HydroFiTs&ROCs

Industryevidencefor2012FiTs&ROCs
consultations January2012
consultations
January 2012

12th January2012
Carl Crompton
CarlCrompton
1

Noteonrevisions
Theoriginaldraftversionofthispresentation(dated1st Jan2012)was
presentedtoDECCatameetingonthe5th Jan2012.
Thisanalysishasbeenrevisedasrequestedandisnowbaseduponthe
wholesaleenergypricesandotherassumptionsdefinedintheDECCImpact
Assessment ie
Assessmentie:
Levyexemptioncertificates:assumedtohaveavalueof4.72in2010/11,andforthisvaluetoremain
constantinrealterms;
Wholesaleelectricityprices:anoutputofthePyry
Wh l l l t i it
i
t t f th P modelling.Investorsareassumedtohavefiveyears
d lli I
t
dt h
fi
offoresightofwholesalepricechanges,thenassumethepricestaysconstantinrealtermsfortherestof
theprojectlife;
ROCvaluetoasupplier:assumedtoaverageatthebuyoutpriceplus10%,whichistheexpectedvalue
ROC value to a supplier: assumed to average at the buyout price plus 10% which is the expected value
whentheheadroomcalculationsetstheleveloftheObligation,i.e.36.99x1.1=40.69/MWh.=in
2010/11prices;

The
ThePyry
Pyry assumptionsonwholesaleelectricitypricesarehigherthanwe
assumptions on wholesale electricity prices are higher than we
woulduseinternallyandhigherthanbankswouldbewillingtouseinproject
financing
However,wehaveusedtheprecisefigurestoeliminateanydisagreementon
energyprices theanalysisstillsuggeststhat0.5ROCsistoolow

BHAcapitalcostdatabase
(basedon171actualhydroprojects)

Dotsarereal
projects data
from 171 actual
from171actual
projectscollected
for2009FiTs
consultation

Redlineisatheoreticalcurve
fittedtodatatogiveasingle
equation linking installed
equationlinkinginstalled
capacityinkWwithspecific
capitalcostin/kW

Howevercostsareinflatingforhydrodueto:
g
y
Bestschemeshavealreadybeencherrypicked
est sc e es a e a eady bee c e y p c ed
Remainingschemeshavehighercapitalcosts:
Noeconomiesofscaleorlearningcurvesforhydro
N
i
f
l
l
i
f h d
eachschemeis
h h
i
bespokewithlittlestandardization(asinwindandsolar)
Increasedcivilcosts(moredifficultterrain)
Increased civil costs (more difficult terrain)
Increasedgridconnectioncosts(furtherdistances/lessdeveloped
territory)
y)
Increasedpermitting,planningandenvironmentalcosts(fishpassesand
othermitigationmeasures)
Highermaterialcosts:concrete,steel,copper,plastic

Andincreasedoperatingcosts
p
g
Stepincreaseinbusinessratesin2010
Everincreasingrentalsfromlandownersandcommunities
g
Everincreasingenvironmentalmitigation(highercompensationflows)

Somerecentexampleprojects
CapacityvsCapex(latest2011/2012projects)
12,000

Greendotsaremostrecent15sub2MWprojectsbeingdeveloped
in2011/2012.Allaresignificantlymoreexpensivethanthe
historicalcurvepredicts

10,000
GQ2
GQ1
CO13
CH
APE
CO2
BL
CO4

8 000
8,000

Capex/kW
W(/kW)

Redlineistheoreticalcurve
basedonhistoricaldata

CO1
ARD
APH
6 000
6,000
GE1
GE4

GE2

4 000
4,000

GE5

GE3

,
2,000

0
0

200

400

600

800

1,000
Capacity(kW)

1,200

1,400

1,600

1,800

2,000

Somerecentexampleprojects
CapacityvsCapex(latest2011/2012projects)
(l
/
)
14,000

12,000

Bluelineistheoreticalcurvewhich
mostcloselyapproximatescurrent
t l l
i t
t
truecostofhydro(=historicalaverage
plus20%)

10,000

Capexx/kW(/kW)

GQ2
GQ1
CO13
CH
APE
CO2
BL
CO4
CO1
ARD
APH

8,000

6,000
GE1
GE4

GE2

4,000

GE5

GE3
2,000

0
0

200

400

600

800

1,000
Capacity(kW)

