Economic Analysis on the Profitability of Wind in Portugal between ...

How is Portugal in respect to other countries?Share of energy fromrenewable in grossfinal consumption in2005* (PrimaryEnergy)Target in2020 (RE inPrimaryEnergy)*RenewableElectricitytargets**Windtargets**Denmark 17% 30% 52% 30%Germany 5.8% 18% 38.6% 48%Spain 8.7% 20% 40% 21%Portugal 20.5% 31% 55% 23%UK 1.3% 15% 30% 20%*Source: DIRECTIVE 2009/28/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 April 2009 on the promotion of the use of energyfrom renewable sources. Target for 2020 in gross final energy consumption includes electricity, transport and heating and cooling**Source: Annual Renewable Report 2010, EirGrid Group -Ireland3

Why is the Portuguese case interesting?1. Fast and impressive diffusion2. Push-pull policy mechanisma. Incentive: FITb. Barrier: connection right3. Policy mechanism has overcompensate windproducers4

1. Fast and impressive diffusionGross Electricity Generation and Imports (GWh)59,00049,00039,00029,00019,0009,000-1,000199219931994199519961997199819992000Fossil fuel generation was reduced from 83% of electricitydemand in 1992 to 50% in 20102001Year200220032004200520062007200820092010ElectricityImportsWind,geothermal andPV generationHydroGenerationFossil fuel-basedGenerationSource: datafrom DGEG,20115

Wind diffusion at National Level2001: less than 1% of electricitycoming from wind2010: 9,000 GWh of windelectricity equal to 17% of totalgeneration2020 goal: 14,500 GWh (23% oftotal generation)6Source: based on Inegi (Institute of Mechanical Engineering, PortoUniversity)

Feed-in tariffs• FITs generally include avoided costs, and in somecases, also accounts for social and environmentalbenefits that arise from the deployment ofrenewable energy sources versus other electricitygeneration alternatives• The implementation, design and level of FITsvaries widely from country to country and overtime: in some countries it’s a value that isupdated over time. Portugal selected a morecomplex system.10

How this two-way mechanism hastranslated in location of wind parks?2002 2010Regions whereconnection rightswere granted12Wind capacity installed at municipality level in PortugalFigure constructed using data from Inegi, APREN, e2p and IGEO

Why is the Portuguese case interesting?1. Fast and impressive diffusion2. Push-pull policy mechanisma. Incentive: FITb. Barrier: connection right3. Policy mechanism has overcompensate windproducers13

Changing FIT paid to existent windparks?Tremendous positive impact of the policybut…… At what cost?the total funding provided by thegovernment was approximately $4.1 billionsup to 2010 ($2005 values).Overcompensation? How much in profits?14

Who are the Wind IPPs?Wind developers in Portugal, by December 2010Wind power developers inPortugalOutrosIberwindEDP renováveis PortugalENEOP 2GenergEEVMElectrabelEDF en PortugalTecneiraAccionaEnersis0% 5% 10% 15% 20%Share in total cumulative capacity by December 2010All groups except ‘others’ are large companies with operations overthe world and activities in water, waste management and gasproduction, among others.15

Wind IPPs ProfitsNet present valueanalysis per MWhEstimate NPV for scenarios anddifferent pAnnualized revenue per MWh = FIT’Annualized costs per MWh = LCOEsEstimate p and FIT’ needed toachieve NPV=0Easy comparison betweenLCOEs and revenue receivedInstead of return to capital16

Project scheduleRevenueYear 0CostsInvestment made on year 0. Oneyear of construction. Connectionin January 1 st year 1.Electricity generation starts inyear 1.FIT period = TFITendsLifetime = payback period of capital costs = nScenariosProductionendsScenarioFIT ends in yearBAUScenario 2Min {n, max(T up to Dec 2019, 15 years)}FIT until Dec 2019 (if lifetime permits) or15 years of operationMax {After 12 years of operation,December 2012}Scenario 3 FIT ends in December 2012 or 2014,regardless connection year.**1992 projects will have 21 years of lifetime because they are currently in operationand receiving the FIT17

ConnectionyearEnd lifetime(20 years)Last yearwith FIT1992 2012 20121993 2012 20121997 2016 2016......2000 2019 20192001 2020 20192002 2021 20192003 2022 20192004 2023 20192005 2024 20192006 2025 2020.........2009 2028 20232010 2029 2024...BAUFIT for all lifetimeFIT for >15 yearsFIT for 15 yearsYears after FIT: still an afterprice guaranteeLifetime of 20 yearsCapacity installed:73 MW (2%*)Capacity installed:428 MW (11%*)Capacity installed:3400 MW (87%*)* % of 2010 cumulativeinstalled capacity18

