Crown Eco Capital Management

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Renewable Energy: The Vision And A Dose Of Reality

- Part 1

In recent years, there has been more and more talk of a transition to renewable energy on the grounds of climate change, and an increasing

range of public policies designed to move in this direction. Not only do advocates envisage, and

suggest to custodians of the public purse, a future of 100% renewable energy, but they

suggest that this can be achieved very rapidly, in perhaps a decade or two, if sufficient political will can be summoned. See for instance this

2009 Plan to Power 100 Percent of the Planet with Renewables:

A year ago former vice president Al Gore threw down a gauntlet: to repower America with 100 percent carbon-free electricity within 10 years.

As the two of us started to evaluate the feasibility of such a change, we took on an even larger challenge: to determine how 100 percent of the world’s energy, for all purposes, could be supplied by wind, water and solar resources, by

as early as 2030.

The European Dash for Off-Shore Wind

- GermanyRecently emphasis has been placed on developing large-scale off-shore wind resources in countries, such as Germany and the UK, where these are available. The advantages are that it is a stronger and

more consistent resource than on-shore wind, and that planning hurdles can be avoided. Germany, which has decided to phase out nuclear power by 2022, has been particularly interested in taking this route, and

plans to build 10GW of off-shore wind installations by 2020 and 26GW by 2030. It has been more challenging than expected, however, particularly in relation to the exceptionally expensive grid

connections and extensions required to bring power from a different direction than the grid had been designed for:

Germany’s power-transmission companies have tabled plans to build four electricity Autobahns to link wind turbines off the north coast with manufacturing centres in the south … Tennet, Amprion, 50 Hertz

and Transnet BW said that building 3,800km high-voltage electricity lines - at a cost of around €20-billion - over the next decade was possible if politicians and public rallied behind the so-called energy

transformation…

…In a first blueprint for the government, the companies proposed 2,100km of direct-current power lines - similar to those used for undersea links like that between the U.K. to the European continent - to connect the North Sea and the Baltic coasts to the south. On top of that, 1,700km of traditional alternating-current

lines would have to be built, they said. These would complement 1,400km of this type of line already planned or being built - at a cost of €7-billion - under the government’s decade-old network plan.

Since Ms. Merkel closed eight of the country’s 17 nuclear reactors last summer and brought forward the phase-out of the energy source to 2022 from 2036, her biggest headache has proved the stability of the

electricity network, which was designed to pipe nuclear electricity from south to north, not renewable electricity from the coast.

The cost and financial risk associated with building off-shore grid connections is so high that power companies are struggling to fund them. They are liable to wind farm developers if the latter are unable to sell their electricity for want of a grid connection. Significant connection delays are occurring, described

by the German wind industry as "dramatically problematic". Delays could potentially leave completed wind installations unable to deliver power to the mainland, and worse, requiring fossil fuel to run them in the

meantime:

The generation of electricity from wind is usually a completely odorless affair. After all, the avoidance of emissions is one of the unique charms of this particular energy source. But when work is completed on the Nordsee Ost wind farm, some 30 kilometers (19 miles) north of the island of Helgoland in the North Sea, the sea air will be filled with a strong

smell of fumes: diesel fumes.

The reason is as simple as it is surprising. The wind farm operator, German utility RWE, has to keep the sensitive equipment -- the drives, hubs and rotor blades -- in constant motion, and for now that requires diesel-powered

generators. Because although the wind farm will soon be ready to generate electricity, it won't be able to start doing so because of a lack of infrastructure to transport the electricity to the mainland and feed it into the grid. The necessary

connections and cabling won't be ready on time and the delay could last up to a year.

In other words, before Germany can launch itself into the renewable energy era Environment Minister Norbert Röttgen so frequently hails, the country must first burn massive amounts of fossil fuels out in the middle of the North Sea -- a

paradox as the country embarks on its energy revolution.

The situation has since worsened since:

What started out as a bit of a joke - last December Der Spiegel noted how RWE's Nordsee Ost wind farm, far from delivering clean energy, was burning diesel to keep its turbines in working order - has rapidly turned serious. Siemens, the contractor for Germany's offshore transformer stations, has booked almost €500 million in charges, according to Dow Jones. RWE is set to lose more than €100 million at Nordsee Ost. And E.ON's head of Climate and Renewables,

Mike Winkel, is on record as saying that no one, at E.ON or anywhere else, will be investing if the network connection is uncertain.