1,200

1,400

1,600

1,800

2,000

Additionaldatapointsabove2MW
CapacityvsCapex
14,000

ROCsonlyabove5MW

FiTsZone(upto5MW)

(Canbeuseddownto50kW)

12,000

Capexx/kW(/kW
W)

10,000

Datapointsofan
additional162MW+
add
to a 6
projects(2011/2012
prices)addedshowing
j y
majorityabovethe
curve

8,000

6,000

Curve
extrapolated
outto10MW

4,000

2,000

0
0

1,000

2,000

3,000

4,000

5,000

6,000

InstalledCapacity(kW)

7,000

8,000

9,000

10,000

Cost curve used to generate potential IRRs

CostcurveusedtogeneratepotentialIRRs
Detailed20yearfinancialmodelwasrunforeveryprojectsizefrom5kWto
10MW
Assumptions:
LoadFactorof35%(typical)
d
f %(
l)
Capitalcostfromtheoreticalcurve
PowerpricesfromDECCImpactAssessment
Power prices from DECC Impact Assessment
FeedinTariffsassumed<2MW,ROCsassumed>2MW(FiTsassumedtobe
existing(2011)values&ROCvaluesasperDECCImpactAssessment)
Operatingcosts=22.5%ofGrossRevenue(realitynormallybetween20%and
25%includinganallowanceforrentalpaymenttolandowners)
CorporationtaxatUKratesusingcurrentHMRCapproachoncapitalallowances
Corporation tax at UK rates using current HMRC approach on capital allowances
IRRsshownareProjectIRRsassumingnodebt(inrealitycostofdebtwillbeclose
toprojectIRR~7%soleveragewillnotmateriallyimprovetheEquityIRR)
Modestinflation(1%)appliedtopowerpriceandoperatingcosts
1yearallowanceforconstructionperiod

ProjectIRRvs InstalledCapacity

BasedoncurrentFiT/ROClevelsandtheoreticalcostcurve

10.00%

DECCtargetreturn
DECC
t
t t
forFiTs(58%)

9.00%

DECCOnshoreWindproposedHurdleRate
(9.6%)

DECCHydroproposedHurdleRate
(7 5%)
(7.5%)

8 00%
8.00%

ProjecttIRR(%)

7.00%
6.00%

1ROCassumedfor
schemesabove2MW
(orange line)
(orangeline)

5.00%
4.00%
3.00%

CurrentFiTrates
assumed for schemes
assumedforschemes
below2MW(blueline)

2.00%
1.00%
0 00%
0.00%
0

1,000

2,000

3,000

4,000

5,000

6,000

InstalledCapacity (kW)

7,000

8,000

9,000

10,000

ProjectIRRvs InstalledCapacity

BasedoncurrentFiT/ROClevelsandtheoreticalcostcurve

10.00%

DECCtargetreturn
DECC
t
t t
forFiTs(58%)

9.00%

DECCOnshoreWindproposedHurdleRate
(9.6%)

DECCHydroproposedHurdleRate
(7 5%)
(7.5%)

8 00%
8.00%

ProjecttIRR(%)

7.00%

1ROCsufficienton
schemes above 5MW
schemesabove5MW.

6.00%
5.00%

1ROCinsufficient(less
1
ROC insufficient (less
thanhurdlerateof7.5%
IRR)between2and5MW

4.00%
3.00%
2.00%
1.00%
0 00%
0.00%
0

1,000

2,000

3,000

4,000

5,000

6,000

InstalledCapacity (kW)

7,000

8,000

9,000

10,000

EffectofdifferentROCmultiples
0.5ROC
14.00%

1ROC

1.5ROC

2ROC

2ROCstoogenerous IRRs>10%possible
onlargerschemes

12.00%

Proje
ectIRR(%
%)

10.00%
8.00%

Optimum
range1
1 1.5
15
ROCS

6 00%
6.00%
4.00%

Nodevelopmentlikelyat0.5ROCs=IRRs
No
development likely at 0 5 ROCs = IRRs
below6%onallbutlargestofschemes

2.00%
0.00%
0

1,000

2,000

3,000

4,000

5,000

6,000

InstalledCapacity (kW)

