Low Nordic elcertificate prices undermine investment in wind power
Wind power developers in Norway and Sweden are questioning the economic viability of new wind farms because of chronic oversupply on the Nordic renewable energy certificates (elcertificate) market, according to market participants.
The ongoing price depression has already seen some developers shelve wind power projects that are otherwise ready for construction, one analyst said.
"There are around 9m elcertificates banked which can be sold when prices are deemed sufficiently high, placing downward pressure on the market," said Triventus Consulting investment and economics head Justin Jeffs.
With prices bearish, there was a consensus among sources that some clean technologies are being priced out of the market.
Onshore wind power has a high risk of exposure - despite the technology being touted as key to Norway and Sweden reaching 2020 clean power generation targets - with production costs making projects with elcertifcates marginal at today's levels.
The production cost for onshore wind power in Norway and Sweden is around €70/MWh, according to market participants.
In contrast, biomass-fuelled power generation was placed in a slightly lower cost range, while hydro power projects are priced in the €3040/MWh range.
On the wholesale power market, the Nord Pool front-quarter Baseload product on the Nasdaq OMX Oslo exchange settled at €36.85/MWh on Thursday, while July's ICIS assessment of the spot elcertificate product was (Swedish kronor) SKr170/MWh (€20/MWh).
This puts total income for front-quarter delivery on the futures market for wind farm operators at around €57.00/MWh - more than €10/MWh short of the average production cost.
The elcertificate market encourages producers to invest in renewable electricity generation assets by granting certificates for every megawatt hour generated from qualifying renewable technologies.
The certificates are commercially tradable assets and act as an additional source of income for renewable producers.
The market is technology neutral, with demand created by a quota obligation on all electricity suppliers.
The mechanism is the primary policy instrument behind Norway and Sweden's joint bid to source 26.4TWh of electricity generation volumes from renewable energy sources by 2020.
The Swedish side of the deal is heavily dictated by its requirement to produce 50% of its power from clean sources by 2020 under the EU renewable energy directive (see EDEM 30 June 2011).
But the price depression issue could become a major barrier to this goal. In 2008, the spot elcertificate price did not fall below SKr238. In 2009, it did not dip below SKr291, and in 2010, the price did not fall below SKr209.
In 2011, it fell below SKr200 for the first time.
Investors said the market is likely to face low elcertificate prices in the short term with the supply glut remaining an issue.
Strong renewable outturn is also keeping wholesale electricity prices on a tight leash, with more than 50% of the Nordic power market supplied from clean energy sources.
Nordic hydropower is having a bumper year, with Norway and Sweden maintaining a strong hydrological balance since last year (see EDEM 12 October 2011). Consequently, producers and project developers are facing squeezed profit margins.
"The elcertificate prices are low when combined with current electricity prices. Too low for some developers to make a profit," Jeffs said.
"Similarly, financing conditions generally are making projects difficult to realise for smaller developers and unattractive for professional investors, utilities and industrials. The economic situation in Europe is unlikely to help the financing market, nor the demand for electricity."
"With the current regime, the Nordics are heading into a well oversupplied market in the not-too-distant future," a second market analyst said.
"Prices could go extremely low compared to other regions in Europe. So whether power producers have the incentive to build new capacity is a question."
According to John Ravlo, commercial director at renewable energy portfolio manager Ecohz: "Total income is not sufficient to make an onshore wind power investment profitable, but total income is sufficient for several new hydro and bio power projects.
"Several onshore wind power projects are ready for construction, but lack of profitability has postponed construction."
Despite bleak economic conditions for wind power generation in Norway and Sweden, there remains some optimism among stakeholders that low elcertificate prices will not hinder the development of the sector indefinitely.
"The main problem is that investors focus on current levels [the forward curve is generally priced 1-5 years ahead] and not on future levels [5-25 years ahead] from which they will get their income. All forecasts of future levels show an increasing trend," said Poyry SwedPower senior advisor Lennart Larsson.
"Wind projects take a long time to realise [3-5 years typically] and prices go up and down," Jeffs said. "Norway joined the system at the end of last year, bringing a further supply-demand factor to the equation. Furthermore, some production is due to disappear from the system this year, reducing the amount of certificates.
"Finally, the government has a checkpoint meeting in 2015 at which it can increase the quota if prices are deemed to be too low to ensure the 2020 target is realised," he said. CR
See sister publication European Clean Energy Markets (ECEM) for ICIS assessments of Nordic elcertificate valuations. For more details, call +44 207 911 1919 or email: firstname.lastname@example.org
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