Green energy supply: source or invest?

A growing number of companies adopts renewable energy goals and commits to green energy supply. Top of the bill might be Ikea, that has committed to produce as much renewable electricity as it consumes in its industrial sites, storage sites and shops by 2020. Apple is approaching the 100% renewable electricity supply rapidly, and was already at 93% in 2015. And here’s just a handful of famous company names that have committed to the symbolic 100% renewable electricity supply by 2020 target:

Swiss RE, Bank of America, BMW, British Telecom, Coca Cola, Goldman Sachs, ING, La Poste, Phillips Lighting, Sky Entertainment, UBS, Unilever

(These names and much more information on corporate renewable energy efforts can be found on the RE100 website.)

With a climate change denying Trump administration in the US, one could easily be pessimistic about the prospects of greening the world’s energy supply. However, I believe that the renewable energy revolution is a train that is rolling and can’t be stopped in its tracks:

1. A large part of the public is convinced that climate change is a real problem. Companies feel a pressure to present green energy credentials to clients, current and future employees, investors, or they just go green because of an inborn sense of social responsibility.

2. The costs of building renewable energy generation has dropped spectacularly. Energy from windmills now costs between 52 and 110 euro per MWh, according to Wind Europe. That is 48 to 102 dollars at the current exchange rate. Electricity from photovoltaics looks even more spectacular. According to the International Renewable Energy Agency, a project in Dubai that was commissioned in May 2016 will produce power from the sun for a cost as low as 30 dollar per MWh.

In many places in the world, the all-in cost of consuming electricity from the grid is higher, making it profitable to generate on-site green electricity rather than buying from the grid.

For feeding the green electricity into the grid, the 110 euro per MWh needed for some windmill projects, might still be too high for the investment to make business sense. Subsidies and governments willing to grant them to windmills and solar panels might still be needed for the time being. But then the energy industry has always been subsidized. The UK will pay EdF 92,50 pound sterling per MWh for building a nuclear power plant at Hinkley Point, that’s a 107,54 euro per MWh. Isn’t that money more wisely spend on windmills?

Renewable energy is also playing a crucial role in bringing electricity to poor countries. Access to green electricity in remote regions, isolated from reliable grids, can be crucial for those regions’ development. The recent acceleration of growth of renewables in developing countries is likely to continue.

If Donald Trump thinks that his skeptic approach to greening energy supply is part of his businessman’s attitude to the presidency, then he is mistaken. A 21^st century businessman integrates green energy supply goals in his corporate strategy, because they make business sense. As an energy buyer, the chances that you will be asked to buy green energy are increasing and they will continue to do so, whether Mr. Trump is in the White House or not.

Getting that question on greening the energy supply confronts the energy buyer with an important dilemma:

Will you go green by sourcing green electricity from the grid or by investing in your own green electricity production? To give an answer to this question, we have to make some considerations:

1. The physics and logistics of electricity supply make it difficult to label

Many years ago, we researched the green energy options of a client of ours. One of their team members kept insisting that he wanted proof that the green electricity was coming from a particular windmill near their factory. Due to the physics of electricity it’s impossible to do this. You cannot produce MWh’s in your windmill and attach a label to them saying: “Electricity from windmill so-and-so, to be delivered to company so-and-so”.

Electricity supply works by keeping the tension on the grid at a constant level by injecting as much electricity into the grid as the end-consumers are collectively consuming. But there is nothing that is physically being moved from place A to B. Therefore, it is impossible to say where the MWh’s that you consume were produced.

To deal with this, systems such as the European ‘certificates of origin’, have introduced a double marketing system. Producers of green electricity in Europe receive a certificate of origin. This is a piece of paper that says that a MWh of electricity was produced by a windmill, solar panel, by hydro, geothermal, biomass, etc.

The green electricity producer will sell electricity twice. The product itself (often called the “grey electricity”) goes to the grid at market prices. Next to that, the producer will make some extra income by selling the certificates of origin in a separate market.

Energy suppliers buy these certificates and bundle them with the physical MWh’s that they supply in green electricity products. That doesn’t mean that the power you consume comes from a particular windmill or solar panel. It means that as a consumer you have made an extra investment to support renewable energy. Some consumers have taken the labeling logic a step further by buying certificates of origin themselves in quantities equal to their physical consumption.

