Financing European energy infrastructure | 49 comments (49 topical, editorial, 0 hidden)

Re: Financing European energy infrastructure (4.00 / 3)

European Tribune - Financing European energy infrastructure

My next step is to discuss the dispatch curve, remind everybody that market prices of electricity are driven by marginal costs which are low for nukes and wind, and high for gas-fired plants (and linked to the price of gas). I make two further points which set gas-fired plants from wind farms:
gas-fired power plants are largely price makers: it is their cost which drives market prices, and thus gas-fired power plants are pretty sure to always receive revenues close to what they need to cover their costs;
wind farms are price takers, but their effect on the system is to bring prices down, as they displace more expensive plants when wind blows (that's what is called the "merit-order effect", which I've discussed extensively in the past in my wind series);
I take this to the logical conclusion:
the more gas you have in the system, the higher the price of electricity on the market will be;
the more wind you have in the system, the lower the price of electricity on the market will be.

I have been thinking a bit about this and how to argue in Sweden (where gas is almost non-existent). What I wonder is how the picture changes if gas is replaced by hydro. Hydro shares the cost structure of wind and nuclear but the market making powers of a flexible power source.

Is it gas flexibility that allows them to charge rent or its high cost that drives high prices?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Mar 28th, 2011 at 04:09:43 PM EST

Re: Financing European energy infrastructure (none / 1)

I think the argument for hydro is the same as for gas, not for nuclear and or wind, at least in Sweden. The reason being is that hydro plants in Sweden were built during a regulated power regime, and the strict credit regulations we had until 1985 especially excepted hydro power (and public housing), shoveling vast amounts of credit in their direction. Furthermore, there are (I suppose) far fewer possible surprises during the construction of a dam than a reactor, as there is so much greater experience of constructing the former, and the fact that it is inherently simpler. Add to this that hydro is not only flexible but also cheap, and you get a throughly superior mode of generation. Countries with an abundance of hydro (like Norway) use nothing but it.

So yes, even in a deregulated environment everyone is going to build hydro, until you run out of good sites, Which usually happens mighty quick. The Swedish hydro program was more or less completed by 1965-1970, after which it was topped up by oil-fired power plants (Stenungsund, Karlshamn etc). Then came the oil crisis, which meant a massive push for district heating and nuclear power to replace oil.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Mar 28th, 2011 at 06:39:12 PM EST
[ Parent ]

Re: Financing European energy infrastructure (4.00 / 3)

Both wind and hydro are price takers in a market system, however while wind is a volatile power source ~ "use it or lose it", hydro is a dispatchable power source.

So while they are both price takers, hydro can choose when and where it takes the going price. Indeed, in a pure market setting, it ought to take the prospective future prices that it may be able to take into account when it decides whether to generate and if so how much to generate.

In an small country open economy context, where there is a broad export market that can take up surplus production, that means that on the same gross annual energy production, this ability to cherry pick strong price periods means that hydro is financially viable at a higher average price than wind is financially viable, and so that despite its high fixed cost component, it can survive on a higher cost basis than a volatile power source such as wind can.

The same logic applies, of course, its just that hte ability to cherry pick the prices to take means that the logic applies at a larger hydro capacity, and in many instances a country will run out of high quality dammed hydro sites to exploit before they run out of ability of the power grid to absorb hydro capacity without prices dropping below the rates that will refund the capital cost.

Note that run-of-river hydro, unlike conventional dammed hydro, is a volatile rather than dispatchable power source, so it is in general in the exact same boat as wind.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Mar 28th, 2011 at 08:17:29 PM EST
[ Parent ]

typo ... (4.00 / 2)

... mangles the meaning, too ...

"this ability to cherry pick strong price periods means that hydro is financially viable at a higher average price than wind is financially viable, and so that despite its high fixed cost component, it can survive on a higher cost basis than a volatile power source such as wind can."

... this ability to cherry pick strong price periods means that hydro is financially viable at a higher average cost than wind is financially viable, and so that despite its high fixed cost component, it can survive on a higher cost basis than a volatile power source such as wind can.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Mar 28th, 2011 at 11:28:02 PM EST
[ Parent ]

From a purely technical point of view (4.00 / 2)

wind and water complement each other beautifully. I could spend all day watching Spanish production.

_{It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II}

by eurogreen on Tue Mar 29th, 2011 at 08:08:05 AM EST
[ Parent ]

hydro (4.00 / 2)

the answers above are all valid, but there is another point to note: even though Sweden does not have gas, its prices are still influenced by fossil fuel generation thanks to the NordPool, is the joint electricity market of Scandinavia, which includes also Danish coal-fired plants and gas-fired plants, as well as Norwegian hydro.

It's increasingly influenced by links to the main continental market (via Germany) so gas-prices get expressed via these exchanges.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Mar 29th, 2011 at 08:15:10 AM EST
[ Parent ]

Hence the small open economy ... (none / 1)

... assumption.

The capitalized cost per unit annual production capacity and the degree to which hydro has a premium revenue yield over the unweighted-average prices determines whether and for how that volatile market price path falls below break-even.

So there is a market penetration where hydro shoots itself in the foot under marginal market pricing, but its a higher market penetration, and in the small open economy assumption, its market penetration of the broader regional market.

A closed economy would have a lower threshold before its necessary to adjust the marginal pricing policy to gain the full benefit of hydro potential, though as a closed economy it may also have more freedom to impose a pricing policy tailored to its circumstance.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Mar 29th, 2011 at 01:23:04 PM EST
[ Parent ]

Re: hydro (4.00 / 4)

The funny thing in recent years, is that when power prices are high down on the continent, power lines work well and the price up here is pushed to the continental level. However, when prices for once are low down in Germany, the power links usually suffer mysterious breakdowns, or nuclear reactors suffer unexpected extended maintenance breaks, and so on. This has resulted in Swedish average power prices (in the completely non-transparent Nord Pool power exhange) actually being higher than those in Germany, in spite of radically lower production costs!

Why is this? Well, the power market in Sweden is an oligopoly controlled by Eon, Fortum and Vattenfall, who jointly own the nuclear stations. Vattenfall is wholly owned by the state and delivers fat annual dividends to the state coffers, and the higher the price of power, the more revenue electricity taxes bring in. No one, not power companies or the government, except consumers have an incentive in the market not being manipulated. And consumers have no pricing power what so ever.

Just sayin'.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 29th, 2011 at 02:29:48 PM EST
[ Parent ]

A high energy price is, I'm guessing, fundamental (none / 0)

to Sweden's energy strategy, and no doubt necessary to the zero-carbon plan.

If electricity prices were lower, reflecting true costs, that would not give such a strong push to conservation, urban heating etc. People might even use electric heaters.

_{It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II}

by eurogreen on Wed Mar 30th, 2011 at 05:07:18 AM EST
[ Parent ]

Re: A high energy price is, I'm guessing, fundame (none / 1)

The high prices actually have nothing to do with any environmental concerns, and everything to do with the deregulation of the power market and lining the pockets of corporate fat cats, including the over-payed exectuives at state-owned Vattenfall. The chairman of the board was fired last week by the government due to corruption over corporate compensation.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Mar 30th, 2011 at 05:23:28 AM EST
[ Parent ]

Let me reformulate that... (none / 0)

If they were playing the game and letting letting the market operate, electricity prices would sometimes be lower, or in other words, prices would fluctuate more.

Would this not be problematic for the zero-carbon plan?

_{It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II}

by eurogreen on Wed Mar 30th, 2011 at 12:39:33 PM EST
[ Parent ]

Re: Let me reformulate that... (4.00 / 3)

Not really, Swedish electricity is almost zero-carbon as it is. If anything keeping the electricity price elevated makes it harder to get electricity to replace oil in traffic.

Note also that Vattenfall uses part of the profits to expand buy buying coal and nuclear on the continent and stripmining pictoresque German villages for low grade coal. So while high prices could be part of a green strategy, it is not so here. It is just part of Vattenfall's strategy for empire building.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Mar 30th, 2011 at 12:44:22 PM EST
[ Parent ]

Re: Let me reformulate that... (none / 0)

This one of those things that piss me off the most. So much that I wrote a debate article for the local paper last fall - and got it published!