Scenario 2 (after 12 years of production)ConnectionyearEnd lifetime(20 years)Last yearwith FIT1992 2012 20121993 2012 20121997 2016 2012......2000 2019 20122001 2020 20122002 2021 20132003 2022 20142004 2023 20152005 2024 20162006 2025 2017.........2009 2028 20202010 2029 2021...FIT for all lifetimeFIT for >12 yearsFIT for 12 yearsYears after FIT: still an afterprice guaranteeLifetime of 20 yearsCapacity installed:12 MW (0.3%*)Capacity installed:65 MW (1.7%*)Capacity installed:3865 MW (98%*)* % of 2010 cumulativeinstalled capacity19

Scenario 3 (FIT ends December 2012)ConnectionyearEnd lifetime(20 years)Last yearwith FIT1992 2012 20121993 2012 20121997 2016 2012......2000 2019 20122001 2020 20122002 2021 20122003 2022 20122004 2023 20122005 2024 20122006 2025 2012.........2009 2028 20122010 2029 2012...FIT for all lifetimeFIT for > 15 yearsFIT for 12-15 yearsFIT for < 12 yearsYears after FIT: still an afterprice guaranteeLifetime of 20 yearsCapacity installed:12 MW (0.3%*)Capacity installed:65 MW (1.7%*)Capacity installed:3865 MW (98%*)* % of 2010 cumulativeinstalled capacity20

Wind investment costs in the EU, Denmark andPortugalWind Investment Costs ($2005/MW)Thousands200018001600140012001000800600400IEA lowEU averageDKDecreasing trendDenmark andPortugal costs align200 IEA high01985 1990 1995 2000 2005 2010 2015YearsSource: IEA, DEA, Zervos21

To estimate Portugal wind generation costs:Danish investment costs 1992-2002• Assume the same evolution of costs for Portugal andDenmark over the same periodIt is possible that wind turbine costs differ between both countries:Portugal wind development later than Denmark, and different FITBut similar increase: between 1992 and 2004 Denmark increased itswind capacity approximately by 2700 MW and Portugal by 1700 MW.This period is not the most wind intensive in terms of capacityadditions for both Portugal and DenmarkDanish and Portuguese costs look alike in the overlapping years(correlation of 0.94)22

Wind investment costs and capacity factorAddedMW210000172014153666101225500691440789544472Investment Costs ($2005/MW)$1,800,000$1,600,000$1,400,000$1,200,000$1,000,000$800,000$600,000$400,000$200,000$00.001990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012YearsInvestment Costs($2005/MW)Capacity factor0.300.250.200.150.100.05Capacity Factor– Wind capacity (MW) and generation (MWh) for 1992-2010. ERSE, Inegi– Annual average wind FIT paid in Portugal ($2005/MWh) for 1992-2010. ERSE– Wind investment costs in Denmark ($2005/MW) for 1992-2002 (DEA) and inPortugal for 2003-2010 (IEA)Inegi: Institute of Mechanical Engineeringand Industrial Management at Universityof PortoERSE: Regulatory Energy AgencyDEA: Danish Energy Agency23

Main results• BAU, with p=$0/MWh is feasible, except for 2010 projects(feasible with p=$30/MWh)– All projects can compete, starting year 16 or December 2019*• Scenario 2, with p=$30/MWh is feasible, except for 2008-2010projects.– Projects connected 1997-2007 can compete starting year 13*.• Scenario 3, with p=$30/MWh is feasible for 1997-2003 projects.– Projects connected in 1997-2003 can compete now*.• New Legislation: NPV of extra payments at least between $0-$16/MWh!24*Assuming market remains the same with the introduction of new players, i.e.the average price received by wind entrants will be p=$30/MWh

Results: TotalSpendingNational aggregatesThe same for allscenarios since theFIT assumed from2011 and onwards is$105/MWhNet FIT spending corresponds to after price $0/MWh (ifthe after price is the price received at market)25Because market prices are in average approx. $30,Scenario 3 is not an option. Scenario 2 is an alternative

Results: NPVand FIT’ forscenariosIf FIT ends after 12 years(Sc. 2) or now (Sc. 3)Still, scenario3 is an optionfor 1997-2003 projectsAnd scenario2 is NOT anoption forotherprojects26

