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©2013 Navigant Consulting, Inc. ENERGY DISPUTES & INVESTIGATIONS ECONOMICS FINANCIAL ADVISORY MANAGEMENT CONSULTING Incentive Schemes for Offshore Wind.

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Presentation on theme: "©2013 Navigant Consulting, Inc. ENERGY DISPUTES & INVESTIGATIONS ECONOMICS FINANCIAL ADVISORY MANAGEMENT CONSULTING Incentive Schemes for Offshore Wind."— Presentation transcript:

1 ©2013 Navigant Consulting, Inc. ENERGY DISPUTES & INVESTIGATIONS ECONOMICS FINANCIAL ADVISORY MANAGEMENT CONSULTING Incentive Schemes for Offshore Wind Development in Europe Presented by Bruce Hamilton | Navigant Session Title: Support Mechanisms Tuesday, February 5, 14: :30

2 1 ENERGY Agenda 1» Offshore Wind Support Schemes 2» Support Schemes Currently Used in Europe 3» Evaluation of Support Schemes 4» Conclusions

3 2 ENERGY Agenda » 1» Offshore Wind Support Schemes 2» Support Schemes Currently Used in Europe 3» Evaluation of Support Schemes 4» Conclusions

4 3 ENERGY Offshore Wind Support Schemes » Policy Categories A variety of potential policy options exist to support more rapid commercialisation of offshore wind. Investment Support Schemes (MW focused) Operating Support Schemes (MWh focused) Price Driven Mechanisms »Cash Grants »Loan Guarantees »Low Interest Loans »Accelerated Depreciation »Tax Credits »Feed-in Tariffs »Feed-in Premiums Quantity Based Mechanisms »Tendering of Investment Grants »Green Certificates »Tendering of Long- term Contracts

5 4 ENERGY Offshore Wind Support Schemes » Feed-in Tariff Feed-in Tariffs are the most popular incentive schemes used in Europe. AdvantagesDisadvantagesLessons LearnedCountries »Applies to actually produced electricity »Encourages owners to conduct long-term O&M »Reduces the cost of capital »Ultimately paid by electricity consumers and not by taxpayers »Can provide the public with a long- term hedge against increasing power prices »Least expensive and most effective way to build up renewable energy capacity »Reduces offtake risk »Can encourage over- investment if prices are set at too generous levels »Can be hard to determine the right level of a FiT »Tariffs should be guaranteed for a long duration »Tariffs offered to new projects should reduce over time »Allowing projects to switch to market prices during the FiT period is useless and costly »Programs should focus on market-responsive and price- lowering program designs »Administrative burdens need to be considered »Should be inflation-linked »Austria »Bulgaria »Cyprus »Finland »France »Germany »Greece »Hungary »Ireland »Latvia »Lithuania »Luxem- bourg »Nether- lands »Portugal »Slovenia »Spain Characteristics of Feed-in Tariffs

6 5 ENERGY Offshore Wind Support Schemes » Feed-in Premium A Feed-in Premium has many of the advantages of the FiT but it results in less stable cash flows. AdvantagesDisadvantagesLessons LearnedCountries »Applies to actually produced electricity »Encourages owners to conduct long-term O&M »Proven to be effective at spurring investment »The gross costs of the support mechanism are fully transparent »Allows the system to benefit from the merit order effect as renewable energy volumes are injected directly into the power market »Can encourage over- investment if premiums are set at too generous levels »Cash flows are less stable than with a FiT »There is no long-term price hedge like with FiTs »Tariffs should be guaranteed for a long duration »Tariffs offered to new projects should reduce over time »Measures should be built into the policy to contain the total cost »Belgium »Estonia Characteristics of Feed-in Premiums

7 6 ENERGY Offshore Wind Support Schemes » Green Certificates Green Certificates can be used to spur competition between technologies, but they require investors to hold volume and price risk. AdvantagesDisadvantagesLessons LearnedCountries »Is market-based and thus means to be “technology neutral” »Allows competition between different renewable energy technologies »Quotas can be adjusted over time, giving policymakers a more direct tool to control the level of investment in renewable energy »Prices of green certificates can be highly volatile »Makes investors carry significant volume risk »When projects are delayed, prices of green certificates can become high as quotas are not reached »It is difficult for new and unproven technologies to penetrate the market »The penalty for not reaching the obligation quota should be higher than the difference between the price for renewable energy and conventional energy »A minimum price for the green certificates appears to be necessary in immature markets »The obligation quota should be set with a long time horizon »Generally, green certificate regimes lead to higher costs for consumers and confusion amongst investors »Norway »Poland »Romania »Sweden »U.K. Characteristics of Green Certificates

8 7 ENERGY Offshore Wind Support Schemes » Tendering Tendering of long-term contracts promotes competition between developers but the price and delivery may not meet expectations. AdvantagesDisadvantagesLessons LearnedCountries »Visibility on renewable energy investment volumes and future production »Visibility on cost for the regulator »Competition between bidders should ensure the lower cost options are developed »Prices may not be aligned with the regulator’s expectations »The government has no certainty that the investment will actually take place »Long time period between bids submission and actual construction, leading to cost uncertainty »A penalty for non-compliance to the contracted tender should be implemented to avoid low bids that are not feasible »It is important to have a balanced volume allocated in each tendering round »A price adjustment mechanism must be allowed for limited factors, e.g. financing costs, forex rates, refined design basis »U.K. »Netherlands »France »Italy »Denmark »Portugal »Ireland Characteristics of Tendering Schemes

