Bloomberg New Energy Finance - Week In Review

Europe sees progress on EU ETS reform, solar costs but not enough on interconnection

Europe had many of the juicy energy headlines in the last week, ranging from the UK's first Contract-for Difference (CfD) auction, to moves towards reform of the European Union Emission Trading System, to a new EU-wide initiative to encourage the building of electricity interconnectors between member states.

In the UK, Scottish Power Renewables’ 714MW East Anglia One offshore wind farm was the biggest capacity winner in the UK’s first CfD auction – its new support mechanism for renewables, nuclear and carbon capture and storage. A total of GBP 315m ($489m) of new contracts have been offered, according to the results announced on 26 February, which could result in over 2GW of more power-generating capacity.  The average clearing price of GBP 81.95/MWh shows how competitively priced onshore wind can be in the UK.

Two of the five solar plants were also offered contracts for GBP 50/MWh for the 2015/16 delivery year – little more than the market power price at GBP 44/MWh and significantly less than onshore wind at GBP 82.50/MWh. The winning solar developers may have expected another bidder to raise the clearing price to an economically feasible level, and may struggle to sign a contract at such low prices, according to the Bloomberg New Energy Finance report on the auction.

EU ETS reform moved a step closer on 24 February when the European Parliament’s environment committee voted in favour of an early start of the market stability reserve (MSR), aimed at boosting carbon prices. In particular, they agreed that the MSR should begin in 2018 – three years earlier than the Commission’s proposal – and some 1.3Gt of backloaded and unallocated permits should be placed in the reserve, rather than returned to the market at the end of Phase III.

The environment committee gave Ivo Belet, who responsible for steering the proposal through the Parliament, the mandate to initiate talks with EU member states. Eight have said they are concerned about an early beginning for the mechanism, while another eight are pushing for a 2017 start. Taking its typical anti-EU ETS reform stance, Poland does not support any rule change before 2021, the country’s climate negotiator, Marcin Korolec, said on 26 February. However, BNEF expects the MSR proposal to find sufficient support among countries, with an increasing chance it will be passed into law before the August recess, according to our latest EU ETS Deep Dive. Member state representatives will next meet to debate the MSR on 10 March.

The following day, the European Commission presented its strategy paper on the creation of an ‘energy union’ together with a communication on the non-binding target to develop interconnection equivalent to 10% of the bloc’s installed generating capacity by 2020. The aim of the energy union is to coordinate the Commission’s work to strengthen security of supply and reduce dependence on fossil-fuel imports, as well as harmonise and integrate national energy markets and infrastructure.

As to interconnection, member states failed to meet the first non-binding 10% target set for 2005 and last year the EU-wide level stood at 8%. The Commission’s new communication seeks to encourage member states to collaborate on energy infrastructure planning and prioritise the construction of new interconnectors. However, as our Analyst Reaction published 26 February notes, the communication makes no changes to the existing rules and incentives, making it unlikely to have a significant impact. Two countries that took a step closer to their 10% target, however, were France and Spain, which on 20 February inaugurated an interconnector. The new link, which cost 10 times as much as originally estimated, will double the amount of power they can exchange.

In commodities, US natural gas futures on 26 February dropped the most in five weeks after the government reported an underestimate in an inventory decline. Gas for delivery in April slid 5.8% to $2.697/MMBtu on the New York Mercantile Exchange – the biggest one-day reduction since 20 January. The next 12 months will see continued oversupply and prices will remain soft until later this year, according to the Q1 2015 North America Gas Outlook.

The Brazilian ethanol industry remains on shaky ground: producer Aralco Industria e Comercio filed for bankruptcy in the US on 26 February, “as a result of pricing instability, Brazilian currency devaluation and poor harvests caused by climate issues”, said the court filing. Aralco's bankruptcy is not likely to be the last in Brazil. Several family-owned sugarcane groups have seen their balance sheets battered by years of low sugar and ethanol margins, too much debt and a policy framework that has shrunk ethanol demand since 2011. Slight relief may arrive as the Brazilian government levies higher taxes on gasoline. These will raise prices by $0.08/litre by April 2015 and spur ethanol demand, according to the Q1 2015 Global Advanced Fuels Market Outlook. However, it may be too little, too late for some producers.

Meanwhile, Audi is aiming to steal the electric limelight at this week’s Geneva auto show: to date, its clean energy efforts have been overshadowed by Tesla’s rise and BMW’s i3 urban compact and i8 plug-in hybrid sports car. In response, Audi plans to be the only major luxury car maker to focus on a zero-emission vehicle in Geneva, with its revamped $165,000 R8 sports car. The electric version of Audi’s edgy R8 can drive as far as 450km (280 miles) before needing to recharge, which Audi says can be done in “significantly less than two hours”. The range is more than double the 200km the i3 can travel on battery power, while Tesla’s Model S can go as far as 502km. The evolution of vehicles will be one of the four main themes or ‘pillars’ of this year’s BNEF ‘The Future of Energy’ Summit in New York which begins in 41 days. Summit programme director William Young explains why these four pillars of the electric utility are important in the latest VIP Comment.