Other cost estimates• LCOE estimates (10% discount rate, 0.17-0.25 capacity factor, 20 years,O&M $5/MWh, investment costs between $1,500/kW-$1,700/kW):– Projects connected between 1992-2010: $77/MWh-$123/MWh• IEA 2010 LCOE (10% discount rate, 0.21-0.41 capacity factor, 25 years,investment costs between $1900/kW - $3700/kW):– North America: $70/MWh - $140/MWh– Europe: $120/MWh-$240/MWh– Asia Pacific: $115/MWh• EIA for 2016 (0.34 capacity factor) for the U.S.:– $82/MWh -$115/MWh– Plant costs in 2011: at least $2400/kW, in 2010: $2000/kW• Irena 2011: $80/MWh-$120/MWh OECD Europe (capital cost of $1,500-2,500/kW, 10% discount rate)27

NPV varies by year of connection…$20.002010 projects need a 20-year (lifetime)FIT between $101 and $112 (NPV of 0-$5/MWh)$10.00NPV ($/MWh)$0.00-$10.00-$20.00-$30.00-$40.000 20 40 60 80 100 120 140Intercept:Minimum FIT paidover lifetime (coverLCOEs)FIT over lifetimeIncreasinginvestment costs19921993199720101998200020042007200828

Sensitivity <strong>Analysis</strong> for BAU scenario29Results are highly sensitive to discountrate. Financing mechanisms are key

New Legislation10 MW wind park revenue: 20,000 MWh/year $2.5 million/year payments: $6,000/MW year $60,000/year30

Very high dueto low extrainvestmentcosts!31NPV ($2005/MWh) of additional profits over 5 or 7 years, discounted to December 2012 –as the new legislation starts on early 2013PV in 2012, as payments to SEN start 2013. Assumptions: 2.5% payment to the Junta, $5/MWh O&M costs, 10%discount rate, 35% of 2010 investment costs incur in 2019 for all parks to extend their lifetimes for additional period.Old and new projects refer to those connected before and after DL33A/2005, respectively. Limits in PV refer to the FITlimits established in DL35/2013, equal to €74/MWh to €98/MWh

Policy implicationsUnder BAU scenario:Positive NPV (except 1992, 1993 and 2010) withp=$0/MWhLeave Decree/Law 33A/2005 in2020 all parks go and compete (2010projects need approx. $60/MWh)Instead: the government increased the FIT periodto ensure liquidity!NPV of extra payments at leastbetween $0-$16/MWh!Scenario 2: Shorten the FIT periodby three years and guaranteep=$60/MWh (2010 projects needapprox. $80/MWh)Expected NPV between $1/MWhand $9/MWh.32

• The government could have spent much less fundsand created the same incentive (positive NPVs)– Scenario 2 and 3 are alternatives (offering a$60/MWh) to the BAU scenario with savingsbetween $1 and $2 billion.• New projects: offer a 20-year FIT between$100/MWh and $110/MWh to guarantee NPV of$5/MWhThe FIT is supported by all consumers and is increasing thedeficit of the SEN. This is particularly important forsubsequent wind additions that lead to exports priced atless than $30/MWh33

Main results• BAU, with p=$0/MWh is feasible, except for 2010 projects(feasible with p=$30/MWh)– All projects can compete, starting year 16 or December 2019*• Scenario 2, with p=$30/MWh is feasible, except for 2008-2010projects.– Projects connected 1997-2007 can compete starting year 13*.• Scenario 3, with p=$30/MWh is feasible for 1997-2003 projects.– Projects connected in 1997-2003 can compete now*.• New Legislation: NPV of extra payments at least between $0-$16/MWh!34*Assuming market remains the same with the introduction of new players, i.e.the average price received by wind entrants will be p=$30/MWh

Acknowledgment and Funding• Advisors Inês and Marcelino for their support• Fundação para a ciência e tecnologia, FCT inPortugal• Center for Climate and Energy DecisionMaking, CEDM• Meetings in EDP and REN, Teresa Simões fromInegi, Gabriela Prata from CEEETA, PedroRoldão from ERSE, faculty and colleagues atEPP for their time and advice35

