Into the unknown: evaluating drivers of low- carbon investment in a - PowerPoint PPT Presentation

Into the unknown: evaluating drivers of low- carbon investment in a subsidy free world 17 October 2018 Cornwall insight HELPING YOU MAKE SENSE OF THE HELPING YOU MAKE SENSE OF THE www.cornwall-insight.com ENERGY AND WATER SECTORS ENERGY AND WATER SECTORS

Setting the scene 17 October 2018 Gareth Miller HELPING YOU MAKE SENSE OF THE HELPING YOU MAKE SENSE OF THE www.cornwall-insight.com ENERGY AND WATER SECTORS ENERGY AND WATER SECTORS

Who we are Pre-eminent providers of market, regulatory, and RESEARCH policy research, analysis, training and consulting ANALYSIS Independent experts CONSULTING across borders and markets TRAINING Trusted by customers for our unrivalled insight www.cornwall-insight.com 3

Our customers www.cornwall-insight.com 4

Cornwall Insight’s journey 2005 2010 2012 2016 2017 Secured Full service Company Unrivalled Growing investment: offering: founded: coverage customer - Business - Subscriptions - Nigel - Regulation base: Growth Cornwall - Financial - Policy - 300+ Fund & models - Market Opens Irish - Consulting Intelligence business - Training www.cornwall-insight.com 5

Your journey… 2014 2015 2016 2017 New RO bands and CfD AR2 CPS frozen No subsidy accounting excludes solar & Biomass Onshore wind for onshore controls for and Solar<5MW onshore wind & conversion RO wind Solar low carbon grandfathering RO closure new CfD >5MW RO “freeze” CPS freeze auctions for diluted closure LECs extended less-established removed only www.cornwall-insight.com 6

What is subsidy free? • It is clear that as we stand many renewable technologies are being asked to invest on a subsidy free model • And to meet our targets the will need to succeed • But what does subsidy free mean? o Is it no government support or consumer levy funding at any time for a project? o Or, is it a neutral cost position for the government or consumer over the whole life of a project? • We would argue for the latter, even if some in government , and particularly treasury interpret it as the former in way cost controls designed • Later we unpack a powerful model to split the difference and deliver scale deployment • But the question remains, without new government policy now, can subsidy free actually be delivered? www.cornwall-insight.com

Investment is falling Renewable energy investment, UK 2005-18 ($bn) From hereon likely to Annual investment lower than anytime be lumpy and driven by this decade with commissioning dates of recent spikes driven large offshore projects, by “gold-rush” of and lower volumes of subsidy-free subsidy closures www.cornwall-insight.com 8

Shaky investor attraction to the UK Steady investment confidence under a stable regulatory The repeated incursions environment – RO, ssFiTs, EMR against renewable support white paper and prospect of schemes drives lower investor change creating wobbles attractiveness Attractiveness bounces back – thanks to talking up the investment potential in subsidy-free. But is it real! Source: Renewable Energy Country Attractiveness Index, EY www.cornwall-insight.com 9

Yet we must build more… Waterfall of capacity 2018-2050 160 Source: National Grid FES, Two Degrees, Cornwall Insight www.cornwall-insight.com 1

New build pipeline not enough Current renewables planning pipeline 18.0 16.1 16.0 14.0 12.0 10.0 GWs 8.0 7.2 6.0 4.0 2.7 2.1 2.0 0.8 0.0 Capacity in planning Technology Fuelled Solar Photovoltaics Tidal Barrage and Tidal Stream Wind Offshore Wind Onshore Source: Renewable Energy Planning Database October 2018 www.cornwall-insight.com 11

Existing projects will lose support Roll-off of subsidy for current fleet 60 Over 45GW of existing without Peak subsidy in 2026 subsidy by 2040 50 40 GW 30 20 10 0 RO Subsidised FIT Subsidised CFD Subsidised CFD Forecast New Subsidy RO Subsidy Ended FIT Subsidy Ended CFD Subsidy Ended Total Subisidies Total Subsidy Ended Source: Cornwall Insight, 2018 www.cornwall-insight.com 12

And will need to be replaced… Projects within their useful 25 year asset life 2002-2039 60 Over 53GWs of Peak operating capacity renewable assets within useful asset-life 50 may need to be rebuilt/repowered 40 to recover the peak GW 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 Onshore wind Offshore wind Solar PV Nuclear Biomass Hydro EfW ACT Wave and tidal Micro CHP Source: Cornwall Insight, 2018 www.cornwall-insight.com 13

How will we meet the challenge?  Today we will try to answer that question! Time Topic Speaker 14:10 Wholesale prices: trends, cannibalisation Mike Mahoney and impacts on project performance 14:40 PPA market and investment underwriting in Ben Hall a subsidy free world 15:10 Alternative sources of return – upside and Tom Palmer downside 15:40 Break 16:00 Small is beautiful – workable options for James Brabben the post FiT world 16:25 The case for floor price CfDs Gareth Miller 16:50 Q&A Ben Hall www.cornwall-insight.com 14

