Once a wind farm developer has calculated the annual gross energy output, a tricky operation comes along: to correlate the energy output to a gross income.
In one of my previous articles I described how we can estimate the gross energy output of a wind farm according to the site assessment and wind speed figures.
I calculated that the annual gross energy output of a 10 MW wind farm in a location with an average wind speed of 7 m/s, taking into account all the possible losses, is about 24,500 MWh.
OK, all good. Now, what do we do with this energy? Since I don't think we are going to connect a 24,500 MWh/yr power plant to our home electric circuit to power the kettle and the microwave, I would more sensibly say that we want to sell this electric energy to someone else (if we didn't and we really thought we can use this power for ourselves, we had better invest our own money since no banks would spare a pence for us, unless this power is effectively re-invested in something worth it).
Here is where the Renewable Obligation scheme makes its entrance.
Over recent years, European governments have tried to figure out how they could encourage energy suppliers to buy electricity from renewable generators and at the same time give financial support to companies willing to get into the renewable energy market.
Many different schemes have been deployed in terms of direct grants, tax incentives for investments in renewable energy, competitive auctions of contracts, feed-in tariffs, market based schemes and many others. But in the end, the latter two seemed to be the best positioned for a successful outcome.
Feed-in tariffs and market based schemes brought with them ideological battles.
Feed-in tariffs have been the approach mostly taken in the three countries with the biggest contributions to the national grid from wind energy across Europe: Denmark, Germany and Spain.
According to the European Network of Transmission System Operators for Electricity, the capacity penetration of wind power (installed wind power capacity - peak load ratio) at the beginning of 2007 in Denmark, Germany and Spain was 66, 28 and 27 respectively.
Under the feed-in tariff scheme, there is a fixed schedule of payment to the electricity generators in money for KWh of electricity generated from renewable sources. In Germany and Spain this period is of 20 years.
On the other hand, the idea behind so-called "market-based" schemes is to create a protected market for renewable electricity. Renewable certificates are traded in a competitive market: energy suppliers buy electricity from renewable electricity generators which in turn sell a number of certificates to the suppliers. Renewable certificates are originally issued by the government and released to certified green generators.
According to Lauber (2004), there is a strong ideological battle behind the two different approaches. The proponents of the market based model come from a neo-liberal background and they usually have an aversion to state intervention in the market.
Governments with more "welfarist" approach, like Germany, Denmark and France, have usually adopted a feed-in tariff model, whereas government with a more neo-liberal attitude, like the UK and the US, have gone for a market driven solution.
The European Commission in 1999 expressed support for competitive models on the basis that they would be more cost-effective than feed-in tariffs.
In Britain, the first renewable program was called Non Fossil Fuel Obligation (NFFO). The system was designed to promote competition for contracts to supply renewable electricity. Developers bid electricity prices for which they would be paid for output from their proposed projects. The lowest bids were given contracts. According to Mitchell (2000) this scheme didn't have great success because developers seemed to bid for contracts to gain market share rather than establish economically viable projects.
After this first experiment, the Renewable Obligation was introduced in 2002 by the British government to replace theNFFO. RO encourages all electricity suppliers to meet an escalating target for supplying a proportion of their power from renewable sources. The target started at 3 per cent and rises incrementally to 10.4 per cent by 2010 and 15 per cent by 2015. It is likely to be extended to 20 per cent by 2020. Despite many criticisms, the scheme is currently in place and it is applied for power plant with a power capacity > 5 MW.
For renewable generators with a capacity < 5 MW, a feed-in tariff scheme is adopted.
So, how much money a wind farm can generate under this scheme? The answer is: it depends.
Since we are in a free market, the price is not fixed but it can be negotiated between the seller and the buyer, i.e. the electricity generator and the supplier. But can it really be negotiated? Or maybe, what really matters is how big you are in the market and how much power you have to decide the price?
NFPAS is a British company that organises online auctions of ROCs and renewable electricity on the web. According to them, the average price of electricity sold through the auction held in January 2010 was 8.24p/kWh for electricity to be supplied during the "summer" period 1st April 2010 to 30th September 2010. The average price was for electricity together with Climate Change Levy Exemption Certificates (LECs), Renewable Obligation Certificates (ROCs) and Renewable Energy Guarantees of Origin (REGOs). On the NFPAS web site there is a table showing the average electricity prices over the last years.
Though the selling price has dropped considerably since the end of 2008 (as it has happened to the energy prices in general), 82.4 GBP/MWh is still a good price. The bad news is that this is a price for a 6-12 month contract, this is why it is so good. That means every 6 months energy generators have to look for another buyer, perhaps by auctioning again their electricity and their ROCs. This way of trading the ROCs is not usually suitable for developers that want to borrow money from banks. Banks generally want the guarantee of a long term contract, and wind power developers are currently being offered around £50-£60 per MWh for a 15 year contract. I will address this problem quite soon in some other articles, but briefly a viable way of sorting this out is to introduce equity and possibly grants into the financial mix of the project. In other words, the more you are not dependent on bank loans, the more you can afford shorter contracts hence the higher the price of your electricity.
But how much are ROCs really worth? According to Ofgem, the Office of the Gas and Electricity Markets, over the period 2010-11, the buy-out price will be £36.99 perRenewables Obligation Certificate (ROC). The buy-out price sets the rate which suppliers need to pay if they do not present sufficient numbers of Renewables Obligation Certificates (ROCs ) to meet their obligations under the scheme, which for 2010 is 10.4% of their total sold electricity. Up until March 2009, eachROC represented one megawatt hour of electricity; from April 2009 onwards the value of the ROC has been "banded" dependent on the generation technology type. The renewable generator can sell ROCs either with or separately from the electricity generated.
Of course, Ofgem sets the penalty buy-out price of ROCs, they can't set the price at which electricity generators sell their ROCs. This is set by free market rules.
A question now arises. Why should electricity suppliers be willing to buy ROCs from renewable generators at a higher price when they can simply pay the £36.99 penalty?
The renewable targets are likely to be under-fulfilled for various reasons, including the fact that electricity suppliers have an interest in ensuring that the RO is not over-subscribed leading to a crash in the market value of ROCs (thus devaluing their own renewable energy investments, in fact some big electricity suppliers have invested money in renewable power plants). This means that, as long as theRO remains in its present form, and the RO targets are not met (it seems a paradox, but it is true!), then the ROCs and their recycled value will be worth more than £36.99 per MWh. When you take into account other incentives like the spot market price of electricity (around £20 per MWh) and the fact that renewable electricity schemes do not have to pay the climate change levy (£4.3/MWh), over £50-£60 per MWh is available, in theory, for renewable electricity generators. It looks like a crazy mechanism, but this is it.
Back to my calculation now. How much money? 24,500 MWh/yr x 50 GBP/MWh = 1,225,000 GBP/yr or, if we can afford to gamble at the auction, 24,500 MWh/yr x 80 GBP/MWh = 1,960,000 GBP/yr.
This looks a big amount of money, but we need to consider that the investments needed to build the wind farm are a lot of money as well. Since we can't fairly compare a lot with a lot without the exact figures, in the next articles I will dig into the dreaded world of investments and cash flow.
Do you want to know what it takes to build up a wind farm from the ground up? Stay tuned, I am going to find out.