Thank youQuestions?36

2020 Portuguese goals• “31% of the gross final energy consumption, 60% of the electricity produced and10% of the energy consumption in the road transport sector will be derived fromrenewable sources in 2020;• To reduce Portugal’s energy dependence on external sources, based on theconsumption and importation of fossil fuels, to around 74% in 2020, by means ofincreasing use of endogenous energy resources (estimated reduction using a Brentreference of 80 USD/bbl);• To reduce the balance of energy imports by 25% (around € 2 billion) with theenergy produced from endogenous sources, making it possible to reduce importsby an estimated 60 million barrels of oil• To consolidate the industrial cluster associated with wind energy and to createnew clusters associated with new technologies in the renewable energy sector,ensuring a Gross Added Value of 3.8 billion Euros and creating 100,000 new jobs inaddition to the existing 35,000 jobs associated with the production of electricityfrom RES by 2020;• To promote sustainable development, creating the necessary conditions to meetthe commitments that Portugal has made with regard to reducing greenhousegases, by means of a greater use of RES and energy efficiency” NREAP, July 201037

Kyoto CO2 agreements• 2008-2012: reduce emissions to 8% below the1990 level (over-achieved: 11% reduction by2011)• Translated into 2020 national emissions goals(between reduction of 28% for Luxemburg andincrease of 27% for Portugal)• Targets are legally binding under EU law38

FIT scheme for top wind countries in the E.UCountries System TariffDenmark Premium above market price Commissioned in 2008-2013: Guaranteed bonus of 0.25DKK (approx. €ct 3) per kWh for 22,000 full load hoursplus 0,023 DKK (€ct 0,3) for covering the balancing costs.Different for plants financed by utilities.Portugal Tariff €ct 9 per kWh for 20 yearsSpain Both for 20 years €ct 8.1270 per kWhfrom the 21st year onwards: €ct 6.7921 per kWh (RD661/2007)GermanyFranceUKThe calculation of the tariff is based onthe expected costs. This aims toguarantee the cost-effective operation ofmost plants. Has digressionGuaranteed minimum payments, whichmay be increased by a premium thatdepends on total exports.An inflation-indexed payment rate table ispublished every year prior to 1 Februaryby the Gas and Electricity MarketsAuthority (art. 16 FTO 2012).€ct 4.87 – 8.93 per kWh (according to duration ofpayment) + repowering bonus of €ct 0.5 per kWh andplant service bonus of €ct 0.48 per kWh (§ 29 par 1-2; §30 EEG).Onshore: €ct 8.2 per kWh for all plants during the first 10years and then €ct 2.8 – 8.2 per kWh for the next fiveyears, depending on the overall time of operation andtime of operation per year (Arrêté du 17 novembre 2008)100kW - 500kW:0.1804500kW - 1.5MW: 0.0979>1.5MW: 0.041539Source: For Portugal: ERSE. For rest of countries, RES-legal at www.res-legal.de

Formula for FITs in PortugalFixedfactor(function ofcapacityinstalled)Variablefactor(function ofelectricityproduced)Environmentfactor(function ofelectricityproduced)MonthlypaymentZ-factor: REtechnology1. Transmission and distributionavoided costs2. Inflation adjustment40

Formula for FITs in Portugalthe monthly Factor payment on time of Fixedto the power production parcelproducer in monthVariableparcelEnvironmental RES-E techparcel factorAdjustingforinflation…T&Dlossesavoided41

T1: 1 month subject tofinesT2: 3.5 to 5.5 months(includes T1)T3a to T3b: 12months. Theenvironmental licenseusually takes between9 and 12 monthsDGEGasksinformation toRENT1STARTAsk information to DGEGabout connection pointsT2*This was only valid for projects in 2001 that waitedfor 2002 to have another opening. Since then, thereare NO others openings to grant connection rightsunder this procedure. So, if in 2002 the answer wasno, the investors probably applied to the 2005 publictender or decided to invest in other type of projectsIs theregridcapacityavailable?YesNoLook up for other locationand wait until there is otheropening for wind*Ask for an anticipation forgrid expansionNoThecapacityavailableis enough?T3aNoInvest in a smaller wind parkYesPay a deposit for thefinancial costs of thatanticipationAsk for environmentallicense if neededPut all the paper work together (construction license, land rights, etc)and make the design of the park (specific designs depending on thevoltage level of the connection point)42References: Decree Law 312/2001 and Professor Sá da Costa, August 29 th interview

T4a to T4b: the producer hasmaximum 24 months (>50MW) or 36months (

Wind IPPs ProfitsNet presentvalue analysisAnnualizedanalysis44

More detail: at regional levelDifferencesacrossregions forthe sameyearDifferenceswith thenationaloutput45*Region 7 with average annual capacity factor similar to the national average over the same period, **Region 9 with averageannual capacity factor above national average over the same period, †Region 10 with average annual capacity factor belownational average over the same period.