It's in Swedish, but at least you can read it. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Mar 30th, 2011 at 12:52:09 PM EST
[ Parent ]

Re: Let me reformulate that... (none / 0)

Good proposals for regulation. Did you get any reactions?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Mar 30th, 2011 at 02:42:20 PM EST
[ Parent ]

Re: Let me reformulate that... (none / 0)

Lots of positive e-mails from readers to the newspaper, but no replying article arguing against my proposals.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Mar 30th, 2011 at 03:05:58 PM EST
[ Parent ]

Re: Let me reformulate that... (4.00 / 2)

A friend of mine who is an active social democrat wrote a proposition to their regional annual meeting which was more or less verbatim based on this article. It was shot down for being too far to the left, and probably contrary to a number of EU rules.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Mar 30th, 2011 at 03:09:16 PM EST
[ Parent ]

Re: Let me reformulate that... (none / 1)

Far to left of the Socialdemocrats? You commie :)

But that is a good result from an article.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Mar 31st, 2011 at 12:29:42 PM EST
[ Parent ]

Re: hydro (none / 0)

This was what I was looking for, though my question was vague and all answers are appreciated.

So if I understand right, building wind in Sweden should lower electricity prices as Danish and German gas gets replaced?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Tue Mar 29th, 2011 at 04:03:04 PM EST
[ Parent ]

Re: hydro (none / 0)

If everything works the way it's supposed to, yes.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 29th, 2011 at 04:18:39 PM EST
[ Parent ]

Re: hydro (none / 0)

But I have a feeling that the more wind we build, the more "problems" will happen at our nukes and in the power lines, so the need for German/Danish gas/coal plants will never go away. If that happened, power prices would fall which would erode the profits of the power companies, not to mention the power tax revenues of the state. And we can't have that, can we?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 29th, 2011 at 04:21:23 PM EST
[ Parent ]

Re: hydro (none / 0)

Unfortunately, that seems like the likely scenario. Vattenfall has a long history of running its own policies, going back at least to the 1930ies when they prevented Sydkraft (then owned by southern Swedish city councils, now part of Eon) from establishing itself as a parallell national power company.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Tue Mar 29th, 2011 at 05:02:52 PM EST
[ Parent ]

Re: hydro (none / 0)

The German gas plants are price makers whether Sweden is buying from or selling into that market, so as long as the Germans continue to need the German gas plants.

One thing to be noted in Jerome's "wind killed by volatile gas prices" is that if a substantial share of windfall gains by wind turbines in a are channeled into more construction of wind turbines, then those new wind turbines will have even bigger windfall gains during upswing periods, financing more construction.

This would be a construction boom and bust with gas prices, but one could envision the windfall-financed turbines as paying a revenue share back to the windfall providing turbines, rather than financing forward, when the price drops below the long term finance cost of the windfall providing turbines.

So the financed turbines "save", eg, 50% of their windfall gains in more wind turbine capacity. If they have "seeded" an additional 10% capacity when the downswing hits, they are now selling from 110% of the capacity on the same fixed cost, so the effective fixed cost is 9% lower. If they have "seeded" an additional 20% capacity, they are now selling from 120% of the capacity on the same fixed cost, so the effective fixed cost is 17% lower.

Indeed, a region or major municipality that was in a position to publicly fund a "seed farm" on a revenue share rather than fixed annual obligation basis could have an even firmer footing, since the "seed farm" could be set to be bankruptcy proof with 100% net revenue share at or below the target capital cost level and 50% net revenue share to the public owner and 50% net revenue share to seeding new capacity on the increment above the target capital cost level.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 30th, 2011 at 01:07:44 AM EST
[ Parent ]

Re: hydro (4.00 / 2)

This is more or less equivalent to accelerated amortisation of existing wind farms (for the record, the latter seems more sensible, since it avoids boom-and-bust cycles in the construction industry). The problem with that is that it depends on the timing of the gas troughs. It works well when you have time to aggressively amortise your loans before the gas slump hits. But if your new construction comes online during a slump, you go tits-up real quick.

