The landscape for investing in renewable energy projects has changed dramatically. The players, the technologies, the market forces have all evolved, making it more challenging and more crucial to accurately determine the risk associated in specific projects.
In the last decade and more, renewables growth has occurred under the umbrella of feed-in tariff (FIT) schemes and other subsidy or premium-price systems. Renewable energy now has claims to be both a mature technology and a mature sector, and is viewed thus by stakeholders in the energy sector. Subsidies and FIT schemes are being replaced by auction systems, or by no external support at all, examples of the latter being pure ‘merchant’ projects and corporate Power Purchase Agreements (PPAs).
This has caused huge turmoil among players in the renewables industries. Lenders no longer have the comfort of long-term prices guaranteed by a government.
The results of public auctions have produced surprisingly low prices for solar PV, onshore wind, and offshore wind, encouraging other governments to follow this path. Also, in some countries, the growth of renewables (particularly solar PV) under FIT schemes has been greater than governments have expected, resulting in substantial unexpected costs to be borne by the electricity consumer or taxpayer.
This has occurred in parallel with substantial capital and operational cost reductions for wind and solar. Improved design of both components and projects has produced substantial cost savings, particularly for offshore wind. For solar PV, the increase in volume has resulted in manufacturing improvements and cost reduction.
Solar and wind projects are therefore now exposed to ‘merchant risk’, which conventional thermal generators have always had to live with.
For potential investors looking to assess the value/risk profile of specific projects, trustworthy long-term power price projections are essential. Of course, investors can mitigate some or all of the risk by sharing it with utilities through PPAs. However, the risk still needs to be considered, and a consensus on future power price evolution is required to set the level of the PPA in the first place.
Price forecasting – a multiple-scenario approach
Forecasting wholesale power price developments is extremely complicated and must take into account a number of influencing factors – technical, economic, environmental, political, legal and societal. Typically, multiple scenarios are produced, which can lead to wildly differing valuations of the same project, as each stakeholder uses the curve that best suits their own interest. This often leads to significant delays in negotiations and the realization of the project. Furthermore, users of the curves gain very little insight into the assumptions behind the curves or the factors that could influence actual power prices within a given scenario.
A single specific scenario
At DNV, we base our predictions on a single scenario, our vision of the most likely future of the energy market derived from our Energy Transition Outlook model. From the high-level, global scenario, we have created a quantitative, European market model, allowing us to generate power price curves for each country. Having a single curve per country or price region, helps to standardize investment bidding, giving all stakeholders the same base point for negotiations. By providing insight into the various factors that could influence the actual power price evolution in that the market, we help investors determine the risks related to a project and how to mitigate them.