7,000

8,000

9,000

10,000

Proposedoptimumsolution
DECCtarget
returnforFiTs(5
8%)

10 00%
10.00%

OnshoreWindproposedHurdleRate(9.6%)

HydroproposedHurdleRate(7.5%)

9.00%
8.00%

ProjecttIRR(%)

7.00%
6.00%
5.00%
4.00%
3 00%
3.00%

FiTs
assumed
below
below
2MW

2.00%
1.00%

1ROCrequired
1
ROC required
above5MW

1.5ROCsrequired
between2 5MW(for
mostofrangetoexceed
hydrohurdlerateof7.5%
=stilllessthanthatof
onshorewind=9.6%)
h
i d 9 6%)

0.00%
0
0

1 000
1,000

2 000
2,000

3 000
3,000

4 000
4,000

5 000
5,000

6 000
6,000

InstalledCapacity (kW)

7 000
7,000

8 000
8,000

9 000
9,000

10 000
10,000

Why 0 5 ROCs is insufficient

Why0.5ROCsisinsufficient
TheCapex assumptionpresentedbyARUPbroadlyagreewiththeBHAdatabase
(see next slide)
(seenextslide)
However3otherareasoftheArupreportappeartobeeitherincorrectorunfair:
o
o

LoadFactor(P142ofConsultationPaper)isassumedtobe45.8%.Therealityonmostrunofriver
schemes(themajorityofnewschemes)isintherange3335%
h
(h
j i
f
h
)i i h
%
Operationalexpenses (P134ofConsultationPaper)seemlow.20%25%ofGrossRevenueat
150/MWh isusuallyanaccurateassumptionasaguidelineforallopex includinglandrentals,
business rates insurance maintenance duos charges etc
businessrates,insurance,maintenance,duoschargesetc.
HurdleRate(P142).Hydro(alongwithPV)isassignedahurdlerateof7.5%,OnshoreWindis9.6%,
Wave13.8%etc.ThisissubjectivebutthereisastrongargumentthatthehurdlerateforHydro
shouldbeatleastthesameasOnshoreWind(ie 9.6%)asbothtechnologieshavesimilarmaturities,
developmentprocesses,typesofinvestoretc.

AlltheabovethreewillunderestimatetheROClevelrequiredtostimulate
est e t to yd o
investmentintoHydro
Also fromconsultationpaperCostevidenceforsmallscale(<5MW)hydropower
suggestaROCrangeof0.25.3isrequired.Assmallscalehydroiseligibleforthe
smallscaleFeedInTariff(FIT),wedonotbelievethatitisnecessarytocreatea
ll
l F d I T iff (FIT)
d
t b li
th t it i
t
t
separatebandforsmallscalehydroundertheRO.
CurrentlytheFiTlevel(generationtariffof47/MWh)isinsufficienttoencourage
investmentinthe25MWrange(mostschemesaredownsizedto2MW).This
rangeiseffectivelyneglectedbyboththeFiTandROCregimes.

ComparisonwithARUPCapex assumptions
CapacityvsCapex
14 000
14,000

12,000

BHA database
BHAdatabase
ARUP"Median"assumption

Capexx/kW(/kW
W)

10,000

Asidefrominaccuraciesduetoindividualflat
stepstheARUPMedianassumptionsonCapex,
broadlyagreewiththeBHAdatabaseofcosts

8,000

6 000
6,000

4,000

2,000

0
0

1,000

2,000

3,000

4,000

5,000

6,000

Installed Capacity (kW)

InstalledCapacity(kW)

7,000

8,000

9,000

10,000

Summary of hydro FiT & ROC levels

SummaryofhydroFiT&ROClevels

TheFeedInTariffforHydrowasworking:stimulatinginvestmentacross
most of the size range (0 2MW) without providing super returns to
mostofthesizerange(02MW)withoutprovidingsuperreturnsto
investors.Currentlystalledpendingconsultationpublication.
Using cost curve generated from 171 real hydro projects (and updated
Usingcostcurvegeneratedfrom171realhydroprojects(andupdated
with31additionalprojectsin2011/2012)itcanbedemonstratedthat
returnsareintherange58%formostofrange02MW.Therefore:no
changesrequiredtosub2MWFiTlevels.
FiTsabove2MW(47/MWh)insufficientreturnstostimulateinvestment
Th
Theproposed0.5ROCforhydroprovidesevenlowerreturns(sub6%IRR)
d 0 5 ROC f h d
id
l
( b 6% IRR)
andwillthereforelikelyresultinzeroinvestmentinhydroprojects>2MW
Based upon the data the following structure is proposed:
Baseduponthedatathefollowingstructureisproposed:
CurrentFiTratesbelow2MW
1.5ROCsbetween2and5MW
1.5 ROCs between 2 and 5MW
1ROCabove5MW

