EKON in the News

Germany plans to achieve 100% energy from renewable sources by 2040. The planned reform of its Renewable Energy Act now includes a considerable increase in its targets. Renewables are expected to generate up to 80% of the country’s electricity production in 2030 and 100% in 2035. Kim Keats, a Director at EKON Strategy Consulting, points out nine complementary measures to try to rebuild the situation in Spain.

How to manage the risks of the electricity market in such a volatile price environment? This and other issues were dealt with at the Solar+Wind Spain Congress, organized by Energy Box.

"If anything seems clear, it is that when the wind blows and it is sunny, electricity market prices drop,” Kim Keats Martínez, director of Market Modeling at EKON Strategy Consulting said today.

Kim Keats is convinced that in the coming years "a period of stability will come with renewables dominating the energy mix". But he also sees some uncertainties stemming from the logical dysfunctions that any change in the model has. "As coal, nuclear or gas plants are shut down, our price forecasting model suggests a price hump may occur between 2033 and 2043." This price increase will depend on several factors such as the installed renewable power or the development of storage systems.

Why does the EU Emission Trading Scheme ("ETS”) market work? It is not out of major polluters goodness of heart. If a major polluter forms part of the EU ETS and does not have sufficient EU Allowances ("EUA”) to cover their annual emissions, they will face penalties of 100€/tCO2e. This provides the "stick” to ensure compliance. But there is also a "carrot”: the major polluter can reduce its liability by reducing its own emissions and, if it can overachieve, it can sell any excess EUAs in a secondary market.

A market for green certificates ("GC”) works in a similar manner.  First, the authorities define a timeline of renewable generation targets.  This can be defined as a fixed energy quantum (TWh) that must be generated or supplied from renewable sources.  The target can also be defined as a percentage of generation or demand so that the energy target adjusts to changing macroeconomic conditions.
Except in reality, prices of electricity and the cost of supplying renewable generation can move for all sorts of reasons. The important thing to remember is that the price of GCs in a market environment will adapt to new information in a way that any government cannot if it opts for an auction approach.

To summarise, a mandatory GC market:
·         Achieves decarbonisation goals.
·         Automatically adjusts to decarbonisation goals when demand changes.
·         Adjusts an existing system, that of the EU certificates of origin.
·         Incurs no additional cost to the government.
·         Works with and not against the market.
·         Treats all renewable energy projects equally, that is, it does not discriminate between existing and new, auction and non-auction, one technology or another
·         Can use the GC allocation to support strategic sectors or technologies by allocating more than one GC per MWh of generation.

The health crisis caused by the coronavirus has turned society and the economy upside down. Thus, when barely a handful of weeks have passed since the curtain dropped on # COP25, the reality is that the statement "we must act now" still resonates in the environment. But COVID-19 stopped everything in its tracks. Or not?

In the context of the future energy, renewables must play an essential role, but all of this has been shaken, to a large extent, by the health crisis.

This is expressed by the director of EKON Strategy Consulting, Kim Keats. Based on his statement on the sharp drop in electricity demand since the health crisis began, he estimates that renewable energy faces a situation for which it may not have been prepared: low demand and affordable prices for other technologies, as is the case right now for gas.

This double impact, worsens the economic prospects for energy renewable. When demand falls, less renewable capacity is needed to reach the same level of penetration and when thermal generation costs fall, electricity prices fall, reducing the renewable capacity that can be sustained economically.

But it does not finish here. Kim Keats deals a severe blow to the renewable sector and warns that, if things do not change, it will be necessary to review renewable development plans in the medium and long term.

In particular, the planned capacity expansion at the NECP would lead to average prices captured by wind and photovoltaic well below its normalized costs (LCOE). This involves a "missing money” problem, referring to the fact that prices do not adequately reflect the value of the investment. If we do not return to the previous status quo, the plan and its implementation will need an adjustment.

Until such time as storage technologies allow a 100% renewable electricity system based on, should nuclear energy be considered part of a low-emission mix? Or are there preferable alternatives?

Yes, nuclear can be part of a low emissions generation mix, as its marginal costs are very low. Furthermore, nuclear is unlikely to slow down the deployment of renewables. With the intermittent nature of electricity generation from wind and solar, flexible sources of electricity can provide stability (such as hydro, combined cycle, demand management, etc.) while energy storage systems will absorb specific excesses (such as hydraulics, batteries, etc.).