2. Green comes in many shades

More than 20 years ago, I read a book of which I vaguely remembered the title to be “Grass instead of atoms”. It envisioned a future in which all of the world’s energy would be supplied by biomass. The theory was that biomass is carbon-neutral, as the carbon dioxide produced by burning the plant material would be compensated by the CO2 sucked from the air by the growing plants. Green activists embraced the biomass idea heartily.

Twenty years later, the world and definitely the green movement has grown much less enthusiast about biomass:

1. Due to its low calorific content, you need a lot of plant material to produce a reasonable amount of energy. This causes huge logistic problems.
2. Not the least of it being the huge amounts of land that you need to produce sufficient biomass for supplying the world with energy. Land that in many cases could be used better to grow food. And land that was sometimes won by cutting down valuable, bio-diverse and more carbon-sucking rain forest. Next to that there are the environmental issues caused by monoculture. Very rapidly, we discovered that the world would not be better off if the whole equatorial zone was transformed into a massive palm oil plantation.
3. The theory of the carbon-neutrality of biomass can be challenged, especially if you cut rain-forest to plant palm oil and when you ship your biomass halfway across the globe.

Many well-intentioned biomass projects have ended in a public relations nightmare due to the questionable environmental credits of burning plant material. To investors’ horror the environmental groups that push for more green energy are often the first ones to raise protest against specific projects. Think about the many times local green activists have raised protests against the construction of a windmill.

The certificates of origin are granted to any green electricity project, regardless of its real environmental merits. If you consider going ‘deep green’, you might make some extra investments by buying some higher quality certificates.

3. Buying green electricity is very cheap

In Europe, you can currently buy certificates of origin. That is very cheap. The reason for this low price is simple: demand is lower than supply. Every MWh of green electricity produced in Europe gets a certificate. At this moment, 29% of all electricity produced in Europe is green (2015 data coming from Agora Energiewende). As long as all the citizens, companies, public authorities, etc. that buy green electricity consume collectively less than 29% of all electricity consumed in Europe, the demand for green electricity will be lower than the supply. Hence the low price of buying green electricity.

If your only interest in buying green electricity is “green-washing”, getting the paper on the wall to say that you buy green so that you can satisfy the customers that are asking for it, the low price of green electricity is good news. However, many customers have a more genuine interest, more serious intentions of making a valuable contribution to the environment. For them, just spending a few ten thousands of euros or dollars on certificate-buying will not be very satisfying.

Moreover, a public relations catastrophe is looming again. Environmentalists are increasingly aware of how easy and cheap it is to claim ‘100% renewable electricity’ by buying certificates of origin. Clients that involve NGO’s in their sustainability policy (e.g. through the WWF Climate Savers initiative), already feel that pressure to do something more valuable than buying 15 cent per MWh certificates of origin.

4. Not all green electricity is good for the environment

Certificates of origin don’t work as a tool for putting pressure on energy companies to increase their green electricity production. But it works as a system for having companies with green intentions invest money in greenery. Unfortunately, that money isn’t always effective.

An effective investment in green electricity means that less carbon dioxide is emitted. Very often, the money you pay for certificates of origin goes to an old hydro power station or a windmill, solar panel or biomass power station that have been there already for many years. For hydro, wind and solar, the marginal cost of production is 0, meaning that their owners produce the electricity whenever they can. Bringing us to the startling conclusion:

Whether you pay for the certificate of origin or not, the green electricity would have been produced anyhow.

So, your effort to pay extra for the certificates of origin isn’t keeping a gram of carbon dioxide out of the air. You could solve this by buying higher quality certificates. However, if you invest every euro you spend to source green electricity in your own renewable energy production, you are effectively keeping CO2 out of the air. It will mean that a windmill, solar panel or other project gets built thanks to your efforts that pushes fossil-fuel fired MWh’s from the grid. As the investment costs to produce your own energy are so much larger than what you spend buying certificates, it might be financially impossible to achieve the symbolic 100% renewable goal. But the money is spent so much more wisely and with a net better effect on the environment.