Investment in wind farms is drying up on growing risk and uncertainty:

Sales of offshore wind turbines collapsed in the first half, a sign the power industry and its financiers are struggling to meet the ambitions of leaders from Angela Merkel in Germany to Britain’s David Cameron. One unconditional order was

made, for 216 megawatts, 75 percent less than in the same period of 2011 and the worst start for a year since at least 2009, according to preliminary data from MAKE Consulting, a Danish wind-energy adviser…

…"The industry in Germany has been frozen for a few months because of grid issues," said Jerome Guillet, the Paris-based managing director of Green Giraffe Energy Bankers, which advises on offshore wind

projects…

…Grid operators and their suppliers in Germany underestimated the challenges of connecting projects, Hermann Albers, head of the BWE wind-energy lobby, said in an interview earlier this year. Albers expects

Germany won’t reach its 10- gigawatt goal by 2020, installing not more than 6 gigawatts by then.

Shares of Vestas, the world’s biggest wind turbine maker, have fallen 80 percent in the past year, underperforming the 56 percent decline in the Bloomberg Industries Wind Turbine Pure- Play Index

(BIWINDP) tracking 14 companies in the industry. Siemens, which with Vestas dominates the offshore business, dropped 27 percent over the same period.

In order to mitigate the risk and prevent the wind programme from stalling, German power consumers are to be on the hook to compensate wind farm owners for the cost of grid connection delays:

The draft bill endorsed by Chancellor Angela Merkel’s Cabinet of Ministers would make power consumers pay as much as 0.25 euro cents a kilowatt-hour if wind farm owners can’t sell their electricity because of

delays in connecting turbines to the grid. The plan is aimed at raising investments after utilities threatened to halt projects and grid operators struggled to raise financing and complete projects on time.

The cost of consumer surcharges to maintain the 'Energiewende' (the shift to renewable energy) appears set to become an election issue in Germany:

Germany's status as a global leader in clean energy technology has often been attributed to the population's willingness to pay a surcharge on power bills. But now that surcharge for renewable energy is to rise to 5.5 cents per kilowatt hour (kWh) in 2013 from 3.6 in 2012. For an average three-person household using 3,500

kWh a year, the 47 percent increase amounts to an extra €185 on the annual electricity bill.

"For many households, the increased surcharge is affordable," energy expert Claudia Kemfert from the German Institute for Economic Research told AFP. "But the costs should not be carried solely by private

households." Experts have pointed out that with many energy-intensive major industries either exempt from the tax or paying a reduced rate, the costs of the energy revolution are unfairly distributed.

Meanwhile, the German Federal Association of Renewable Energies (BEE) maintains that not even half the surcharge goes into subsidies for green energy. "The rest is plowed into industry, compensating for falling prices on the stock markets and low revenue from the surcharge this year," BEE President Dietmar Schütz

told the influential weekly newspaper Die Zeit.

Grid instability is of increasing concern in Germany as a result of the rapid shift in the type and location of power generated. The closure of nuclear plants in the south combined with the addition of wind power in the

north has aggravated north-south transmission constraints, which are only marginally mitigated by photovoltaic installations in Bavaria.

With a steep growth of power generation from photovoltaic (PV) and wind power and with 8 GW base load capacity suddenly taken out of service the situation in Germany has developed into a nightmare for system operators. The peak demand in Germany is about 80 GW. The variations of wind and PV generation create situations which require long distance transport of huge amounts of power. The grid capacity is far from

sufficient for these transports.

As the German grid is effectively the backbone of the European grid, and faults can propagate very quickly, instability is not merely a German problem. Instability can result from a combination of factors, including electricity imports and exports and the availability of fuel for conventional generation. Germany narrowly

avoided, causing an international problem in February 2012 due to power flows between Germany and France and a shortage of fuel for gas-fired generation in southern Germany.

Many new coal and gas-fired plants are to be built in the south in order to address the problem. Old coal plants are likely to have their lives extended and emission limits loosened in order to maintain needed

generation capacity. Thermal plants are being effectively forced to operate uneconomically, as they must ramp up and down in order to make way for the renewable power that has priority access to the grid.

