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Monday, May 25, 2015

Polish Presidential Election: Implications for Renewable Energy

In the opinion of many, Civic Platform (PO) has grown a bit arrogant and very non-transparent in its model of governing. Pundits will have a dozen explanations for the election of Andrzej Duda yesterday, but wide-spread support for his party, Law and Justice (PiS), is not one of them. Voters signaled their concern about PO and wanted something else....just about anything else.

If this trend continues into the Parliamentary elections, as I think it will to a lesser degree, expect PiS gains but no majority. A weaker coalition government with PO, PSL and possibly SLD is the most likely outcome.

It is important to remember that all of the political parties are publicly pro-coal and none of them have a real program to address the growing economic and technological challenge in Polish energy to shift to the "next thing."  PiS is more likely to make foreign energy investors nervous, however, with their more xenophobic rhetoric.

PiS is widely described as anti-wind energy and worked hard in the so-called "Landscape Law" to restrict the possible locations for wind farms. It is difficult to see how this issue will be re-visited without an overwhelming PiS majority in the Parliament, one of the least likely scenarios.

PO stood alone against the prosumer amendment in the new renewable energy law. Some of the support for the law was obviously opportunistic, but PO has come out of the RES legislative experience with a reputation of being anti-green energy. The close connection between PO and PGE, the biggest state-owned utility and largest coal-fired power producer in Poland, has been notable. Will a new government inevitably bend the same way as the inducement of hundreds of political patronage appointments in the energy sector warps their perspective? In Poland, probably so.

 A weakened PO increases their need to rely on other political parties to form a government. And all of the options are for inclusion of parties with a somewhat greater sensitivity to green energy than PO. An outright PiS majority in Parliament could adversely affect wind energy in the auction mix in the future, but it is very difficult to come up with replacements for that much green electricity.

Since almost no politicians in Poland have any understanding of renewable energy and distributed energy (and largely want to remain ignorant), chaos theory will be the best predictor of the future of RES. Large amounts of inertia will prevail with a spattering of deliberate actions which will be in essentially random directions.

Don't look for any big changes.

Wednesday, May 20, 2015

Fossil Fuel Subsidies: The Myth of a Free Market Shattered

My Republican colleagues typically comment on renewable energy, that if it is viable it would survive without subsidies. They point to fossil fuels and claim that green energy should receive the same treatment, i.e. only market-based revenue and investment. But this myth is wholly at odds with the reality around the world.

Fossil fuels have been one of the most heavily subsidized human endeavors in the history of the world. The International Monetary Fund report, just released, notes that globally fossil fuels receive approximately $600 million a HOUR in government support. See PL article. The basis of this huge cost figure is the externalities of fossil fuel burning (mainly coal). There are several new reports of the huge external cost of burning coal in Poland (which leads Europe in air pollution for fossil fuels).

But even the narrow definition of subsidies for internal costs results in a big figure for support. Over 10 billion Euro a year in Europe (where the policy is to allegedly decarbonize the economy). In Poland, from 1990 to 2012, the Warsaw Institute for Economic Studies estimated that 40 billion Euro was spent in direct subsidies for the coal industry, excluding a much higher external cost.  Even Germany, last year provided more support for coal than any other technology in the energy mix except for PV solar.Even the majoprity of renewable energy support in Poland ended up going to support coal-fired power plants by virtue of rewarding co-firing vastly more than its actual costs.See Mott's Blog, "The New Law Must Reduce Support For Co-Firing To Reflect Its Actual Low Cost Of Production," October 8, 2014.

Exploration for oil in the United States amount to over $5 billion a year. See Harvard Magazine 2014.

Some point out that renewable energy globally gets proportionally more support than fossil fules (about three times as much per energy unit). But the notion that fossil fuels developed and arfe sustained solely by market mechanisms is a myth.

We are also witnessing the achievement of parity in the market place between many forms of renewable energy and conventional fossil fuels. This date has long been anticipated, but has already arrived in some geographic regions of the world.

Tuesday, May 19, 2015

Simulated Auction by Polish Wind Association: Predictable Problems

The Polish Wind Energy Association just conducted a mock auction for renewable energy support using the system included in the new Polish law. The results foretell the problems we can expect in the actual auction and are not surprising.

The main take-away by the association was the under-bidding in the large auction (over 1 MW projects) and less than 4000 MWhr/MW. The prices were unrealistically low. This phenomenon is very common in RES auctions. Bids are speculative and below the real costs of doing the projects in the hope of snagging the support. This is a very common - maybe unavoidable  - problem with reverse auctions:

While auctions aim for a specific amount of electricity to be produced or capacity to be installed, empirical experience has shown that a shortfall of the auctioned amount is a rather common phenomenon. This is mainly due to ‘underbidding,’ which results in economically non-feasible projects.” EcoFys, Design features of support schemes for renewable electricity, January 2014,  page 45 [Report to the European Commission].

