---- Hydro Industry Evidence - ROC Consultation - 12 Jan 2012 (1)

8/10/2019 ---- Hydro Industry Evidence - ROC Consultation - 12 Jan 2012 (1)

1/18

HydroFiTs

&

ROCs

Industryevidencefor2012FiTs&ROCs

12th January2012

1


2/18

Noteonrevisions Theoriginaldraftversionofthispresentation(dated 1st Jan2012)was

presentedtoDECCatameetingonthe5th Jan2012.

Thisanalysishasbeenrevisedasrequestedandisnowbaseduponthe

wholesaleenergypricesandotherassumptionsdefinedintheDECCImpact

: Levyexemptioncertificates:assumedtohaveavalueof4.72in2010/11,andforthisvaluetoremain

constantinrealterms;

o esa ee ec r c ypr ces:anou pu o e yry mo e ng. nves orsareassume o ave veyears

offoresightofwholesalepricechanges,thenassumethepricestaysconstantinrealtermsfortherestof

theprojectlife;

,

whentheheadroomcalculationsetstheleveloftheObligation,i.e.36.99x1.1=40.69/MWh.=in

2010/11prices;

woulduse

internally

and

higher

than

banks

would

be

willing

to

use

in

project

financing

However,wehaveusedtheprecisefigurestoeliminateanydisagreementon

energyprices theanalysisstillsuggeststhat0.5ROCsistoolow


3/18

BHAcapitalcostdatabase(basedon171actualhydroprojects)

Dotsare

real

projects data

Redline

is

a

theoretical

curve

fittedtodatatogiveasingle

projectscollected

for2009FiTs

consultation

capacityinkWwithspecific

capitalcostin/kW


4/18

Howevercostsareinflatin forh drodueto:

Bestschemeshavealread beencherr icked

Remainingschemeshavehighercapitalcosts:

oeconom es

o

sca e

or

earn ng

curves

or

y ro

eac

sc eme

sbespokewithlittlestandardization(asinwindandsolar)

Increasedgridconnectioncosts(furtherdistances/lessdeveloped

territory)

Increasedpermitting,planningandenvironmentalcosts(fishpassesand

othermitigationmeasures)

Higher

material

costs:

concrete,

steel,

copper,

plastic Andincreasedo eratin costs

Stepincreaseinbusinessratesin2010

Everincreasing

rentals

from

landowners

and

communities

Everincreasingenvironmentalmitigation(highercompensationflows)


5/18

Somerecentexampleprojects

Capacity

vs

Capex

(latest

2011/2012

projects)12,000 Greendotsaremostrecent15sub2MWprojectsbeingdeveloped

in2011/2012.Allaresignificantlymoreexpensivethanthe

historicalcurvepredicts

CHAPECO2CO13GQ1

GQ2

10,000

Redlineistheoreticalcurve

basedonhistoricaldata

APH

ARDCO1

,

(

/kW)

GE1

GE2 GE4

,

Capex/k

GE3

2 000

,

00 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Capacity(kW)


6/18

Somerecentexampleprojects

14,000

CapacityvsCapex latest2011 2012projects

12,000Bluelineistheoreticalcurvewhich

GQ2

10,000

)

mos

c ose y

approx ma es

curren

truecostofhydro(=historicalaverage

plus20%)

BLCH

APH

APE

ARDCO1

CO2CO4CO13GQ1

8,000

x/kW

(/kW

GE1

GE2 GE4

4,000

6,000

Cape

GE3

2,000

0

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Capacity(kW)


7/18

Additionaldatapointsabove2MW

14,000 Capacity

vs

Capex

12,000

FiTsZone(upto5MW)ROCsonlyabove5MW(Canbeuseddownto50kW)

10,000

) CurveDatapointsofan

additional162MW+

8,000

/kW

(/k

extrapolated

outto10MWprojects(2011/2012

prices)addedshowing

majorityabove

the

4,000

6,000

Cape curve

2,000

0

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

InstalledCapacity(kW)


8/18

Detailed20

year

financial

model

was

run

for

every

project

size

from

5kW

to

10MW

Assumptions:

Loa

Factoro

35

typica

Capitalcostfromtheoreticalcurve

FeedinTariffsassumed2MW(FiTsassumedtobe

existing(2011)

values

&

ROC

values

as

per

DECC

Impact

Assessment)

