Renewables executives and KPMG energy industry leaders held a breakout session at the 2017 KPMG Global Power & Utilities Conference to discuss strategies that large utilities are using in their renewables project deployment. Their observations on recent market trends and developments included the following:
Denmark's Ørsted, known as DONG Energy until it divested the last of its upstream oil and gas business in 2017, has several large projects in the works, according to Samuel Leopold, former CEO of wind power at Danish utility Orsted (formerly DONG). The company's large and growing footprint has highlighted for him the impact of wind's transition to competitive markets with the introduction of auctions and tenders to gain access to subsidies.
“The competition has made it a pure cost game,” he said. “Therefore, the focus on having your costs under control has become the key driver in the industry.”
Segmentation is becoming more important as the market matures, Leupold added. Companies need to decide where they want to try to build their business: markets like the Netherlands, which have low barriers to entry but allow a number of competitors to come in quickly; North America or the UK, which require significant investment before participating in an auction; or new markets with more risk but less competitive pressure.
To help reduce costs, Ørsted relies on data analytics to process the million data points from each wind turbine, allowing the company to shift from 'unpredicted maintenance' to cheaper 'predicted maintenance,' Leupold said.
Approximately five years ago, utilities began to actively bring in partners to help finance renewables expansion, according to Adrian Scholtz, Partner, Head of Renewables, KPMG in the UK.
There are so many potential pools of capital from all around the world, and so many different structures, rarely can Scholtz estimate the winning partner at the outset of the process, he said.
Now Scholtz sees the pendulum swinging back, with utilities considering partners at project level and relatively cheap corporate debt instead.
“I wonder whether over the next few years utilities will be looking at structuring their capital at higher levels, and therefore not looking as much at partnering structures,” he said.
“There's a bit of mystery around these companies,” Leupold added. “You know from the schoolbook that project finance is not going to be cheaper than a good balance sheet, but there's this notion of black magic these guys can do.”
Leupold cautioned that the pot of money for renewables investment from what he called 'more risk-loving investors' may not be as deep as the industry needs.
“We need to be careful. If you have very ambitious growth plans for renewables in Europe or in the world, there might not be sufficient capital available from people who have that higher risk profile,” he said. Scholtz said that investors are 80 percent passive and 20 percent non-passive, “so there's much less capital appetite, and that capital needs a clear investment thesis.”
There may be a role for merchant power purchase agreements (PPAs) to take on risk to enable more passive investors to come in and fulfill the broader ambitions that the energy sector has for renewables, the panelists said. However, straight corporate PPAs are just not going to be sufficient enough to take more than 20 percent at best of your merchant risk. This is the route we need to follow; we need to mature the market.
Added Scholtz, “It’s incumbent on all of us—entrepreneurs in the market, utilities, power users and regulators—to drive that percentage increase, because it’s probably the main opportunity to reduce merchant risk.”
“I see a big opportunity for multiple technologies to work together not just to deliver megawatt hours, but to deliver megawatt hours at the right point in time,” Scholtz said.
The power price forecast is becoming increasingly divorced for the intermittent power generated, he said, moving lower and lower over time. He referred to Ireland where in 10 years the power price forecast specific to the asset is 20-25 percent lower than the general power price. “It really is incumbent on the owners and developers of the assets, as much as policy and regulation, to find entrepreneurial solutions.”
Leupold said that he takes the unpopular point of view that the value of batteries may have been overhyped. He pointed to two 'mysteries.'
First, while there is excitement about battery storage, the market doesn’t give any value to it. “The people who own storage power plants tell us their business model is dead.”
Second, there remains confusion between kilowatt hours and kilowatts. Recently, Leupold was demonstrating a battery solution to an excited group, “and then I told them, ‘this is one and a half minutes of the wind farm,’ and the excitement went completely bust.”
Leupold said he likes the potential for hydrogen long-term battery storage, but questioned the environmental implications for more widespread battery usage.
“We are living in this crazy world where we say we care about the environment - but nuclear has to go,” he said. “I’m just not sure there isn’t going to be an awakening at some point in time. If you really go for this deployment of batteries, you will have to recycle them, and that will become a real issue for the environment.”
Finally, the panelists discussed the effort to connect energy customers with green power. Valérie Besson, Partner, Head of Energy and Utilities, KPMG in France, said that corporates are looking to utilities for solutions while simultaneously pursuing their own green power generation efforts.
They are committed to 100 percent renewable energy so they can be great partners. I think it’s an opportunity, but also it’s a threat at the same time. - Valérie Besson, Partner, Head of Energy and Utilities, KPMG in France
Leupold agreed. “If you have solar power on the rooftop because you put it there, why do you need the utility? Then, when it comes to technology, probably the Apples of the world understand more about this than most of the utilities.”