5. Sourcing means spending money without return, contrary to investing

Which brings us to a next observation. Spending money on certificates is just that, spending. Investing money means that you can expect a return on your euros or dollars. On-site renewable energy production is often developed by a third party with a power purchase agreement. In many cases you will receive a fixed amount of money for renting your terrain or rooftop. Next to that, you can buy the electricity at a price far below the price at which you buy from the grid. Such projects always lead to savings, and thanks to such third party arrangements without even having to invest the company’s money.

When you invest in off-site renewable energy projects, the return will depend on the particular set-up, and often on the subsidy arrangement. In many cases, renewable energy is an interesting investment as the return is relatively stable and reliable.

6. What do you want to achieve with your green energy efforts?

As you can read from the observations above, greening your energy takes more reflection than just buying a green power product based on certificates of origin. Investing the money in your own green electricity production is a more valuable approach, both for the environment and for your financial bottom line. However, not every company might be ready to have such large amounts of cash flowing to green power investments.

As an energy buyer, your research of the energy markets can lead to more valuable choices for your company. To determine your approach, it is worthwhile to make a good preliminary analysis of what you want to achieve with your green energy efforts, e.g. through a stakeholder analysis. If you’re just greening to satisfy customers, you might be happy with the certificates of origin. If you also want to prove your green credentials to environmentalists, you might decide to go deeper.

Nowelizacja ustawy o odnawialnych źródłach energii – konsekwencje dla odbiorców końcowych

Prefer the English version? You can find it here.

W dniu 28 czerwca Prezydent RP podpisał nowelizację ustawy OZE, która wejdzie w życie już 1 lipca 2016 r. i już z tym dniem wprowadzone zostaną zmiany które mogą mieć konsekwencje dla odbiorców końcowych.

Nowy obowiązek – niebieskie certyfikaty – od 1 lipca 2016 r.

Już od 1 lipca 2016 zmianie ulega wymiar obowiązku w zakresie przedstawienie do umorzenia świadectw pochodzenia energii ze źródeł odnawialnych (zielonych certyfikatów). Obecny wymiar obowiązku wynoszący 15% zostaje zmniejszony na całe drugie półrocze 2016 r. do 14,35%. Oznacza, to że sprzedawca energii, za drugie półrocze 2016 r. będzie zobowiązany do przedstawienia do umorzenia mniejszej ilości zielonych certyfikatów w odniesieniu do energii elektrycznej sprzedanej odbiorcy końcowemu.

Jednakże wraz z obniżeniem obowiązku w zakresie zielonych certyfikatów, już od 1 lipca 2016 r. wprowadzony zostanie nowy obowiązek i nowy rodzaj certyfikatów – obowiązek umorzenia świadectw pochodzenia potwierdzający wytworzenie energii z biogazu rolniczego (tzw. niebieskie certyfikaty). Wymiar obowiązku w zakresie niebieskich certyfikatów będzie odnosił się do 0,65% wolumenu zakupionej energii – czyli będzie równy obniżce obowiązku w zakresie zielonych certyfikatów.

Wydaje się, że takie przesunięcie powinno być neutralne dla odbiorców końcowych tym bardziej, że łączny procentowy wymiar obowiązku w zakresie zielonych i niebieskich certyfikatów pozostaje na tym samym poziomie co sprzed nowelizacji ustawy OZE. Jednakże wprowadzenie obowiązku w zakresie niebieskich certyfikatów prawdopodobnie spowoduje wzrost cen energii elektrycznej dla odbiorców końcowych. Wynika to z faktu, że cena niebieskich certyfikatów (ze względu na ich małą podaż) prawdopodobnie będzie zbliżona do opłaty zastępczej (300,03 zł), tym samym będzie ponad czterokrotnie większa niż obecna cena zielonych certyfikatów – czyli odbiorca końcowy zapłaci za niebieskie certyfikaty dużo więcej aniżeli płaci obecnie za zielone certyfikaty.

Tabela 1: Obowiązek praw majątkowych od 2010r. (opracowanie własne)

 Jaki będzie wymiar obowiązku w zakresie zielonych certyfikatów na rok 2017 ?

