ECEM: Nordic windpower investment stagnant, despite bullish elcertificate market

22 March 2013 17:18 Source:ICIS

An substantial bull run in the Nordic elcertificate market in recent months might not be sufficient to attract significant investment into the region's windpower sector, according to market participants.

Traders have frequently told ICIS that Swedish kronor (SKr) 250 (€29.6) was the minimum that spot prices should be to make viable new wind farms, and some parties are known to have chased up prices over a prolonged period in a bid to ensure this outcome.

Latest ICIS assessments show that the spot price is only SKr18 below this threshold, with the contract expected to breach this level in a matter of months, while 2015 prices are just SKr4 short.

However, some quarters suggest that an elcertificate price above SKr250 might not be the catalyst for investment into onshore wind power that some had hoped for.

In addition to elcertificate prices, wholesale electricity prices are an obvious factor in investment decisions, with the combined prices influencing revenue streams.

And Nordic wholesale electricity prices have largely demonstrated downside in the years following the financial crisis because of weakened fuels and carbon markets and, more recently, a strong hydrological balance in Scandinavia. Consequently, profit margins for power producers have been squeezed, leaving fewer funds available to invest in renewable energy, further increasing the need for elcertificate and wholesale power prices to push higher to compensate for the shortfall.

"Bigger companies are still building new wind farms, but many small firms are finding it hard to get loans and secure funding in this economic climate," said Orjan Hedblom of the Swedish Wind Power Association.

The production cost for onshore wind power in the Nordics remains around €70.00/MWh, according to market participants (see sister publication EDEM 27 July 2012), a level that the combined elcertificate and wholesale electricity price is now approaching.

Not all renewable energy investments are suffering from the current prices levels, with technologies such as biomass and hydro having lower production costs.

"A lot of hydro projects in Norway are rather cost-effective. A fair share of these projects will be viable even without the elcertificate price," said Norway-based Thema Consulting Group partner Arndt von Schemde.

Volatility and illiquidity are also of concern to investors looking to take on long-term projects. Wind farms are considered a minimum 15-year commitment, and elcertificates can be volatile, with liquidity often be an issue.

"Furthermore, there is more reluctance from Norwegian investors to look into wind, with the country relatively new to the elcertificate market and their expertise traditionally in hydro power."

Sweden has been operating a green certificate market since 2003, while Norway only joined last year. However, persistently low prices in recent years have seen some wind projects put on hold until things improve, elcertificate market sources told ICIS.

The market is part of a wider strategy between Norway and Sweden to source 26.4TWh of electricity generation volumes from renewable energy sources by 2020.

Although elcertificates reaching SKr250 might not turn out to be the milestone some had hoped for, participants are confident that the mechanism will deliver.

"The Nordic system already has more energy from renewable sources, and is ahead of schedule so far. If the market needs help, the government will intervene in 2015, when they can adjust the quotas if need be," concluded Michael Bergh, CEO of Swedish broker SKM. Christopher Rene

By Christopher Rene