities to neighboring countries compared with e.g. Finland. Therefore the wind power integration costs of Denmark are lower than those of Finland in wind case 2%. Ministry for Science Technology and Innovation Risø s mission is to promote environmentally responsible technological development that creates value in the areas of energy, industrial technology and bioproduction through research, innovation and consultancy. 71

72 8) Recommendations for least-cost RES-E integration based on results of the simulation softwar GreenNet, Carlo Obersteiner, TU Vienna Copenhagen, 12 December 26 Copenhagen, 12 December 26 Modeling Least-Cost RES-E Grid Integration based on the Simulation Software GreenNet Carlo Obersteiner Energy Economics Group Vienna University of Technology Gusshausstrasse 25-29/373-2 A - 14 Vienna, Austria obersteiner@eeg.tuwien.ac.at 1. Overview of GreenNet Agenda 2. Modeling approach of GreenNet Grid-related and system-related cost of RES-E integration 3. Selected results based on GreenNet model runs RES-E deployment for different scenario settings Corresponding grid-related and system-related cost 4. Lessons learnt 5. Policy recommendations and conclusions GreenNet-EU27 Dissemination Workshop Copenhagen, 12 December 26 Copenhagen, 12 December 26 Copenhagen, 12 December Overview of GreenNet Simulation software deriving scenarios on least cost RES-E deployment under a variety of different RES-E policy settings, cost allocation strategies and energy policy constraints Geographical coverage of empirical data base: EU27 + HR, CH, NO Simulation period (results on annual basis): RES-E support instruments: implementation of currently existing policy in each country Examples of scenario settings: Selection of a single country or any cluster of countries up to EU27 Selection of a single RES-E technology or any cluster of RES-E technologies Entire portfolio of existing cost allocation policies (deep vs. shallow vs. super-shallow RES-E integration) Parameter variation of key parameters like capacity credit of wind, specific cost of load response options, etc. Major results: RES-E deployment under several different scenario settings and parameter variations on country-level as well as on EU27-level Deployment of the different disaggregated grid-related and system-related cost of RES-E integration Different strategies for implementation of grid-related and system-related cost of RES-E integration into the supply curve (existing power plants and additional potentials). Cost allocation of these cost (RES-E support instrument vs. grid tariff vs. balancing/ wholesale markets) affects overall generation cost of RES-E developer (and, therefore, investment decision). Short-Run / Long-Run Marginal C 2. Modeling grid and system-related cost Grid connection cost Grid reinforcement cost System operation cost (capacity & balancing cost) additional cost allocated to balancing cost (wind power) final supply curve incl. cost for grid integration & system operation producer consumer existing generation - conventional & RES-E (SRMC) add. RES-E potential (LRMC) RES-E (e.g biowaste) RES-E (wind onshore) RES-E (wind onshore) RES-E (e.g. biogas) RES-E (wind offshore) Capacity Copenhagen, 12 December 26 Copenhagen, 12 December 26 Modeling grid connection cost Results of RES-E case studies are the basis for model implementation Wind onshore Grid connection cost: 8 % of total project investment Wind offshore Grid connection cost depending on distance to shore Zone (near shore): 1% of total project investment Zone 1 < 3 km: 15% of total project investment Zone km: 2% of total project investment Zone 3 > 5 km: 25% of total project investment Depreciation period: 15 years Interest rate: 6.5 % Model implementation enables separate application of learning rates for grid connection and the wind farm itself Modeling grid reinforcement cost Empirical data (transmission grid only) based on national load flow analyses Correlation between wind penetration and specific grid reinforcement cost Share of cost allocated to wind determined by the capacity factor: C GR, Wind = CF Wind * C GR, total Due to bandwidth of grid reinforcement cost three scenarios are implemented Grid Extension Cost /MWh Empirical data high average low Grid Extension Cost - Empirical Data based on Country Studies 2,5 Wind generation Reinforcement Cost References (Share in % of total) /MWh 2, 1,5%,27 van Roy et al. (23) 2,6%,29 4,5%,52 Verseille (23) 1,5 6,2%,11 9,4%,24 DENA (25) 12,1%,29 1, 4,8%,18 Janiczek et al. (23) 7,2%,36 19,1%,56 t Hooft (23),5 14,9% 1,42 ILEX / UMIST (22) 23,6% 1,63, 6,4%,68 DETI / NIE (23) 2% 7,% 5%,68 % 1% 15% 25% Wind generation (Share in % of total) 72