Given that it takes at least two years from the time you start committing serious money to a wind farm and until it goes online, this means that you have to be able to predict gas prices 2-4 years into the future. If you can do that, you can make better money playing liar's poker in the futures market.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 30th, 2011 at 01:47:44 AM EST
[ Parent ]

Re: hydro (none / 0)

The point of the futures market is that if you're in the wind business it shouldn't matter to you what the price of gas is since you can hedge it. In other words, at 2-4 years ahead you can lock in a price for gas if you need to.

Also, it doesn't matter what your view of gas prices is, since the only price you can lock is the futures price.

At least that's the theory, and I wouldn't be surprised if it didn't work in practice. I'd appreciate hearing from Jerome about how it actually works in practice.

So, in what may be my last act of "advising", I'll advise you to cut the jargon. -- My old PhD advisor, to me, 26/2/11

by Migeru (migeru at eurotrib dot com) on Wed Mar 30th, 2011 at 02:36:47 AM EST
[ Parent ]

well (4.00 / 4)

it takes more something like 6-12 months onshore (and yes, probably 2 years offshore) to go from financing to operations.

But at financing, you need to have entered into your power purchase agreements, in order to lock in the revenue you need to justify the funding (if you are not in a FIT regime), so you - or rather the buyer - have made at that point whatever bet you wanted to make on power/gas prices.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Mar 30th, 2011 at 06:45:53 AM EST
[ Parent ]

Re: hydro (none / 0)

A substantial difference with accelerated amortisation with windfall gains is that accelerated amortisation does not roll out more wind power capacity, and so does not have the same positive impact on Sweden's net exports.

It avoids the boom and bust in the building cycle by avoiding the boom part. That's not the part we want to avoid. And since a substantial share of the boom and bust falls to German capital goods industry.

To the extent that we can shelter windpower from under predatory state institutions with a feed-in tariff, that's a superior option, but if we cannot get windpower out from under predatory state institutions, better to structure things so that there is a boom while busts can be ridden out without bankruptcy.

In terms of the "seed farm" wind turbines, structured as described they survive through a bust and reproduce when experiencing windfall gains. And every windfall gain financed turbine only needs to cover minimal operating and maintenance costs.

Once the prorated "seed farm" capital costs over the output of the "seed farm" and "seeded farm" are below the capital costs plus lowest fuel cost of gas turbines, the whole complex becomes always-reproducing, and the boom and bust is about the rate of reproduction.

All assuming, of course, a relatively small open economy with cross transmission into a larger regional demand sink.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 30th, 2011 at 02:50:43 AM EST
[ Parent ]

Re: hydro (none / 0)

A substantial difference with accelerated amortisation with windfall gains is that accelerated amortisation does not roll out more wind power capacity, and so does not have the same positive impact on Sweden's net exports.

I think you're tacitly assuming that the "seeded" farms have a lower required rate of return on equity than the "seeding" farms. After all, if the "seeded" farms make sense on a seeding basis with constant cost of equity, then they should also make sense on an accelerated amortisation basis, assuming that you have available, equally priced, equity from other sources. As long as wind is a small(ish) fraction of total real capital investment, the latter does not strike me as an unduly unreasonable assumption.

And since a substantial share of the boom and bust falls to German capital goods industry.

Yes, if you allow a boom-and-bust cycle, you'll keep production in Germany. But if you have stable onshore demand, you'll get onshore industry (the economics of transporting windmills relative to transporting the raw materials say that the manufacturing will relocate to the vicinity of the demand). That's why you want to avoid a boom-and-bust cycle in the first place.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 30th, 2011 at 03:05:47 AM EST
[ Parent ]

I'm assuming that the return on ... (none / 0)

... equity from the seeded farms is the realized flow of revenue from the sale of the power they generate over operating costs, since the seeding farms own a pure equity stake in the seeded farms and in all farms they seed in turn during surplus periods.

Accelerating amortization of finance capital funded windpower under predatory state market arrangements can reduce exposure to the being bankrupted by a downswing ~ and downswings are to expected, since the ride down from Peak Oil will be a bumpy one ~ but cannot eliminate insolvency risk. By contrast, a pure equity holding with no fixed obligation has no insolvency risk if the operating costs themselves are below the price maker's capital cost.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 30th, 2011 at 05:15:40 PM EST
[ Parent ]

Financing European energy infrastructure | 49 comments (49 topical, 0 editorial, 0 hidden)

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