![]() This new world requires a new outlook, new analytical tools and new ways of doing things.“The idea that companies should just be left to do as they please because they are, after all, the geese that lay the golden eggs of economic growth. Project owners will need to re-examine their business models in a merchant world. The desire for politicians to insulate communities from all the implications of a subsidy-free world at does not negate the business challenge of merchant pricing. To mitigate supply and grid risk, governments will play a key role in the development of interconnectors, smart networks, and storage technologies. As that more contemporary economist, Nobel laureate Joseph Stiglitz said, ‘The reason why the invisible hand often seems invisible, it’s often not there’. Governments will not let go of all their power for such a vital market. There is a need to ‘keep the lights on’ for the economic, physical, and political wellbeing of a nation. To an extent, it is disingenuous to refer to the invisible hand in markets as regulated as electricity generation. Of course, the wonders of the invisible hand mean that if all owners of generation assets can generate more when supply (wind) is low, any spike in prices will be short-lived. Not only will they be able to generate more total revenue, but by ramping up output when other supply is low, they produce relatively more when merchant prices are high. ![]() In markets where wind is a significant share of total generation, increasing generation has a potential ‘double whammy’ for owners. Investment giant Macquarie links with Scottish start-up for North Sea wind bid This upside does not diminish the perceived innate riskiness of a project but could increase the possible returns. It is possible that subsidy-free projects could generate more revenue that those with a fixed price for their electricity. The electrification of transport, the decommissioning of coal generation and the general shift away from fossil fuels, all present upside price risk for electricity prices. Of course, as any trader knows, business risk has upside as well as downside. Project owners will have to accept lower margins or decide whether they can achieve further cost reductions to compensate for any rise in cost of capital. The addition of revenue risk and variability is not something usually welcomed by investors.īig Oil and deep water to drive offshore wind to become $1.4trn market by 2050Įven with cost of capital at historically low levels, investors look at relative risk and returns when making decisions and if this risk is perceived to increase the overall risk associated with offshore wind farm projects, investors will demand higher interest returns. Revenue received becomes much more volatile. However, to remain viable when reliant on power market prices needs a significant shift in project owners' business models. The embracing of a more laissez-fairer approach is also likely to appeal to any renewable energy sceptics. Moving to a merchant market framework is likely to prove popular with politicians. Without these, owners are exposed to what the doyen of free market economics, Adam Smith, called the ‘invisible hand’ – the unseen force that ensures supply and demand match in an optimal way. Government subsidy or long-term power purchase agreements (PPA) provide project owners with a stable price over most of a project’s lifetime. ![]() ![]() Indeed, the Dutch government have already launched a zero-subsidy auction for the right to develop the 700MW Hollandse Kust Noord offshore wind farm. Greatly reduced offshore wind costs have created the possibility of subsidy-free project development.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |