Who takes the risk of nuclear power?

June 17, 2010

Following the oil spill in the Gulf of Mexico, BP has promised to clean it all up. In fact, on 16th June 2010, it announced it would set up a $20bn fund for that purpose. Intuitively, this seems right. A private company is taking risks. This can bring fortune if all goes to plan. If not, the company has to pay a heavy price. According to BP’s boss – a one-in-a-million chance. All seems fair. And in this instance, it will probably work because BP is otherwise a cash-generating business.

Does this free-market principle of equally facing the upside and downside of risk-taking activities extend to other areas? It seems not. Obviously not in banking with all the banks that had to be bailed out. There is another interesting example: nuclear power – would any company build a nuclear power station if it faced the risk of having to pay for any major incidents without limitation? Of course, the probability of such an event is very low, its severity however would most certainly wipe out any operator. What happens here is that the risks of nuclear power stations are socialised.

Should operators of nuclear power stations start paying into a fund?


UK Feed-in Tariff: Where will the money go?

March 9, 2010

The UK has recently announced feed-in tariffs for electricity from renewable sources. See http://www.ownergy.co.uk/tariffs/FIT/ , thus abandoning its quota system with ROCs (Renewable Obligation Certificates) for installations of less than 5MW. Will it be enough or is it going too far?

The tariff guarantees a fixed price for each kWh generated from renewable sources. The level depends on the technology and size or type of installation and is adjusted annually for inflation. Furthermore, the tariff is guaranteed for 20 years and in the case of photovoltaics even 25 years.

Given that the size of a typical single wind turbine is 2.5MW, this new feed-in tariff is probably largely irrelevant for wind energy.

So far, the UK has attracted very little investment in photovoltaics. Will this change now? Here, the under 5MW segment is hugely relevant, as it covers all roof-top installations up to small free-standing solar parks. Only larger free-standing installations will have to succumb to ROC- trading.

Comparison with German Feed-in Tariff

As Germany has by far the largest installed capacity of PV modules worldwide, having experienced an increase of more than 3GW in 2009 alone, we have compared German feed-in tariffs with the UK’s. With the exception of Northern Scotland, the UK is no less sunny than Germany – one would therefore expect feed-in tariffs to be comparable.

To compare, we have assumed an exchange rate of €/£1.15. Note that we have not taken into account inflation adjustment of the UK tariff or differences in the length of the tariff (25 years in UK vs. 20 in Germany). Even so, the UK- tariffs appear to be very favourable. But let’s look at more details.
Comparison of Feed-in tariffs for PV
1. Grid-connected:
In the UK, electricity that is fed back into the grid attracts an additional 3p/kWh.

From this, it appears that the UK pays a premium of between 5-20% over the feed-in tariff in Germany in 2010, a gap that is set to widen by 2012, as German feed-in tariffs a reduced by ~9% annually while UK degression rate is just 4% annually. The differences in the category of free-standing parks are also in excess of 20%

2. Own Use
To ease the pressure on the national grid, householders are encouraged to use as much solar electricity they produce themselves.

Tariff for own use Saving Total Premium over feed-in
Germany €0.2276 €0.232 €0.4593 17%
UK £0.361 £0.13 £0.49 25%

The financial benefits from direct use come from two sources: First, the tariff for own use. Second, the saving from not having to pay for electricity. Note that electricity in Germany is much higher than in the UK. At current, average, retail electricity prices, the UK pays a high premium for direct use over electricity fed back into the grid.
Note that the discrepancy will most likely be even more pronounced from July 2010 if the German Government passes a law to reduce feed-in tariffs by as much as 25%!

Who will benefit and how much?

This question very much depends on who you’re asking. Let’s have a look at the potential stakeholders.

Government

The UK government’s motivation for introducing the feed-in tariffs is clear. It needs to close the gap in renewables to hit the country’s EU- target of 15% by 2020, which will not be reached unless significant new capacity is built.

Our research into incentive schemes has found that
• There is no significant installed capacity or growth in jurisdictions without feed-in tariff.
• There is no correlation between the level of the tariff and the annual energy yield from the sun or the prevailing electricity prices. Instead, countries that have a larger gap to their 2020-target tend to set higher levels. The UK feed-in tariff is consistent with that empirical result.
• While the existence of a feed-in tariff is essential, there is no correlation between the level of the tariff and the resulting growth, provided the level is set above a certain minimum level.

In conclusion, while the UK feed-in tariff will certainly attract growth in photovoltaics in the UK, the premium that the UK pays over the German feed-in tariff will most likely not result in additional growth. It will also not result in growth in home-grown PV industry, as it attracts too much influx. South Korea for instance, cut its feed-in tariffs sharply in 2009 so that the country can build its own industry.

Private Investors of Rooftop Installations

The good news for investors is: Thanks to feed-in tariffs, investment in photovoltaics is economically viable with an annual return of investment of 8 – 10%. In addition, for householders the income is exempt from income tax. It’s a bit like an ISA with a low risk profile. However, it is unlikely that investors will benefit from the particularly high level of the feed-in tariff, as the equipment (i.e. modules) are target-priced.

Equipment Manufacturers

The previous years have shown that prevailing feed-in tariffs are priced into the equipment for renewable energy installations (PV modules or wind turbines). As a result, the premium paid by governments over a minimum feed-in tariff is captured by the equipment manufacturers. No doubt this will be the case in the UK too, especially since the UK does not have a significant manufacturing base for PV modules and other manufacturers will want to maintain their profitability even after the proposed tariff melt-down in Germany.