Operating in this manner consumes additional fuel and produces accelerated wear and tear on equipment. Price volatility is increased, making management decision much more difficult.

On days when there is a lot of wind, the sun is shining and consumption is low, market prices on the power exchange can sometimes drop to zero. There is even such a thing as negative costs, when, for example,

Austrian pumped-storage hydroelectric plants are paid to take the excess electricity from Germany….

….Germany unfortunately doesn't have enough storage capacity to offset the fluctuation. And, ironically, the energy turnaround has made it very difficult to operate storage plants at a profit -- a predicament similar to that faced by conventional power plants. In the past, storage plant operators used electricity purchased at

low nighttime rates to pump water into their reservoirs. At noon, when the price of electricity was high, they released the water to run their turbine. It was a profitable business.

But now prices are sometimes high at night and low at noon, which makes running the plants is no longer profitable. The Swedish utility giant Vattenfall has announced plans to shut down its pumped-storage

hydroelectric power station in Niederwartha, in the eastern state of Saxony, in three years. A much-needed renovation would be too expensive. But what is the alternative?

German industry is already taking precautionary measures as the risk of power interruptions is rising rapidly. Even momentary outages due to minor imbalances can result in equipment damage and high costs,

and it is unclear who should shoulder the losses:

It was 3 a.m. on a Wednesday when the machines suddenly ground to a halt at Hydro Aluminium in Hamburg. The rolling mill's highly sensitive monitor stopped production so abruptly that the aluminum belts snagged. They hit the machines and destroyed a piece of the mill. The reason: The voltage off the electricity

grid weakened for just a millisecond.

Workers had to free half-finished aluminum rolls from the machines, and several hours passed before they could be restarted. The damage to the machines cost some €10,000 ($12,300). In the following three weeks, the voltage weakened at the Hamburg factory two more times, each time for a fraction of second. Since the

machines were on a production break both times, there was no damage. Still, the company invested €150,000 to set up its own emergency power supply, using batteries, to protect itself from future damages….

….A survey of members of the Association of German Industrial Energy Companies (VIK) revealed that the number of short interruptions to the German electricity grid has grown by 29 percent in the past three years.

Over the same time period, the number of service failures has grown 31 percent, and almost half of those failures have led to production stoppages. Damages have ranged between €10,000 and hundreds of

thousands of euros, according to company information.

Producers of batteries and other emergency energy sources are benefiting most from the disruptions. "Our sales are already 13 percent above where they were last year," said Manfred Rieks, the head of Jovyatlas, which specializes in industrial energy systems. Sales at APC, one of the world's leading makers of emergency power technologies, have grown 10 percent a year over the last three years.

"Every company -- from small businesses to companies listed on the DAX -- are buying one from us," said Michael Schumacher, APC's lead systems engineer, referring to Germany's blue chip stock index….

….Although the moves being made by companies are helpful, they don't solve all the problems. It's still unclear who is liable when emergency measures fail. So far, grid operators have only been required to shoulder up to €5,000 of related company losses. Hydro Aluminum is demanding that its grid operator pay for incidents in excess of that amount. "The damages have already reached such a magnitude that

we won't be able to bear them in the long term," the company says.

Given the circumstances, Hydro Aluminum is asking the Federal Network Agency, whose responsibilities include regulating the electricity market, to set up a clearing house to mediate conflicts between companies and grid operators. Like a court, it would decide whether the company or the grid

operator is financially liable for material damages and production losses.

For companies like Hydro Aluminium, though, that process will probably take too long. It would just be too expensive for the company to build stand-alone emergency power supplies for all of its nine

production sites in Germany, and its losses will be immense if a solution to the liability question cannot be found soon. "In the long run, if we can't guarantee a stable grid, companies will leave (Germany),"

says Pfeiffer, the CDU energy expert. "As a center of industry, we can't afford that."

The expectation of uninterruptible power, and the extreme dependency it creates, is the problem. Consumers do not feel they should be required to provide resilience with expensive back up options,

yet this is increasingly likely in many, if not most, jurisdictions in the coming years. In emerging markets, it is common for power supply to be intermittent, and for fall-back arrangements to be

necessary. We recently covered this situation in detail at The Automatic Earth, using India as a case study.