9 8 ENERGY Agenda » 1» Offshore Wind Support Schemes 2» Support Schemes Currently Used in Europe 3» Evaluation of Support Schemes 4» Conclusions

10 9 ENERGY Support Schemes Currently Used in Europe » Jurisdictions Where Used The Feed-In Tariff is the primary offshore wind support policy used in Europe, with the exception of the U.K. which uses green certificates. Policy Options Jurisdictions Where Used Belgium Denmark Germany Netherlands U.K. Feed-In Tariff (4) 11 22 Tax exemptions  Green certificates with premium prices for offshore installations 33 Grants  Carbon tax  Public finance institutions (5)  (1)Denmark’s FIT level is set by competitive tenders, currently in the DKK/MWh ($13/MWh) range. (2)Netherlands generators are paid the higher of the FIT and the market energy price. (3)U.K. offshore generators receive 2 Renewable Obligation Certificates (ROCs) per MWh, which have traded as high as £47/ROC (~$70). The offshore rate will be reduced to 1.9 ROC/MWh and to 1.8 ROC/MWh if built in 2015 and 2016 respectively, and from 1 April 2027 to 2037 the Government will move to a ‘fixed ROC’ system (a FIT program). (4)Ontario, Canada, has an offshore FIT at $19/MWh; however, it is on hold pending further study. (5)The European Investment Bank (EIB) also borrows funds on the capital markets, which it lends on favorable terms to renewable energy developers directly or via commercial banks.

11 10 ENERGY Evaluation of Support Schemes » Offshore Wind Capacity Offshore wind capacity in Europe has been installed and is being developed under various support schemes. Country Investment Schemes Operational Schemes Installed MW Construction MW Permitted MW U.K.Tax breaksGreen certificates1,8582,3591,266 DenmarkTax breaksFiT by tender Germany-FiT ,877 BelgiumCash grantFeed-in Premium NetherlandsTax breaks FiT (to 2007), tender 24703,238 Sweden-Green certificates16801,888 Finland-FiT Ireland-FiT2500 Portugal-FiT200 France Accelerated depreciation Tender00108 ItalyCash grant Tender & floor price Offshore Wind Capacity in Europe as of Year-end 2011

12 11 ENERGY Agenda » 1» Offshore Wind Support Schemes 2» Support Schemes Currently Used in Europe 3» Evaluation of Support Schemes 4» Conclusions

13 12 ENERGY Policy Options EffortResults Cost to Taxpayers Cost to Ratepayers Administra- tive costs Mechanism to reduce costs Effective in OSW Development Leverages private capital Based on MWh production Reliable revenue stream Weight factor25% 55% 15% Investment Support Schemes I1Cash grants for developers ○●◐○◐●○● I2Low interest loans and guarantees ◐●●○○●○● I3Accelerated depreciation ◐●◐○◐●○● I4ITC for developers ○●◐○◐●○● I5Tendering of investment grants ◐●○●○◐○○ Operational Support Schemes O1FiT ○●◐●●●●● O2Feed-in Premium (PTC) ○●◐●◐●●◐ O3Green certificates ●○○●◐●◐○ O4Green certificates with price floor ●◐○◐◐●◐◐ O5Tendering of long term contracts for MWh ●◐◐●●●●● ● = favorable (score 1.0) ◐ = neutral (score 0.5) ○ = unfavorable (score 0) Evaluation of Support Schemes » Effort and Results Scoring Each policy option is evaluated according to its cost and effort required and its proven and expected effectiveness.

14 13 ENERGY 1 = favorable0.5 = neutral0 = unfavorable Relative Effort Higher (Score = 0) Lower (Score = 1) Relative Results Lower (Score = 0) Higher (Score = 1) Higher priority (“short list”) Policy Options EffortResults Investment Support Schemes I1 Cash grants for developers I2 Low interest loans and guarantees I3Accelerated depreciation I4ITC for developers I5 Tendering of investment grants Operational Support Schemes O1FiT O2Feed-in Premium (PTC) O3Green certificates 0.50 O4 Green certificates with price floor O5 Tendering of long term contracts for MWh Evaluation of Support Schemes » Efficient Policies The policy/program options should be considered within the context of a formal portfolio analysis.

15 14 ENERGY Agenda » 1» Offshore Wind Support Schemes 2» Support Schemes Currently Used in Europe 3» Evaluation of Support Schemes 4» Conclusions

16 15 ENERGY Conclusions »A variety of potential policy options exist to support more rapid commercialisation of offshore wind. »Various countries throughout Europe have chosen different incentive schemes as a means to level the playing field.  Tax breaks are the most popular investment support schemes used in Europe.  The Feed-In Tariff is the primary operating support policy used in Europe, with the exception of the U.K. which uses green certificates. »The following policy/program options have the most attractive combination of low cost and effort and high effectiveness: Investment Support SchemesOperating Support Schemes  Accelerated depreciation  FiT  Tendering of long term contracts  Feed-in Premium (PTC)  Green certificates

17 Key C O N T A C T S ©2010 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Key C O N T A C T S ©2010 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Key C O N T A C T S ©2010 Navigant Consulting, Inc. Confidential and proprietary. Do not distribute or copy. Key C O N T A C T S ©2013 Navigant Consulting, Inc. 16 ENERGY Bruce Hamilton| Director | Energy Navigant Bruce Hamilton| Director | Energy Navigant


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