Therefore, the question becomes, how long will nuclear power plants continue in operation? If the cost of combining storage with solar/wind continues to fall, we will achieve baseload market prices where nuclear power will not longer be profitable … And it would not be the first time that early closures occurred for economic reasons in Spain: that happened to fuel plants and, more recently, coal.

When the quarantine ends, the world and the way people think will no longer be the same. I believe that we will have to put all the necessary resources to advance in the development of storage and hybridization systems to support the unstoppable development of the different renewable technologies, facilitating the flexible management of the system.

Renewables have become, today more than ever, as the main route to post COVID-19 economic revival. First, because it ensures a sustainable way out of the crisis, as claimed in Spain and Europe; and second, because it is in full development. Furthermore, the effects of confinement on activity – in operation during the state of alarm due to its essential nature – have only been felt in some areas, such as self-consumption, and are not, for the moment, widespread. But experts warn that the situation can be complicated if the current scenario continues.

But analysts point to another long-term threat: that the fall in energy demand, which has caused both the prices of gas, oil (West Texas, the benchmark in the US market) and that of electricity to plummet, even going negative in some markets, make new investments unfeasible, as "current prices are insufficient to guarantee a reasonable profitability, if we take as reference the average daily price for the month of April of 18.30 €/MWh until the 24th and compare it with the LCOE (levelized cost of electricity) for wind / renewable generation between 33 and 37 €/MWh, it yields negative returns. This would require a review of the 2030 targets ”, illustrate from Deloitte.

"When demand falls, less renewable capacity is needed to reach the same level of penetration. And when thermal generation costs decrease (combined cycles), electricity prices fall, and renewable investment loses attractiveness, "adds Kim Keats, director of EKON Strategy Consulting, who believes that the expected increase in capacity should also be reviewed in the National Integrated Energy and Climate Plan (PNIEC), if the context does not change.

Article 10 of the new European regulation on the internal electricity market states that "there will be no upper limit or lower limit for wholesale prices of electricity", although the operators of the respective markets (OMIE, in the case of Spain) "may apply harmonized limits to the maximum and minimum matching prices" in the daily and intraday markets.

The maximum limit, as Cinco Días has forecast, will be approved in Spain and Portugal (both countries operate the Iberian MIBEL market) from the current 180 €/MWh up to a ceiling of 3,000 €/MWh. The minimum, which is currently zero euros, would go to -500 €/MWh, according to the president of OMIE, Carmen Becerril.

What will generators be willing to pay to produce energy? Jorge Morales de Labra, director of GeoAtlanter and member of the Fundación Renovables, points out two assumptions: nuclear power plants, whose shutdown and start-up has a high cost, and the oldest renewable energy plants in Spain, which are those that have a guaranteed premium besides receiving the market price.

Kim Keats, Director at EKON Strategy Consulting, adds another possibility: renewable plants that sign long-term power supply contracts (known as PPAs) at a guaranteed price in advance. This would include future construction facilities that sell their production at market price (without premium).

However, some consultants also doubts that, if negative prices are allowed in Spain, they will end up appearing. It alludes to what in the sector is called "complex offers": In theory, we have the same price formation algorithm for all of Europe, but OMIE has "complex offers" that "no one else uses "in Europe and that can be incorporated into the matching under certain conditions (indivisibility, minimum income, scheduled shutdown, production capacity or load gradient …).

These are the main conclusions drawn from the presentation that Kim Keats, Director of Market Modeling at the Spanish consultancy EKON Strategy Consulting, made on the results of its price projection and capacity expansion model during the Solar & Wind SWES Congress 2019.

In the most favorable scenario for the development of renewables, the EKON model expects to achieve 69.4% of electricity generation in 2030, only 4.6% behind the 74% target established by the Government in the draft of the PNIEC. PNIEC has not taken into account that with the expected technological advances in PV and wind technologies, the yields and the number of equivalent hours of operation will increase and it will be possible to achieve greater production with less capacity.

Another conclusions of the EKON model is that, unlike the results observed in other models, the massive entry of renewable capacity, and in particular PV, although it will cause a reduction in the average prices obtained by this technology, will not cause a price collapse (the dreaded "cannibalization").

As long as the entry of new wind and photovoltaic capacity occurs gradually, staggered, and not suddenly (which would be difficult given the technical and financial constraints), a saturation point will be reached so profitability will fall and investors will lose interest in continuing to install new capacity, and prices will tend to stabilize.