Sli.do Do you think it is possible to meet our 2050 targets on the current subsidy-free status quo policy? HELPING YOU MAKE SENSE OF THE HELPING YOU MAKE SENSE OF THE www.cornwall-insight.com ENERGY AND WATER SECTORS ENERGY AND WATER SECTORS

Wholesale prices: trends, cannibalisation & impacts on project performance 17 October 2018 Mike Mahoney HELPING YOU MAKE SENSE OF THE HELPING YOU MAKE SENSE OF THE www.cornwall-insight.com ENERGY AND WATER SECTORS ENERGY AND WATER SECTORS

Price cannibalisation “The depressive influence “During windy hours…the excess on the wholesale electricity supply of renewable based price at times of high output electricity depresses the power from intermittent, weather- price, this is precisely when driven generation such as renewables generate the most solar, onshore and offshore energy, disproportionately wind” earning low prices” Cornwall Insight Lion Hearth “The more the wind blows and the sun shines and demand is saturated, the greater decline in prices on wholesale markets.” Foresight DK www.cornwall-insight.com 17

Subsidy adjusted merit order 100 50 0 Emissions SRMC - £/MWh Gas Coal -50 Biomass ROC CFD -100 Short Run Marginal Cost -150 -200 0 10 20 30 40 50 60 70 80 90 Cumulative nameplate capacity - GW Source: Cornwall Insight www.cornwall-insight.com 18

Price cannibalisation in action Day-ahead auction prices 80.00 70.00 60.00 50.00 £ MWh 40.00 30.00 11-Jun, base £53.55MWh, Wind 12% 12-Jun base £53.33MWh, Wind 11% 20.00 13-Jun, base £53.24MWh, Wind 21% 10.00 14-Jun, base £47.12MWh, Wind 42% 0.00 11-Jun 12-Jun 13-Jun 14-Jun Source: N2EX, Cornwall Insight www.cornwall-insight.com 19

Value factor - variation to base load Value factor of wind power 2018 to date Day-ahead auction 65.00 prices for 2018 show strong correlation with wind power production 60.00 55.00 Value factor Cannibalisation effect markedly greater with wind above 30% of the mix 50.00 45.00 Short term conditions such as extreme cold weather can create 40.00 premium for wind 0 5 10 15 20 25 30 35 40 45 power Percentage market share of generation Source: N2EX Cornwall Insight www.cornwall-insight.com 20

Distribution of wind penetration Number of days renewable generation makes up X% demand 25 2019: Wind power at 20% or more on half of all days 20 2025: Wind power at 33% or 15 more on half of all days Days 2019 2050: Wind power at 54% 2025 10 2050 or more on half of all days 5 0 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% Percentage of generation mix Source: Cornwall Insight www.cornwall-insight.com 21

Future cannibalisation impact Baseload price capture 100% 110% 60% 70% 80% 90% 2019 2020 2021 2022 2023 Average 2024 2025 Solar 2026 2027 2028 2029 2030 P05/95 2031 2032 2033 2034 2035 2036 2037 2038 Baseload price capture 100% 110% 60% 70% 80% 90% 2019 2020 2021 2022 2023 Average 2024 2025 Wind 2026 2027 2028 www.cornwall-insight.com 2029 2030 P05/95 2031 2032 2033 2034 2035 2036 2037 2038 22

Wholesale markets Forward curves - baseload power • Rising since Prices 2016 80 • Pace rising quickened steadily spring 2018 70 60 50 • Extreme cold depleted gas Gas £MWh stocks 40 supply • Wind ‘drought’ issues • Nuclear 30 outages 20 10 • European prices chasing Gas Asia 0 demand • Coal back in in Asia merit • Carbon Change Curve 30/03 Curve 28/09 Source: ICE, Cornwall Insight www.cornwall-insight.com 23

Is there a role for carbon? EU ETS Carbon v Brent Crude Carbon pricing (nominal) price index 70 3.50 60 3.00 50 2.50 40 2.00 30 1.50 20 1.00 10 0.50 0 Apr-18 Apr-20 Apr-22 Apr-24 Apr-26 Apr-28 Apr-30 Apr-32 Apr-34 Apr-36 Apr-38 Apr-40 Apr-42 Apr-44 Apr-46 Apr-48 Apr-50 0.00 2/1/18 2/2/18 2/3/18 2/4/18 2/5/18 2/6/18 2/7/18 2/8/18 2/9/18 2/10/18 Brent Crude EU ETS €/t EUETS £/t CPS £/t Carbon Source: Cornwall Insight www.cornwall-insight.com 24