Project Developers

The feed-in tariffs may have little impact on the project developers in the UK, as limited to 5MW. The degree of attraction will also very much depend on the availability of bank finance.

Conclusion

Motivated by fear of not hitting the country’s EU renewables target by 2020, the UK has introduced attractive feed-in tariffs for renewable energies. While there is no doubt that the announced feed-in tariffs will trigger growth in solar in the UK, it is evident that the UK will be paying a sharp premium over comparable tariffs for no additional impact. Moreover, the tariff is too high to foster growth in a UK home-grown PV industry. The UK government appears to prefer growth in installed capacity over growth in its own industry, but may end up with neither. For small investors and equipment manufacturers however, it’s all good news.

Visit Green Rhino Energy for more details on the subject.


Is there a place for photovoltaics without subsidies?

November 11, 2009

Generating electricity from photovoltaics is perhaps the most expensive conversion technology. However, the attractiveness of this technology very much depends on the location (and thus the local solar irradiation) as well as the prevailing rates for electricity at the location in question. Incidentally, current demand for photovoltaics comes from not-so-sunny countries like Germany where government have introduced generous subsidy schemes.

With falling costs for solar, which places will become attractive for photovoltaics without subsidies? Despite being the Top PV country, it won’t be Germany: Freiburg, one of its sunniest cities only receives 1,100kWh per square meters per year. In comparison, Siciliy enjoys 47% more sunshine while electricity prices are also higher. Also very appealing could be the Atacama Desert in Chile with 60% more irradiation than in Sicily. On the other hand, despite sufficient irradiation, we won’t be seeing photovoltaics in South Africa any time soon, because electricity prices in that country are very low.

Visit Green Rhino Energy for more details on the subject.


How does Alternative Energy fit in BP?

June 23, 2009

Some years ago BP embarked on a big re-branding exercise including a name change from “British Petroleum” to “BP”, which advertising tells us stands for “Beyond Petroleum”. Withi this, BP announced in 2005 to invest $8bn over 10 years into Alternative Energy.

Initially, Alternative Energy together with Natural Gas formed the busines segment “Gas, Power & Renewables”. The rationale behind this grouping was to combine sources that are cleaner than oil together. In 2008, however, the Gas business was finally merged with Oil, while the Alternative Energy segment demoted to a division status, now part of “Other Businesses & Corporate” along with shipping, treasury (interest income) and aluminium assets.

This move looks indicative of the significance the AE- business has among management. Being bundled into a very diverse segment also means, there are on performance details in the annual report and financial statements.

From the annual report we can only glean on some rough data.

In 2008, BP invested $1.4bn into areas with long-term growth potential – wind, solar biofuels and CCS as well as gas-fired power. Total investments (excluding acquisitions and asset exchanges) were $22bn. I.e. investments into alternative energy was 6.36% of total investment.

Annual solar cell production capacity in 2008 was 213MWp. That’s just 1.4% of the global market. BP’s Wind net rated capacity was 432MWp (sum of all assets that have entered into operation).

Net Revenues in “Other business & corporate” was $2.675bn, in comparison to Exploration & Production $37bn and Refining & Marketing $248.9bn, resulting in a loss of $1.233bn within “OB & C” in comparison to $27.7bn in E&P and $6bn in R&M. Hence the “Other Businesses & corporate” segment’s share of total revenues is 0.93%.

It seems to me that:
(1) Alternative Energy is not BP’s core business, despite what advertising campaigns about energy mix might suggest.
(2) Despite significant investment (in both relative and absolute terms), it’s not clear whether it’s a profitable business on its own. By bundling it into “Other Businesses”, a lacklustre preformance can be more easily hidden.

In conclusion, although BP is fully committed to its investment promise, the Alternative Energy section sits uneasily within what is essentially an oil company.


PV Manufacturer working short shifts

June 4, 2009

According to the FT, Q-Cells are working 4 day only. This is quite amazing. Only recently, they have been crowned “Best PV Manufacturer”. However, most big solar projects are project-financed with 70 – 80% bank debt, which obviously has dried up during the credit crunch. Plus, the PV bubble that was Spain has finally burst. There is now too much capacity. Interestingly, Q-Cells have now launched a campaign that is targeted at the consumer market to build a consumer brand. A bit like with Intel and computers before the “Intel Inside” campaign, most ownes of solar modules probably don’t know that their cells are produced by Q-Cells or someone else. Maybe Q-Cells are hoping that this can compensate for the dried up demand in large projects for the time being. I’m sure Q-Cells will be back soon.

http://www.ft.com/cms/s/0/d25b2d04-4fd5-11de-a692-00144feabdc0.html


May 24, 2009

Today I have updated the layout of Green Rhino Energy website. Also, it includes now an overview section on renewable energy sources and got a bit further on solar energy.


May 24, 2009

I was invited to be a judge on the London Business School Cleantech Challenge 2009. This was a competition where teams presented ideas in the cleantech space with plans assuming they had £250k to spend. There was a very wide spectrum of ideas and business models – some focusing on product development, others just on execution. It was good to see that many ideas focused on helping address fuel poverty in developing countries by making new inroads into distribution systems.


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