“A tender scheme creates competition between bidders and, thus, inherently encourages them to bid as low as possible. However, the evidence in France, Portugal, Nova Scotia, U.K., India, China and Brazil shows that they may overestimate their capacity factors, underestimate their costs (because, for example material costs turn out to be higher than they were expected to be) and follow strategic behavior in bidding (i.e., win the bid, then adjust).” Del Rio et al, “Back to the Future,” Renewable and Sustainable Energy Reviews 35 (2014)., supra, page 51.

“Empirical evidence indicates that low implementation rates caused, e.g. by underbidding or the 
existence of non-cost barriers, are one of the main drawbacks of auctions used for RES-support… remains to be seen whether auction schemes can eventually achieve the desired effectiveness.” EcoFys, supra, page 72 (emphasis added).

The auction mechanism always produces an unpredictable amount of actual projects and capacity. The gap between what is awarded in bids and what is built is an inherent result of the system. To avoid this problem, some countries have created major pre-qualification barriers to bidders. But this, in turn, reduces the number of bids and adversely affects competition. The added risk factors cause bids to increase. In Brazil, a 10% deposit of total project costs was required and still only a fraction of the projects were built. In Germany in 2015, the PV auction illustrated that the risk factors may not lead to any savings by using the auction mechanism.

If reference prices are set too low, however, it is possible to have no bids at all (Brazil 2013).

In a report prepared for the European Commission, EcoFys et al noted in January 2014: “…finding a compromise between encouraging high implementation rates without reducing the number of market participants too much proved to be a difficult task.” Design features of support schemes for renewable electricity, January 2014, p. 5. 

The Polish mock auction vividly illustrated the problem of unrealistic bidding. The last British PV auction is another example of the same thing. See Mott's Blog, "What the UK RES auctions Prove and Do Not Prove."Auctions in Brazil were also plagued by lack of actual construction.  In Italy, which is held out as a positive example by the Polish Ministry of Economy, auctions have not resulted in a sufficiently high number of realized projects. 

EcoFys concluded that the auction mechanism is "still undergoing a learning phase." Id. page 77.
Given that the 2020 mandatory deadline is only a few years away, you have to wonder if this is the best time to experiment. On this issue, the DG Competition is as much to blame as the Polish Government.  It seems certain that the auction mechanism will deliver less renewable energy, reduce competition across technologies, and create unnecessary uncertainty over everything.

The predictable winners in the mock auction - we have to wait to see the detailed results - appear to be on-shore wind in over 1 MW, less than 400 MWhr; PV in under 1 MW less than 4000 MWhr, and more expensive technologies in the over 4000 MWhr categories. In same cases, the theoretical winning bids were virtually the same as the reference prices (which the Government predicted to be the case during the February 2015 Parliamentary debate for the small auction). That being the apparent case, there is a real dispute over whether the auction achieves anything in the small project scheme of support, except to limit the number of projects due to higher transaction costs. The Commission's State Aid Guidelines provide that “´competitive bidding process´ means a non-discriminatory bidding process that provides for the participation of a sufficient number of undertakings and where the aid is granted on the basis of either the initial bid submitted by the bidder or a clearing rice. In addition, the budget or volume related to the bidding process is a binding constraint leading to a situation where not all bidders can receive aid.” Section 1.3(43).

This will not be the case in the Polish small auction. So the issue is why have an auction at all.

Finally, the auction mechanism - when it is "working" - leads to a large number of rejected bids. Now these bids are all projects that have building permits, resources committed in the form of wind, biomass, biogas substrates, etc. The losing projects have to await another auction and may well not get built at all. This costs society the loss of readily available renewable energy resources which may remain undeveloped. The price of alleged competition, if it successful, is lower renewable energy development.

All and all, the system appears to be a dicey gamble, more likely than not to have problems.

Friday, May 08, 2015

EU State Aid Guidelines: Huge Problems Ahead

I have done a full analysis with detailed references on the problems with the new EU State Aid Guidelines for Renewable Energy. The paper will be published in the May edition of the European Energy Journal.  It is also being presented at the PowerGen 2015 conference in Amsterdam on June 10, 2015.

My take is that the guidelines are an effort to try to mitigate threats to power energy utilities. They push support into auctions, a mechanism proven to be bias in favor of large established utility bidders. They will hurt smaller investors and equity investment funds. They bungle the support for energy storage (electricity stored from renewable sources is not considered green after it is stored!). They hurt distributed energy by requiring sources over 500 kW to feed to the grid. The create massive uncertainty over 2020 targets by changing all the rules in the last lap of the race. They tie up renewable energy efforts by restricting what is financially feasible and environmentally desirable.

The issues that the guidelines try to address , i.e. overcompensation, can be addressed just as readily and maybe better by adjusting traditional support on new projects as technology cost change over time. The Commission's own study concluded that auctions were still in the experimental stage and that technology-neutral auctions were problematic at this point.

These issues arise due - in my opinion - to the weak green energy lobby in Brussels. Most associations in renewable energy have conventional energy companies as their biggest members. They are co-opted in regulatory proceedings and in mounting legal challenges to bad rules.

Europe needs a "green" green energy alliance that is comprised entirely of companies outside conventional energy corporate interests.