Zgodnie ze znowelizowanym art. 59 ustawy OZE na 2017 r. ustawodawca ustalił obowiązek w zakresie zielonych certyfikatów na 19.35% a niebieskich certyfikatów na 0,65% energii zakupionej przez odbiorcę końcowego. Jednakże jest to maksymalny wymiar obowiązku i zgodnie z art. 12 ust. 5 nowelizacji „Minister właściwy do spraw energii, w drodze rozporządzenia, zmieni wielkość udziału, o którym mowa w art. 59 ustawy OZE, na 2017 r. w terminie do dnia 30 listopada 2016 r.”

Uprawnienie dla Ministra Energii do zmiany wielkości obowiązku wprowadza dosyć dużą niepewność dla odbiorców końcowych. Po pierwsze w ofertach zakupowych energii elektrycznej na 2017, 2018 i 2019r. spotykamy się z bardzo różnym podejściem sprzedawców co do określenia zasad ustalania ostatecznej ceny energii elektrycznej w oparciu o zmiany legislacyjne (np. pojawienie się nowego „koloru”, brak przedłużenia certyfikatu żółtego i czerwonego na rok 2019 itd.). Po drugie sprzedawcy na wiele sposobów kształtują cenę Praw Majątkowych na następne 3 lata, uwzględniając ryzyka zmienności cen i płynności na TGE. Warto zatem dostosować odpowiednią strategię do tak zmiennego otoczenia rynku biorąc pod uwagę przede wszystkim wpływ zmian cen/kosztu energii na biznes prowadzony przez odbiorcę końcowego.

 

Tabela 2: Udział obowiązku praw majątkowych od 2010r. (opracowanie własne)             *Minister Energii zmieni tą wartość do 30/11/2016

Wpływ kolorów na koszt energii odbiorcy końcowego

Bardzo zmienne otoczenie legislacyjne stawia pod znakiem zapytania budżet dla odbiorcy końcowego w następnych latach. W tabeli nr 3 przedstawiono przykładowe szacunkowe ceny za poszczególne kolory w latach 2017 – 2019. Dla odbiorcy zużywającego rocznie ok 100.000 MWh, akceptacja oferty sprzedawcy na rok 2019 uwzględniającej kolor żółty, czerwony i fioletowy, przy braku przedłużenia obowiązku na ten rok powoduje stratę ok 1,4 mln złotych.

 

Tabela 3: Ceny kolorów

Opłata OZE – od 1 lipca 2016 r.

Od 1 lipca 2016 r. wraz z wejściem w życie nowelizacji i rozdziału 4 ustawy OZE pojawi się na rachunkach za usługi dystrybucyjne nowa opłata – tzw. opłata OZE. Zgodnie z art. 95 ust. 1 ustawy OZE operator systemu dystrybucyjnego zobowiązany jest pobrać od każdego odbiorcy końcowego opłatę OZE. Na drugie półrocze 2016 r. opłata OZE została ustalona na poziomie 2,51 zł za każdą MWh energii elektrycznej dostarczonej odbiorcy końcowemu. Na rok 2017 Prezes URE ogłosi poziom opłaty OZE do 30 listopada 2016 r. Warto wskazać, że dla przedsiębiorstw posiadających status odbiorcy przemysłowego opłata OZE podlega zmniejszeniu proporcjonalnie do posiadanej ulgi. W tym zakresie warto sprawdzić na pierwszych fakturach czy operator systemu dystrybucyjnego właściwie wyliczył opłatę OZE.

Zwiększenie Opłaty Przejściowej od 1 stycznia 2017 r.

Nowelizacja ustawy OZE przewiduje również zwiększenie opłaty przejściowej dla części odbiorców. Opłata przejściowa doliczana jest do faktury za usługi dystrybucji na podstawie ustawy z dnia 29 czerwca 2007 r. o zasadach pokrywania kosztów powstałych u wytwórców w związku z przedterminowym rozwiązaniem umów długoterminowych sprzedaży mocy i energii elektrycznej.