Finally, in relation to the new auctions that the Government intends to carry out to stimulate the entry of renewables, Kim Keats pointed out that in a situation in which wind and PV technologies have reached grid parity, that is, they are competitive and profitable in the current market situation without public aid, it is convenient to let the market decide for itself how much capacity to install, without the need for public intervention.

The rise in electricity prices, exacerbated by the Russian invasion of Ukraine, inflicts a fierce punishment on citizens and threatens to paralyze the industrial and business fabric in Spain and throughout Europe. Today the European Commission presents a range of tools that will be discussed on Thursday and Friday by the Heads of State and Government.

To free other energies from this pressure, Spain has put forward several proposals, such as the disassociation of gas from energy price setting, which has been rejected in Europe for months; or establishing a maximum price of 180 euros per MWh, which would de facto leave gas out, a proposal that today seems outdated.

COVID-19 has caused a lot of uncertainty about what it can mean for the renewable sector in Spain. Last April 6, ATA Insights organized a webinar entitled "The Impact of COVID19 on the Renewable Industry at an International Level" in which, among other speakers, Kim Keats, Director of EKON Strategy Consulting participated.

One of the first effects that Kim Keats pointed out, was the drop in demand for electricity, which you can clearly see in the data published by organizations such as REE and ENTSO-E.

Furthermore, even before the crisis, natural gas prices showed a downward trend. This double impact worsens the economic prospects for renewable energy.

Kim Keats warns that if things do not change, it will be necessary to control the renewable development plans in the medium and long term. In particular, the expansion of capacity foreseen in the NECP would lead to average prices captured by wind and photovoltaic well below its normalized costs (LCOE).

This leads to a "missing money" problem; referring to the fact that the prices do not adequately reflect the value of the investment. If we do not return to the previous status quo, the plan and its implementation need adjustment.

The energy of the future for Spain and Europe. This is how the Association of Renewable Energy Companies (APPA). refers to renewable sources. But if we talk about tomorrow, a question arises: how will the coronavirus affect the objectives of reaching 42% of clean energy by 2030?

The fall in the demand for electricity has been the result of the paralysis of a large part of the industry and shops, among other issues.

The effects of the pandemic on the economy are becoming increasingly noticeable. The renewables sector is no exception, suffering a great impact due to low demand and lack of investment.

"I am interested in the speed which demand can be recovered because it is an inconceivable slowdown, a shock external to the world economic system," says EKON Strategy Consulting director Kim Keats. "What is written as part of the plan that has been presented to Brussels, no longer works. When circumstances change, the plan must be changed."

Kim Keats warns that the government will have to review the medium and long-term renewable development plans if the situation does not change. In particular, reaching the NECP (National Energy and Climate Plan) targets would lead to captured prices, by wind and photovoltaic power, below their LCOE and therefore would not reflect the value of the investment. "We will not reach the renewable penetration target by 2030," says Keats, adding that a year of development has been lost. In short, the decarbonisation of the economy can become one of the driving forces behind reconstruction after this crisis.

The coronavirus has not only put our country’s health system to the test, but also renewable energies … and there is great uncertainty about what it may mean. "If things do not change, it will be necessary to review the medium and long-term renewable development plans, such as PNIEC (National Energy and Climat Plan)”, whose updated draft was sent by the Government to Brussels on March 31, according to Kim Keats director from Ekon Strategy Consulting.

Amongst his arguments, the drop in electricity demand that we are experiencing will mean that less renewable capacity is needed to reach the same level of penetration. Specifically, electricity demand has dropped in the first two weeks of the state of alarm. In the first week (between days 16 and 22 of March), it fell by 7.4%; and in the second week (between days 23 and 29 of March) it fell by 9.5%. But this is to be expected given the halting of non-essential services that was decreed on March 29. Electricity demand is expected to drop further in April.

So, what is a bubble? A bubble represent a point in the market where expectations of future returns are higher than reality. This happens when the price of investment instruments on the market rise to a point that exceeds a reasonable valuation and is not sustainable; the famous missing money problem.

However, A deep-dive look into the energy market would lead us to conclude that Spain is not in a bubble… yet. Kim Keats acknowledges that when all energy demand is covered by renewables, prices will drop, but a strong market can balance itself and regulate itself.