The European Dash for Off-Shore Wind

- The United Kingdom

The UK's Renewable Energy Roadmap has plans on a similar scale to Germany, proposing 18GW of wind capacity by 2020 (or some 30,000 turbines). Scotland is particularly keen to emulate, and surpass, Denmark, which generates 30%

of its power from wind. Denmark is able to do this because it does not operate in isolation. It is effectively twinned with with Scandinavian hydro power, which provides the energy storage component, albeit at a price. On windy days, Denmark can export its surplus power to its neighbours, which have large enough grids to absorb power surges, but

it does so at a low price. When the wind is not blowing, Denmark imports power at a high price. Ownership of the storage component makes a significant difference to the economics.

Unfortunately for Scotland, it currently has no access to a comparable hydro resource, either within it own borders or in the English market where it would be selling surplus power. As things stand, if wind power were developed at the proposed scale, it would have to be twinned with gas plants, but North Sea gas is already in sharp decline. For this

reason, Britain and Scandinavia are planning to build NorthConnect, which would join Britain and Norway in the world's longest subsea interconnector (900km) at an estimated cost of £1 billion (€1.3 billion), supposedly by 2020. This would follow on from the BritNed interconnector linking Britain and the Netherlands as of 2011 - a 260km line

developed at a cost of £500 million (US $807.9 million).

"Using state-of-the-art technology, the interconnector will give the UK the fast response we will need to help support the management of intermittent wind energy with clean hydro power from Norway," Steven Holliday of the National Grid says. "It would also enable us to export renewable energy when we are in surplus. At this very moment a seabed survey is underway in the North Sea, looking at the best way to

design and install the cable, which would run through very deep water."

If the project were completed as projected, it would allow the British, like the Danes, to subsidize the Norwegian power system, as the economic advantage lies with the owner of the storage capacity. The

odds of completing such an ambitious project on time, however, and within budget, have to be regarded as low even if we were not facing financial crisis. Given that we are, those odds fall precipitously. The likelihood of having to twin whatever off shore wind is actually built with gas therefore increases. UK

gas production is falling and storage is limited.

The shale gas reserves touted to provide affordable gas in the future amount to a mirage, thanks to the very low EROEI and high capital requirement. The UK is facing a future as a gas importer at the wrong end of a long pipeline from Russia. This is not a secure position to be in, especially given the UK's gas dependence following the 1990s dash for gas. Developing wind power will make little difference if there

is no flexible generating plant to provide back up.

The cost of building the turbines, their grid connections, back up gas plants and additional gas storage would be over ten times the amount required to build a fossil fuel alternative. According to a recent report to Britain's Department of Energy and Climate Change, the cost of the grid connection alone

would be greater than the entire cost o the alternative option.

The cost would have to be borne upfront, while the payback would come over a long period of time. This has significant implications for the net present value, and 'effective EROEI', of wind energy, especially in

a scenario where the applicable discount rate is likely to skyrocket due to growing instability:

When introducing a discount rate of 5%, which can be considered very low both in non-financial and in financial realms, and represents societies with high expectations for long-term stability (such as most

OECD countries), the EROI of 19.2 of this particular temporal shape of future inputs and outputs is reduced to and 'effective' EROI of 12.4 after discounting.

But discount rates are not the same in all situations and societal circumstances. Investing into the same wind power plant in a relatively unstable environment, for example in an emerging economy, where

discount rates of 15% are more likely, total EROI for this technology is reduced to a very low value of 6.4, nearly 1/3 of the original non-discounted value.

Currently stable states are far more likely to resemble developing countries in a future of upheaval.

The investment choice is having to be made at a time when financial crisis is beginning to bite, thanks to Britain's disastrous financial position as the ponzi fraud capital of the world. While wind is currently the preferred option, it is very likely the decision will be revised over the next few years, with relatively few turbines ever having been built, and perhaps even fewer actually connected to the grid. Neither the turbines nor the gas alternative, if there turns out to be sufficient capital to build either one, would last

more than perhaps thirty years, so both represent medium term solutions only.

The CEO of the National Grid, in an interview last year with the Today Programme on BBC Radio 4, informed listeners that they would have to get used to intermittent power supply. No one seemed to be paying attention. It is interesting to note that under the old nationalized and vertically integrated CEGB in Britain, there was a responsibility to keep the lights on. When the CEGB was broken up, the National

Grid inherited only the responsibility to balance supply and demand.