Zgodnie z Nowelizacją ustawy OZE w odniesieniu do odbiorców końcowych innych niż gospodarstwa domowe, których instalacje są przyłączone do sieci elektroenergetycznej:

• niskiego napięcia, opłata przejściowa na 2017 r. wzrasta z 0,85 zł do 1,65 zł na miesiąc na kW mocy umownej,
• średniego napięcia, opłata przejściowa na 2017 r. wzrasta z 2,10 zł na miesiąc na 3,80 zł na kW mocy umownej,
• wysokich i najwyższych napięć, opłata przejściowa na 2017 r. pozostaje bez zmian
• wysokich i najwyższych napięć i którzy, zużyli nie mniej niż 400 GWh energii elektrycznej z wykorzystaniem nie mniej niż 60% mocy umownej, dla których koszt energii elektrycznej stanowi nie mniej niż 15% wartości ich produkcji, opłata przejściowa wzrasta z 1,08 zł na miesiąc na 1,10 zł na kW mocy umownej,

Pełen tekst ustawy można znaleźć tutaj: http://dziennikustaw.gov.pl/DU/2016/925

Nabucco gas pipeline: YES

On Monday, the governments of Turkey, Bulgaria, Romania, Hungary and Austria signed a deal in Ankara that is to kick-start the building of the Nabucco natural gas pipeline. The pipe is to bring gas from the Caspian region to the border of Austria (Baumgarten Hub) and from there to Germany. It could even be used to bring in gas from Middle-East countries (Iran, or more presumably, Iraq). As such it would mean an important diversification of gas supplies to Europe, which presently depends primarily on Russian gas for its gas imports. As its own gas production is falling rapidly, Europe will have to import more and more gas from abroad. If the Nabucco pipeline is built, this gas can come from other places than Russia. This diversification can be completed by building LNG terminals on the Eastern and Southern shores of Europe. The signing of this Nabucco deal earmarks an important evolution in German energy policy. By co-signing the deal, the German government seems to depart with its ‘Russian only’ policy of the past.

I have always believed that diversifying gas supplies into Europe makes perfect geopolitical sense. It is clear that after the end of the cold war, Russian hasn’t exactly moved into the European influence sphere. Disputes over accession into Nato or the EU of Eastern-European countries made this clear. And since President Putin came into power in the Kremlin, it was clear that Russia preferred regaining its super power status instead of leaning closer to the EU. Considering that – unfortunately – international politics today still resemble the sort of power games played in Napoleon’s days, reducing dependency on Russia for gas supplies is the more cautious strategy. It is strange that it took so long before many European top politicians understood this.

German politicians and energy companies in particular, seemed to prefer bringing in all the extra gas from Russia instead of diversifying. Ever since Willy Brandt coined the term in the 1970’s, German Social Democrats have been firm adherents to the Ostpolitik, a policy of tightening economic ties with the energy giant in the East, Russia. This became obvious when German chancellor Gerhard Schröder actively supported the construction of the NordStream pipeline, that brings Russian Gas directly to German soil as it lies on the bottom of the Baltic Sea.

German energy policy is remarkable, natural gas in particular. German politicians pay lip-service to European integration in this domain but at the same time they keep on taking decisions that clearly put the national German interest before common European interests. Bypassing Eastern-European countries with the NordStream pipeline is a good example of that. From a historical perspective, it is not surprising that Poland feels uneasy when neighboring Germany and Russia make deals among themselves. The strange thing is that this apparently powerful German gas policy produces such feeble results. Managers of international companies are always shocked to find out how much more their German sites pay for gas than their counterparts in other European countries. Expensive gas clearly is a handicap for German industry. German industries are also increasingly frustrated about the state of the German energy market liberalization process. Strangely enough, they seem to blame the ‘Oligopoly’ of German energy suppliers for this, and they are focused on power markets. I think that the problems in the German market are much more structural than just suppliers’ behavior. I also think that the gas market is a far greater concern than electricity (developments with the EEX power market, for one thing, are positive). The issues that we face in the German gas market are:

–        It has only recently become possible for companies to offer competitive bids outside the areas where they owned the grid. It took the German authorities a very long time to determine regulated net tariffs, without which competition for clients on other suppliers’ grids is almost impossible.

–        Even today, it remains difficult to get a lot of offers from different suppliers for certain German sites. This is not due to a lack of potential suppliers. Germany is the country with the largest number of holders of a gas supply license. Only, they have difficulties shipping that gas through the country due to the many physical and contractual capacity constraints on the grid, or I should rather say grids, because even the transportation grid hasn’t been unified yet.