Other considerations
Otherconsiderations

Hydro,althoughmodestintermsofavailableresource,shouldbepartof
the overall UK energy mix due to
theoverallUKenergymix,dueto:
o Longevity hydrolastsconsiderablylongerthanothertechnologies(typically50+years
comparedwith~25forWind&PV).WhencalculatingIRR(andtheHurdleRate)the
valueofthecashflowsinlateryearsaresodiscountedtheyhaveanegligibleeffecton
IRR.Hence,nowhereisthislongevityevaluatedorrewardedinthecalculations.In
theorythislongevitycouldbeusedtojustifyahigherHurdleRateandthereforea
hi h ROC
higherROCmultiplethanWindasawayofvaluingthelongevityandassociatedlong
l i l h Wi d
f l i
h l
i
d
i dl
termcontributiontotargets,carbonsavingetc.
o Storageandloadbalancing thedispatchable natureofhydrohasautilitytothe
grid/publicwhichisnotnecessarilycapturedinthesingleprojectIRR/Hurdlerate
/
/
calculation.
o HighproportionofsupplychainisUKbased circa7090%ofthesupplychainvalueis
UKbasedunlikemostothertechnologies.Theassertiononpage38oftheConsultation
thatThedeploymentofasmalladditionalamountoflargescalehydroisnotexpected
toleadtosignificantindustrialdevelopment. issimplyuntrue.GilbertGilkesand
G d
GordonmanufacturesmostoftheE&MpackagedomesticallyandneedsastrongUK
f
f h E&M
k
d
i ll
d
d
UK
markettomaintainandgrowaninternationalreputation.Mostconstruction,
consultancy,financing,legalservicesetcareallprovidedlocallywithprofitsrecirculated
i l l
inlocaleconomies.Rentalspaidtocommunitiesandfarmsareusedtoensurelongterm
i R t l
id t
iti
df
dt
l
t
securityandareusuallyreinvestedsuperlocallyintotheland/farm/localcommunity
itself.

Other considerations
Otherconsiderations

IntermsofthedevelopmentprocessHydroisverydifferentfromother
technologies particularlyPV
technologies
particularly PV
Averagedurationofhydroprojectdevelopment=3years(seenextslide)
vs 3
36
6monthsforPV
months for PV
LongdurationmeansprojectinvestmentslowsorstopsasFiTsreview
datesareapproached(preaccreditationwillhelpthis)
Significantinvestmentrequiredwithnocertaintyontariff(unlikePV)
MultipleprojectsnowstalledawaitingoutcomeofFiTs&ROCreviews:
HydrounfairlypunishedonFiTsduetogreedofPVindustry
Unexpected(andunjustified)reductionofHydroROCs from1ROCto0.5ROC
p p
proposed

StrongcasetodelinkPVfromothertechnologiesaspartofFiTS/ROCs
review.
PVisverydifferentfromHydro shortconstructionduration,shortlife(sub25years)
littleplanningrequirement,goldrushmentality,rapidcostreduction,highlevelof
foreignownershipofsupplychain)
WouldallowtheringfencingoffundstoallownonPVtechnologiestoberolledoutat
asustainablerateandremainunaffectedbytheboomandbustnatureofPV

Timeline of typical hydro project

Timelineoftypicalhydroproject
Totaldurationofahydroprojectisrarelylessthan2.5years
andnormallybetween2.5and4years,including:
PlanningandSEPA/EAconsentingprocess:1.5to2years
Construction:12years
C
i
12

Significantlylongerthanothertechnologies:windandsolar
Year 1

Year 2

Planning & CAR license

pp
1.5 2 yyears
application:
(typical spend by this point =
60k-200k)

Year 3

Construction: 12 yyears

Total duration: between 2.5 and 4 years

Year 4