Anyone who would like a copy of the paper can email me: randymott  (at)

Monday, April 20, 2015

Renewable Energy Update from Poland

There are still some issues to be decided on the shape of the new law on renewable energy. The biggest one for us in the biogas sector is the reference prices, since it is widely expected that the under 1 MW small auction for projects with more than 4000 MWhr/MW a year will be under-subscribed. The Deputy Minister of Economy gave a 500-600 PLN/MWhr cost estimate in the Parliamentary debates, but this is lower than the Institute for Renewable Energy estimates of the cost of production in their 2013 report commissioned by the same Ministry. He also predicted that all small projects that pre-qualify and bid within the maximum reference price should receive support.

This would mean a base price of 190 PLN/MWhr plus the factor times 300 PLN. Since the final law only provides for under 1 MW in practice, the figures would be: 200-500 kW = well over 1000 PLN; 500-1000 kW = 970 PLN. These figures are consistent with numerous studies of the costs of production and are much higher than the Deputy Minister's statement.

Clearly the fate of small biogas projects in the 250-350 kW range depends on getting more support than 500-600 PLN. 

If you add the 120 PLN/MWhr for co-generated heat, the gap narrows, but most farm-based plants cannot achieve the necessary high utilization rate to be eligible for co-generation support.

Unfortunately, the reference prices will not be announced until a few months before the auction. So projects that cannot survive on 500-600 PLN/MWhr (the low figure) will be difficult to plan and least for the first auction. The possibility of grants may be useful to bridge some of the gap, but they present coordination issues with the auction timetable and also cannot be expected to cover enough projects to meet the expected total power sought by the Government.

 On that subject, it seems optimistic to expect an auction in 2016. If the natural course of events is assumed, it will be in 2017. This means that it will be even larger and the under 1 MW share will be even more stressed to find bidders in my opinion.

The schedule for transition to the new law seems problematic for most developers. This is especially true since so many small operations have reduced their development efforts in light of the long delay and low Green Certificate prices. 

Every sector of renewable energy has its own issues with the law and the transition period. The net result is the virtual impossibility of Poland meeting the 2020 target. It remains quite possible that there will have to be supplemental legislation to address the problems, which might include extending the certificate program in the interim and conforming it to state aid rules. 

Tuesday, March 31, 2015

Energy Storage and the New EC State Aid Rules: Oops!

The new state aid rules require that electricity over 500 kW be sold to the grid. See 125. This, of course, is designed to frustrate distributed energy, which is emerging as the development that will change the whole utility industry.

But in the fine print, the new Guidelines also seriously impede energy storage. Electricity coming from energy storage that was renewable going into storage is no longer renewable coming out of storage. Definitions 1.3(19)(11). No operating support is possible if the guidelines are followed. This means that the RES producer must own his storage device to get any credit for the energy he produces and stores.

Operators owning storage devices (charged by third-parties) will not have any green support apparently since what they sell coming out of storage does not qualify for support under the guidelines.

But there is another catch, the guidelines also require that the electricity be sold to the grid to receive operating support, except for small sources. So electricity from larger sources will not be able to get support for what they store.

I am still figuring out if there is something devious at work here or whether it was just a screw-up.

Comparative Cost of Producing Energy

Here are some graphics on what it costs to produce electricity by technology. This does not count the cost of distribution, which heavily favors renewable energy that is locally produced and can be used locally without major distribution costs.

EdF is seeking a price for UK nuclear energy at 90 GB/MWhr (500 PLN) which is more than the average RES price projected under the new Polish law. Wind and PV will both be much, much lower by the time the UK opens a nuclear plant (if ever). The UK capex cost is 14 billion GB or 78 billion PLN. Both the energy price and the capex keep going up (these are from EdF in October 2014).

There is no real dispute that RES will be the cheapest energy available (especially with lower distribution costs) in the relatively near term future.

Friday, March 27, 2015

UK Illustrates How Fast RES Can Deploy(without auctions)

The UK just went from 4 percent renewable energy in 2013 to 19% in 2014. This is the pre-auction surge under their old system. But it illustrrates that RES projects can be rapidly developed in a system that is stable (aid to co-firing in the UK is restricted).

Wind and PV have development schedules that are quite short compared to other electricity production. Auctions will delay projects, since they cannot be put online as they are prepared. The dilemma of auctions is always that strict penalties deter bids and lower pre-qualificatgion requirements and lower penalties encourage bidders to under-bid and under-build. See EcoFys (2014).

An additional problem that I have suggested (I never saw this mentioned by anyone else) is that projects to be eligible  to bid must have all of the legal means of producing energy tied up in legal agreements and a substantial percent of these will lose the auction or not even be bid in the end. So, using the European Commission suggestion that twice the power should be bid as can be awarded, half of the RES potential at any point in an auction system will not be built when it is ready to proceed. For the 19 Member States not on track to meet the 2020 target, this will prove to be fatal.

Poland has leaned very little from these experiences and is likely to see a big drop off in large projects in 2015-2016.