When introducing a discount rate of 5%, which can be considered very low both in non-financial and in financial realms, and represents societies with high expectations for long-term stability (such as most

OECD countries), the EROI of 19.2 of this particular temporal shape of future inputs and outputs is reduced to and 'effective' EROI of 12.4 after discounting.

But discount rates are not the same in all situations and societal circumstances. Investing into the same wind power plant in a relatively unstable environment, for example in an emerging economy, where

discount rates of 15% are more likely, total EROI for this technology is reduced to a very low value of 6.4, nearly 1/3 of the original non-discounted value.

Currently stable states are far more likely to resemble developing countries in a future of upheaval.

The investment choice is having to be made at a time when financial crisis is beginning to bite, thanks to Britain's disastrous financial position as the ponzi fraud capital of the world. While wind is currently the preferred option, it is very likely the decision will be revised over the next few years, with relatively few turbines ever having been built, and perhaps even fewer actually connected to the grid. Neither the turbines nor the gas alternative, if there turns out to be sufficient capital to build either one, would last

more than perhaps thirty years, so both represent medium term solutions only.

The CEO of the National Grid, in an interview last year with the Today Programme on BBC Radio 4, informed listeners that they would have to get used to intermittent power supply. No one seemed to be paying attention. It is interesting to note that under the old nationalized and vertically integrated CEGB in Britain, there was a responsibility to keep the lights on. When the CEGB was broken up, the National

Grid inherited only the responsibility to balance supply and demand.

When introducing a discount rate of 5%, which can be considered very low both in non-financial and in financial realms, and represents societies with high expectations for long-term stability (such as most

OECD countries), the EROI of 19.2 of this particular temporal shape of future inputs and outputs is reduced to and 'effective' EROI of 12.4 after discounting.

But discount rates are not the same in all situations and societal circumstances. Investing into the same wind power plant in a relatively unstable environment, for example in an emerging economy, where

discount rates of 15% are more likely, total EROI for this technology is reduced to a very low value of 6.4, nearly 1/3 of the original non-discounted value.

Currently stable states are far more likely to resemble developing countries in a future of upheaval.

The investment choice is having to be made at a time when financial crisis is beginning to bite, thanks to Britain's disastrous financial position as the ponzi fraud capital of the world. While wind is currently the preferred option, it is very likely the decision will be revised over the next few years, with relatively few turbines ever having been built, and perhaps even fewer actually connected to the grid. Neither the turbines nor the gas alternative, if there turns out to be sufficient capital to build either one, would last

more than perhaps thirty years, so both represent medium term solutions only.

The CEO of the National Grid, in an interview last year with the Today Programme on BBC Radio 4, informed listeners that they would have to get used to intermittent power supply. No one seemed to be paying attention. It is interesting to note that under the old nationalized and vertically integrated CEGB in Britain, there was a responsibility to keep the lights on. When the CEGB was broken up, the National

Grid inherited only the responsibility to balance supply and demand.

A European Supergrid?

A European supergrid, with many cross-border transmission lines, has long been a European goal. The idea is to share power as widely as possible, evening out

disparities in supply and demand across Europe. It is intended to be particularly applicable in terms of evening out the effects of intermittent renewable energy,

notably off-shore wind, which could be linked with distant storage capacity. The vision even includes integrating Icelandic geothermal power.

Initial steps are already being contemplated with regard to integrating off-shore wind in north west Europe:

The North Sea Grid Initiative consists of Germany, Denmark, Norway, Sweden, Belgium, France, Luxembourg, and the United Kingdom. These countries signed a

memorandum of understanding back in 2011 to help spur offshore wind development and tap into the ideal types of renewable energy in different parts of Europe within the next decade. More than 100 gigawatts (GW) of offshore wind are in the development

or planning phases throughout Europe.

Pooling grid connection costs between countries by linking wind farms is projected to bring costs down substantially. Interconnectors are extremely expensive, hence the

incentive to reduce costs wherever possible.

To make offshore wind work in northwest Europe, policymakers may have to adopt even more ambitious plans for the technology, gathering individual projects into hubs further offshore to capture more wind and pool connection costs, in a potentially high

risk strategy.