According to Manuel Cabrerizo, the project market also remains balanced and does not present a collapse in prices; something that would be evidence of an economic bubble. However, there is a big difference in the number of MW under development and the number of projects that reach their final stage. The project market may seem like a bubble on the supply side, but demand remains strong.

Furthermore, regarding off-takers, auctions may offer an outlet at these uncompetitive prices, but the question remains whether this will lead to better prices in the future and whether this will allow the private market to develop naturally. This is expected to happen over time as new off-takers will increase the level of competition. More off-takers on the market will balance the power between buyers and utilities, adjusting prices to a sustainable level avoiding a bubble.

The Spanish photovoltaic market achieved incredible growth rates in the last year. According to Keats and Cabrerizo, this does not mean that the market is going through an economic bubble. Prices in the energy market may be falling, but for the moment, the market can regulate itself and absorb the energy that enters onto the grid.

Kim Keats: As an economist, for me, a bubble is an investment explosion that leads to imbalance, falling prices, and where investors do not meet their expectation of return of capital. So the fundamental question is: How much renewable electricity can be absorbed economically? If more renewable capacity comes onto the market (due to a speculative bubble or a government push) then the energy prices will collapse and other sources of income will be needed. Almost 4 GW were added in 2019 (compared to 2.6 GW in 2018). We are definitely in a boom but it is still too early to determine if this is a bubble.

In Spain wind and PV have reached grid parity, they are competitive in the current market situation without a Feed-in-Tariff. In addition, there is a great deal of interest from developers, sponsors, investors and banks to develop projects without auctions. There are almost 33 GW of new projects that have been granted access and connection permission, while another 100 GW have requested it and are in the pipeline.

Auctions should only be an option to help achieve the PNIEC (National Energy and Climate Plan) objectives so promoters can participate in them, or develop projects through market mechanisms, according to their criteria.

Kim Keats from EKON Strategy Consulting noted that: Forcing the entry of renewable capacity could cause imbalances in the market, affecting the profitability of projects and their ability to repay the debt. Furthermore, it is important that any regulatory mechanism that the Government decides to implement, auctions, green certificates or others, should not discriminate against assets that are already in operation based on their launch date.

On June 13, the Solar + Wind Congress 2019 was held in Madrid, organized by PV Box, which featured presentations by experts from the photovoltaic sector, where they presented the latest research and ideas on the European market, especially in Spain and Italy.

The general director of UNEF, José Donoso, expressed an optimistic prediction for the Spanish solar market. He highlighted that this year more than 4 GW of solar energy purchase agreements will be signed, which is a great improvement compared to recent years.

Kim Keats Martínez, Director at EKON Strategy Consulting, offered his vision of the wholesale electricity price dynamics in Spain. His insight revealed upcoming price trends in different energy sectors based on various influencing factors. On solar power, he said that "EKON remains optimistic that the profitability of renewables will be satisfactory. But we are also more pessimistic because we do not believe that the market is adequate to meet the aggressive capacity goals of the government under the NECP ".

"Spain's National Integrated Energy and Climate Plan (NECP) has not taken into account that with the expected technological improvements in PV and wind energy yields, the number of equivalent hours of operation will increase so greater production can be achieved with less installed capacity", according to a representative from EKON Strategy Consulting. Thus, the Spanish consultancy estimates that the country could achieve 69.4% of renewable electricity in 2030 with 10.5 GW of new wind power and 24.3 GW of new PV power, "whilst the NECP sets itself the objective of deploying 27 and 32 GW respectively.

Kim Keats, director of Market Modeling at the Spanish consultancy EKON Strategy Consulting, presented the results of EKON’s study at the Solar + Wind SWES 2019 Congress, which took place on June 13 in Madrid. The EKON study also highlights that the increase in renewable deployment does not have to cause a collapse in market prices, "as some fear and others predict"; and warns that "NECP does not seem to take into account future technological improvements in wind and PV: the production for each megawatt installed will be higher than before."

Another conclusion of the EKON model is that, unlike the results observed by others, the massive influx of renewable capacity, and in particular photovoltaic, will cause a reduction in the average prices obtained by this technology, but it will not cause a collapse in prices, as some industry players fear.

Kim Keats also argues that having reached grid-parity, auctions are not necessary and that market forces should drive new deployment. Irrespective of whether the government decides to use auctions, or green certificates, it needs to ensure that the measure is not discriminatory (new assets versus developing assets). Discriminatory measures by the goverment could lead to a "missing money” problema.