–        German suppliers have no clue of what service level they are supposed to offer in a modern gas market. I got a good example of that this week. We asked a German gas supplier for conditions similar to those our client was used to in the Netherlands, Belgium and France. The supplier first laughed at us, then made some very small concessions and charged a big extra service fee for those. Take-or-pay conditions in Germany are rigid and unfair. Price fixing services are sub-standard.

If anyone needs to get convinced that liberalization of energy markets isn’t such a bad idea after all, I recommend him to go and negotiate a gas contract in Germany. Some serious measures are necessary to unlock the German gas market. Restructuring the grid operators could be one of those. And this is not about unbundling the larger grids from the giant energy companies that own them. It is all about the excessive costs of transportation (and regulation) that are caused when more than 600 small companies operate a grid. German policymakers however, seem to be too busy entertaining relationships with foreign governments, large energy suppliers and local grid operators to tackle these issues. The fact that Gerhard Schröder became chairman of the shareholders’ committee of the Nord Stream project immediately after retiring from politics, highlights how policy and energy market interact in Germany.

The Nabucco pipeline deal also holds an interesting feature regarding liberalization. As it are gas companies such as OMV, Mol or RWE that will invest, it was to be feared that most of the gas that can flow through the pipeline would be tied up in long term deals. It has been decided however, that 50% of the gas in the Nabucco pipeline will be for the open market. Can this spark the development of Austrian gas Hub Baumgarten as a liquid trading place?

The Russians meanwhile, must worry about the Nabucco development. President Medvedev hurried to Berlin on Thursday to have Angela Merkel confirm her willingness to have the Nord Stream project on line. Russian politicians should realize that their behavior towards their biggest gas client in the past years was the strongest support possible for Nabucco. To my opinion, Russia is right to ask neighboring Ukraine to pay a market price for the natural gas that it gets supplied. The method of enforcing that however, is questionable. By shutting of the gas tap to Ukraine without any consideration for the European customers that sat on the other side of the pipeline through Ukraine, Russia has showed itself as an extremely unreliable supplier. In the past three winters, Russia has punched European gas consumers in the face twice by shutting of gas supplies through Ukraine. Fighting a war with Georgia might have boosted Russian international confidence. Russian governments should however realize that affirming investment in  Nabucco was the only logical counter-step in the international power game that Russia and Europe play over gas supplies. Mister Schröder’s story that building gas pipelines into Russia would ensure security of supply of natural gas to Europe makes most policymakers laugh today. Let’s hope that they realize that security of supply can be guaranteed only by creating open and liquid wholesale and retail markets of gas and by ensuring diversification of supplies by supporting the creation of new entry points.

Long live deregulation

With energy prices tripling in the past three years, many industrial buyers of energy have come to doubt whether deregulating energy markets was such a good idea after all. With exploding energy budgets, it is hard to be enthusiastic about it. It is true that in countries with diversified power production parks, power prices would have probably been lower if the market had remained regulated. In countries such as Germany or Belgium, the power producers used marginal cost pricing to explain why their power prices rise along with gas prices. Everybody understands that this is boosting the profitability of their nuclear or to a lesser extent coal-fired power plants. In a regulated market, it would have been much more difficult to push through such price rises. The regulator would have argued that the cost of nuclear power plants was not running up so high. This has been proved in the French electricity market where prices are still regulated. On the other hand I still see some firm arguments in favor of deregulation.

In some areas of Europe, such as remote parts of Germany or Eastern Europe, you still find yourself confronted with de facto monopolies in the gas market. Dealing with such suppliers learns you why deregulation is a good thing. I was “negoatiating”with one today. We asked him perfectly reasonable conditions regarding volume flexibility and price fixing services. The only answer that he had in store was ‘we do not offer that’. The gas market in the past years would have been a disaster without deregulation. As suppliers have the prices at which they buy from the producers pegged to the oil prices, they would have risen just as much as they have done now. But without competition and without transparency about the oil-indexed formula, customers wouldn’t have had access to services to hedge these exploding prices. Fixing prices for natural gas has only become available when markets were deregulated. And as I have learned today, without pressure from competition, gas suppliers are not likely to introduce services for gas price fixing. So at least in this perspective: long live deregulation!