73 Copenhagen, 12 December 26 Copenhagen, 12 December 26 Capacity credit / Capacity factor of wind power Modeling capacity credit (system capacity cost) Conventional power plants provide both energy (kwh) and capacity (kw) Intermittent wind generation provides limited contribution to system capacity This is expressed in the capacity credit of wind power (take care of definition) Corresponding cost are estimated using the thermal equivalent approach SCAR-Report % 2% 4% 6% 8% 1% Wind penetration Pwind/PL,max Dany/Haubrich (2) DENA (Winter) DENA (Spatial Distribution 23) GreenNet high scenario GreenNet low scenario Extra Balancing Cost [ /MWh] Modeling system balancing cost Driver for short-term system balancing requirements is the magnitude of random power fluctuations, caused by unpredictable changes in both generation and load At present, in different electricity systems a variety of different schemes exist for the allocation of corresponding extra balancing cost caused by large-scale intermittent wind generation Extra Balancing Cost depending on Wind Penetration (Comparison of international studies (except Germany)) PWind,inst / PL,max [%] US-Studien Studies DK Risoe UK ILEX Published German Balancing Cost (E.ON) are far w ay of the trend line. Therefore, they are not shown here. Copenhagen, 12 December 26 Copenhagen, 12 December 26 Modeling different cost allocation policies for RES-E grid integration The simulation software GreenNet models several different grid integration policies - Reference scenario reflects the status quo of cost allocation policies in the EU-27 Deep grid integration - Several disaggregated cost elements allocated to RES-E developer Shallow grid integration - Only grid connection cost allocated to RES-E developer; remaining cost to end-user Super-shallow grid integration - Several disaggregated cost elements (incl. grid connection) are allocated to end-user Electricity generation [GWh/year] 1,2, 1,, 8, 6, 4, 2, 3. Selected results based on GreenNet model runs RES-E deployment in the EU25 up to 22 according to reference scenario Biogas Biowaste Hydro small-scale Photovoltaics Tide & wave Wind offshore Solid biomass Geothermal electricity Hydro large-scale Solar thermal electricity Wind onshore Increase of RES-E generation from 492 TWh/yr in 25 to 128 TWh/yr in 22 Generation from old RES-E technologies remains stable Wind (onshore & offshore), biomass and biogas will increase considerably Copenhagen, 12 December 26 Copenhagen, 12 December 26 Shares of total RES-E generation in the EU25 according to reference scenario Development of specific grid-related and system-related cost of wind integration in the EU25 up to 22 Breakdown of RES-E generation [% of total RES-E generation] 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Wind offshore Wind onshore Tide & wave Solar thermal electricity Photovoltaics Hydro large-scale Hydro small-scale Geothermal electricity Biowaste Solid biomass Biogas 22: Share of total RES-E generation for wind (onshore & offshore) is 39%, followed by hydro 36% and biomass 23% 22: Wind (onshore & offshore) is most dominant RES-E technology Specific cost [ /MWh wind] Grid connection costs Balancing cost Grid reinforcement costs System capacity cost Dominant cost element: grid connection cost Grid reinforcement cost are rather low Extra system operation cost between /MWh wind Assumptions: Average cost scenario in GreenNet. Grid connection and grid reinforcement cost allocated to new plants (25 onwards) only. System balancing and system capacity cost allocated to new and existing plants. 73