Operatingcosts=22.5%ofGrossRevenue(realitynormallybetween20%and

25%includinganallowanceforrentalpaymenttolandowners)

IRRsshown

are

Project

IRRs

assuming

no

debt

(in

reality

cost

of

debt

will

be

close

toprojectIRR~7%soleveragewillnotmateriallyimprovetheEquityIRR)

Modestinflation(1%)appliedtopowerpriceandoperatingcosts

1yearallowanceforconstructionperiod


9/18

ProjectIRRvs InstalledCapacity

10.00%

BasedoncurrentFiT/ROClevelsandtheoreticalcostcurve

DECCOnshore

Wind

proposed

Hurdle

Rate

(9.6%)

9.00%

DECCHydroproposedHurdleRate

arge re urn

forFiTs(58%)

7.00%

. .

5.00%

6.00%

IR

R(%)

1ROCassumedfor

schemes

above

2MW

4.00%Projec

2.00%

3.00%

CurrentFiTrates

1.00%

below2MW(blueline)

.

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Installed

Capacity

(kW)


10/18

ProjectIRRvs InstalledCapacity

10.00%

BasedoncurrentFiT/ROClevelsandtheoreticalcostcurve

DECCOnshore

Wind

proposed

Hurdle

Rate

(9.6%)

9.00%

DECCHydroproposedHurdleRate

arge re urn

forFiTs(58%)

7.00%

. .

1ROCsufficienton

5.00%

6.00%

IR

R(%) .

4.00%Projec

thanhurdlerateof7.5%

IRR)between2and5MW

2.00%

3.00%

1.00%

.

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Installed

Capacity

(kW)


11/18

EffectofdifferentROCmultiples

0.5

ROC 1

ROC

1.5

ROC

2

ROC

12.00%

14.00%2ROCstoogenerousIRRs>10%possible

onlargerschemes

10.00%

)

8.00%

ct

IRR(

Optimum

4.00%

.

Proj

=

range .

ROCS

2.00%

.

below

6%

on

all

but

largest

of

schemes

0.00%

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Installed

Capacity

(kW)


12/18

ProposedoptimumsolutionOnshoreWindproposedHurdleRate(9.6%)

DECCtarget

returnfor

FiTs

(5

8%)

9.00%

.

HydroproposedHurdleRate(7.5%)

7.00%

8.00%

5.00%

6.00%

IR

R(%)

1 ROC re uired

4.00%

Projec

1.5ROCsrequired

between2 5MW(for

above5MW

2.00%

.

FiTsassumed

mostofrangetoexceed

hydrohurdle

rate

of

7.5%

=stilllessthanthatof

0.00%

1.00%

2MWons orewin =9.6

,

,

,

,

,

,

,

,

,

,

InstalledCapacity (kW)


13/18

. The

Capex assumption

presented

by

ARUP

broadly

agree

with

the

BHA

database

However3otherareasoftheArupreportappeartobeeitherincorrectorunfair:

o LoadFactor(P142ofConsultationPaper)isassumedtobe45.8%.Therealityonmostrunofriver

sc emes t emajorityo newsc emes isint erange3335%

o Operationalexpenses(P134ofConsultationPaper)seemlow.20%25%ofGrossRevenueat

150/MWh isusuallyanaccurateassumptionasaguidelineforallopex includinglandrentals,

, , , .

o HurdleRate(P142).Hydro(alongwithPV)isassignedahurdlerateof7.5%,OnshoreWindis9.6%,

Wave13.8%etc.ThisissubjectivebutthereisastrongargumentthatthehurdlerateforHydro

shouldbe

at

least

the

same

as

Onshore

Wind

(ie 9.6%)

as

both

technologies

have

similar

maturities,

developmentprocesses,typesofinvestoretc.