The approach could shave 17 percent off an estimated 83 billion euros to connect 126,000 MW of offshore wind by 2030, according to a report produced last year by

renewable energy lobby groups, consultancies and university research departments, "OffshoreGrid: Offshore Electricity Infrastructure in Europe".

Groups such as Friends of the Supergrid envisage an exceptionally ambitious scaling up of power system integration, with a view to transitioning to an electrified economy by 2050:

"Supergrid" is the future electricity system that will enable Europe to undertake a once-off transition to sustainability. The concept of Supergrid was first launched a decade ago and it is defined as "a pan-European

transmission network facilitating the integration of large-scale renewable energy and the balancing and transportation of electricity, with the aim of improving the European market".

Supergrid is not an extension of existing or planned point to point HVDC interconnectors between particular EU states. Even the aggregation of these schemes will not provide the network that will be needed to carry marine renewable power generated in our Northern seas to the load centres of central Europe. Supergrid is a new idea. Unlike point to point connections, Supergrid will involve the creation of "Supernodes" to collect, integrate and

route the renewable energy to the best available markets. Supergrid is a trading tool which will enhance the security of supply of all the countries of the EU.

The stated goal is to a achieve a transition to sustainability, while providing for a low-carbon, high-growth scenario. This is an obvious contradiction, given that high growth not sustainable by definition. The plan appears to be the pinnacle of techno-utopia, and a clear example of fashionable energy fantasy. Unfortunately unrealistic

dreams can be sold as safe long term investments:

Despite these uncertainties, others believe the supergrid is a smart investment. ‘There are pension funds and many investors looking for safe returns,’ Julian Scola, spokesman for the European Wind Energy Association in

Brussels, said to the New York Times. ‘Electricity infrastructure, which is a regulated business with regulated returns, ought to and does provide very safe and very attractive investment.’

Pension funds, while they still exist in their current form, could be lured into backing something too good to be true, as happened so extensively during the initial phase of the credit crunch. Such investments are highly unlikely

to pay off.

The Broader European Energy Context

In addition to the problems with off shore wind and grids, knock on effects are anticipated in other energy markets with greater reliance on wind power:

There will be an increase in gas-price volatility across Europe as markets with more wind capacity, such as the U.K., Spain, France, Germany and the Netherlands, are linked to those with less, James Cox and Martin Winter, consultants at Poyry in Oxford, England, said in a research report published today. Wind will be the main source of irregular supply, as output can

still fall to zero no matter how much capacity is installed, while solar continues to produce even under cloud cover.

"If it’s cold and still, it’s much more extreme for the gas network because you get the heating demand response to the cold weather and the power response to the still weather," Cox.

The European Union has reached 100 gigawatts of installed wind-energy capacity, equivalent to the output of 62 coal-fired power stations, the European Wind Energy Association said Sept. 27. In the EU, about 5 percent of electricity came from

wind last year.

The winners in this scenario will be owners of so-called fast-cycling gas storage, which can respond rapidly to falling wind generation, and traders who can take advantage of diverging prices at Europe’s trading hubs as weather patterns vary by

geography, Cox said.

Once again, ownership of key energy storage components is critical. In our financialized world, it is also small wonder that traders playing an arbitrage game would be expected to enjoy great opportunities for gain. This dynamic has already

threatened power supplies and is likely to do so repeatedly:

Germany’s electricity grid came to the brink of blackout last week – not because of the cold, but because traders illegally manipulated the system. They tapped emergency supplies, saving money but putting the system at risk of collapse.

Normal supply is maintained by the dealers acting as go-betweens for the industrial and domestic electricity consumers and the generators so that the latter know how much to supply. The Berliner Zeitung said the dealers were legally obliged to

continually order enough electricity to cover what their customers need. But this was not done earlier this month, according to the regulator’s letter. Instead dealers sent estimates which were far too low, meaning the normal supply was almost

completely exhausted. Several industry insiders told the Frankfurter Rundschau daily the tactic was deliberately adopted to maximise profits.

The dealers systematically reduced the amount they ordered for their customers, avoiding the expensive supply and forcing the system to open up its emergency supply – the price for which is fixed at €100 a Megawatt hour. This is generally considered very expensive – but compared to what else was on offer at the time, it represented huge savings – yet put the entire electricity

supply system on emergency footing for no reason.