In Asia, Indian Railways has announced plans to join the ranks of large electricity users sourcing power directly from generators. It pays among the highest electricity tariffs in the country and intends to allow developers to use railway land and buildings to set up 1GW of solar projects in the next five years. Another company with ambition is Indonesia’s state-owned energy utility PT Pertamina, which aims to more than double geothermal capacity to over 1GW by 2020, the firm president said on 25 February. Indonesia had by far the largest geothermal financing last year – at $1.6bn for the 330MW Sarulla project. The technology currently accounts for around 3% of the country’s electricity mix.

Most biofuel investment in 2014 took place in the Americas ($bn): BNEF

Most biofuel investment in 2014 took place in the Americas ($bn): BNEF

Q&A of the week

ACWA Power Sees PV Tariffs Headed Below 5 Cents

ACWA Power shot into the headlines earlier this year when it bid to supply power at a record low tariff of $0.05.845 per unit from a 200MW solar photovoltaic plant in Dubai. The Saudi Arabian company bagged the project from the Dubai Electricity and Water Authority, or DEWA.

Brushing aside concerns about the viability of the project, Paddy Padmanathan, president and CEO of ACWA Power International, told Bloomberg New Energy Finance: 'Is it a repeatable tariff? Absolutely. It is repeatable. If DEWA was to launch another tender on the same basis – with a 25-year offtake contract – in the same locale tomorrow, I am a 100% sure the tariff will be this same number, if not slightly lower.'

ACWA Power also secured the contract to build two concentrated solar power, or CSP, plants in Morocco: Noor II (200MW) and III (150MW), at 0.1567 and 0.1631 respectively, including storage. Concentrated solar with storage is dispatchable power, in that the generator has control over when it delivers electricity, and it can be used directly for water desalination – the company's other main business.

The power generation and desalination company is readying for a public listing in Saudi Arabia, and will seek a secondary listing on the international markets in the next phase. The International Finance Corporation is a 5% shareholder in ACWA Power, which is backed by nine Saudi conglomerates and two sovereign institutions –Sanabil International Investments Co and Public Pension Agency. 

Q: There are multiple opinions on how low oil prices impact renewables. What is your view?

A: We do not think that the low oil prices of today are going to have an impact on the growth of renewable energy, because costs of renewables have come down phenomenally. The story would have been different if the oil price had slid a couple of years ago. In any case, oil is hardly used anywhere for power generation. The few countries that were using oil for power generation – like Saudi Arabia – have already changed their policy. They took a policy decision not to construct new oil-fired plants. Diesel is used to a limited extent around the world but diesel prices are still relatively high. Gas and coal are the main fossil fuels used today and oil and gas prices decoupled a long time ago.

Q: Coming to the Dubai plant, could you share the main reasons for this record low tariff of $0.0585?

A: Firstly, is it a repeatable tariff? Absolutely. It is repeatable. If DEWA was...

This is an excerpt from the Clean Energy & Carbon Brief published weekly. To subscribe to the Clean Energy & Carbon Brief, click here.

BNEF services | Contact BNEF

Copyright © 2007-2015 Bloomberg Finance L.P. All rights reserved. This email has been sent to you by Bloomberg New Energy Finance, a division of Bloomberg Finance L.P. Please feel free to forward it to colleagues interested in renewable energy and energy technologies, provided it is complete and identifies Bloomberg New Energy Finance as the source. Bloomberg New Energy Finance does not purchase data from or to third parties. If you have received this from a colleague and would like to receive your own personal copy each week, please contact sales.bnef@bloomberg.net Please send any queries/comments to the Week in Review editor, and make sure you send us your own financial transactions in renewable energy and energy technology sector: editor.bnef@bloomberg.net.

This service is derived from selected public sources. Bloomberg Finance L.P. and its affiliates, in providing the service, believe that the information it uses comes from reliable sources, but do not guarantee the accuracy or completeness of this information, which is subject to change without notice, and nothing in this document shall be construed as such a guarantee. The statements in this service reflect the current judgment of the authors of the relevant articles or features, and do not necessarily reflect the opinion of Bloomberg Finance L.P., Bloomberg L.P. or any of their affiliates (“Bloomberg”). Bloomberg disclaims any liability arising from use of this document and/or its contents, and this service. Nothing herein shall constitute or be construed as an offering of financial instruments or as investment advice or recommendations by Bloomberg of an investment or other strategy (e.g., whether or not to “buy”, “sell”, or “hold” an investment). The information contained herein should not be considered as information sufficient upon which to base an investment decision. BLOOMBERG, BLOOMBERG PROFESSIONAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG BONDTRADER, BLOOMBERG TELEVISION, BLOOMBERG RADIO, BLOOMBERG PRESS, BLOOMBERG.COM, BLOOMBERG NEW ENERGY FINANCE and NEW ENERGY FINANCE are trademarks and service marks of Bloomberg Finance L.P. or its subsidiaries.

The data contained within this document, its contents and/or this service do not express an opinion on the future or projected value of any financial instrument and are not research recommendations (i.e., recommendations as to whether or not to “buy”, “sell”, “hold”, or to enter or not to enter into any other transaction involving any specific interest) or a recommendation as to an investment or other strategy. No aspect of this service is based on the consideration of a customer’s individual circumstances. You should determine on your own whether you agree with the content of this document and any other data provided through this service. Employees involved in this service may hold positions in the companies covered by this service.