AlltheabovethreewillunderestimatetheROClevelrequiredtostimulate

investmentintoH dro

Also

fromconsultation

paper

Cost

evidence

for

small

scale

(


14/18

ComparisonwithARUPCapex assumptions

Capacity

vs

Capex

12,000

,

10,000

)

ARUP

"Median"

assumption

Asidefrominaccuraciesduetoindividualflat

8,000

/k

W

(/k stepstheARUPMedianassumptionsonCapex,

broadlyagreewiththeBHAdatabaseofcosts

4,000

,

Cape

2,000

0

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000


15/18

TheFeed

In

Tariff

for

Hydro

was

working:

stimulating

investment

across

investors.Currentlystalledpendingconsultationpublication.

with31

additional

projects

in

2011/2012)

it

can

be

demonstrated

that

returnsareintherange58%formostofrange02MW.Therefore:no

changesrequiredtosub2MWFiTlevels.

FiTsabove2MW(47/MWh)insufficientreturnstostimulateinvestment

epropose . or y roprov eseven owerreturns su

andwillthereforelikelyresultinzeroinvestmentinhydroprojects>2MW

CurrentFiT

rates

below

2MW

1ROCabove5MW


16/18

Hydro,although

modest

in

terms

of

available

resource,

should

be

part

of

, :

o Longevity hydrolastsconsiderablylongerthanothertechnologies(typically50+years

comparedwith~25forWind&PV).WhencalculatingIRR(andtheHurdleRate)the

value

of

the

cash

flows

in

later

years

are

so

discounted

they

have

a

negligible

effect

on

IRR.Hence,nowhereisthislongevityevaluatedorrewardedinthecalculations.In

theorythislongevitycouldbeusedtojustifyahigherHurdleRateandthereforea

g er mu t p et an n asawayo va u ngt e ongev tyan assoc ate ong

termcontributiontotargets,carbonsavingetc.

o Storageand

load

balancing

the

dispatchable nature

of

hydro

has

a

utility

to

the

grid/publicwhichisnotnecessarilycapturedinthesingleprojectIRR/Hurdlerate

calculation.

o HighproportionofsupplychainisUKbased circa7090%ofthesupplychainvalueis

UKbasedunlikemostothertechnologies.Theassertiononpage38oftheConsultation

thatThe

deployment

of

asmall

additional

amount

of

large

scale

hydro

is

not

expected

toleadtosignificantindustrialdevelopment.issimplyuntrue.GilbertGilkesand

or onmanu acturesmosto t e pac age omest ca yan nee sastrong

markettomaintainandgrowaninternationalreputation.Mostconstruction,

consultancy,financing,legalservicesetcareallprovidedlocallywithprofitsrecirculated

n

oca

econom es.

en a spa

o

commun es

an

arms

are

use

o

ensure

ong

erm

securityandareusuallyreinvestedsuperlocallyintotheland/farm/localcommunity

itself.


17/18

Interms

of

the

development

process

Hydro

is

very

different

from

other

Averagedurationofhydroprojectdevelopment=3years(seenextslide)

LongdurationmeansprojectinvestmentslowsorstopsasFiTsreviewdatesareapproached(preaccreditationwillhelpthis)

Significantinvestmentrequiredwithnocertaintyontariff(unlikePV)

Multipleprojects

now

stalled

awaiting

outcome

of

FiTs

&

ROC

reviews:

HydrounfairlypunishedonFiTsduetogreedofPVindustry

Unexpected(andunjustified)reductionofHydroROCs from1ROCto0.5ROC

ro osed

Strongcase

to

de

link

PV

from

other

technologies

as

part

of

FiTS/ROCs

review.

PVisverydifferentfromHydroshortconstructionduration,shortlife(sub25years)

littleplanningrequirement,goldrushmentality,rapidcostreduction,highlevelof

foreignownershipofsupplychain)

WouldallowtheringfencingoffundstoallownonPVtechnologiestoberolledoutat

asustainablerateandremainunaffectedbytheboomandbustnatureofPV


18/18

Totalduration

of

a

hydro

project

is

rarely

less

than

2.5

years

andnormallybetween2.5and4years,including:

PlanningandSEPA/EAconsentingprocess:1.5to2years

Construction:

1

2

years Significantlylongerthanothertechnologies:windandsolar

Year 1 Year 2 Year 4Year 3

Planning & CAR license

a lication: 1.5 2 ears

Construction: 1-

2 ears

(typical spend by this point =

60k-200k)

Total duration: between 2.5 and 4 years

---- Hydro Industry Evidence - ROC Consultation - 12 Jan 2012 (1)

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Transcript of ---- Hydro Industry Evidence - ROC Consultation - 12 Jan 2012 (1)