21 Nov 08 Eddie's Blog Global

The shape of things to come

We are very happy to see Wall Mart announce that they will purchase wind power for a proportion of their electricity for hundreds of their Texan stores.

They see windpower as a hedge against fossil fuel price volatility. We begin to understand why Wall Mart has been such a successful retailer over the past twenty years.

All the costs of wind and other renewable are fixed. One can confidently predict what the production cost will be in 5, 10, 15 years into the future. What other technology can this be said of? Well it can be said of photovoltaic, ocean current technology, hydro or indeed any technology that uses the natural forces of nature to make electricity.

There has been a lot of debate in the world about the best support scheme for getting new renewable technology up and running.

The most common ones are:

• The feed in tariff (REFIT),
• The renewable obligation certificate scheme (ROC)
• Various tax based schemes and
• CO2 trading schemes.

Of this the simplest to implement is the REFIT. It is what got wind energy up and running in Denmark, Germany and Spain.

The other schemes all work, or can be made to work if they are designed properly by Governments.

The real benefit of the REFIT is that it gives a fixed price for a definite period. It is this attribute that acts as the fossil price risk hedge. No matter what price the fossils come in at, the Refit gives the country renewable energy at a fixed price.

The ROC price fluctuates with the price of fossil fuel. It is therefore co-related to it and in statistical terms it is not a hedge. By some simple calculations therefore it can be shown that a ROC support scheme will be more expensive to the customer in the medium to long term.

The one support scheme that doesn’t work (with one exception) is a competitive scheme where developers are invited to bid lower prices. It has always amazed me why this is so because competitive systems work in so many other areas of human endeavour.

Here is my current assessment of why competitive schemes have failed so badly:

1. In an innovative industry like wind those that know least about building wind farms bid the cheapest. When it comes to building them the lowest bidder finds out it can’t be done at the price they bid.

2. Companies like bragawatts instead of megawatts! Big polluting companies often bid in cheap prices into renewable energy competitive schemes so that they can advertise the fact that they intend to build so many megawatts. They use the results to show they are committed to helping the environment.

Of course they very seldom build them out and cite new reasons why they didn’t.

3. Some companies use competitive schemes to try and dominate an industry in a country. We have seen in Ireland where one company was awarded 60% of the MWs in a competition. They built none of them. Soon afterwards they called in all the other companies (who were all cash starved) and tried to take them over.

4. Competitive schemes are used by countries who don’t understand the unique benefits of renewable. (Free fuel, reduce pollution and hedge against raising prices). All they are able to do is compare capital costs of renewable vs. gas turbines. It is a much more sophisticated process to model life cycle costs.
Free fuel, risk hedging, low operation costs have to be put together with capital investment costs to arrive at a customer centred genuine low cost over twenty five years.

5. The pure economist will always assume that competition is best. So without facts or knowledge they default to competition.

More about the other schemes in later blogs.