All of a sudden, access roads to wind farm sites in France appear to be paved with gold. Cases are being cited where per megawatt prices of both operational plant and those waiting to be built have doubled over the past year, way above the increased cost of turbines. Gone are the days of struggling developers and penny pinching owners, replaced by a distinct whiff of get-rich-quick speculators and investors who see a more sophisticated market worth taking a punt on. But is the new appetite for risk in France a true sign of market maturity? Or is it a worrisome trend in foolhardiness?
Driving the young market is France's new regulatory regime, which fixes power purchase prices for onshore wind at EUR 0.082/kWh for the first ten years of operation. After that, the rate varies according to the productivity of the site, between a low of EUR 0.028/kWh and a high of EUR 0.082/kWh. No other western European country offers such potential for quick growth. There are few opportunities these days in Spain, Britain, Germany and Italy where the markets are either saturated or sewn up by big players. In contrast, the French market is wide open. In a peculiarly French twist, it is largely comprised of small and medium size developers, busy prospecting sites and building project pipelines. The fragmented structure is the result of a regulatory framework which capped project size at 12 MW, coupled with a laborious permitting process in which local companies with good local contacts are at an advantage.
These developers and their project pipelines are easy pickings for the big time investor. French wind is proving a powerful magnet to venture capitalists and independent power companies. It is also attracting serious interest from foreign utilities. Among those taking stakes in the French market last year were Spain's Endesa and Iberdrola, Italy's ENEL, Portugal's EDP and even American power company AES.
The utility interest, however, is not necessarily driven by a simple profit motive. There are strategic considerations too: establishing a market presence while the door is open, ensuring a diversified portfolio, and securing as much wind power as possible in anticipation of tougher penalties for exceeding carbon emission allowances in the next round of the European Trading Scheme for emission credits. If utility interest in wind is for other than purely commercial reasons, they will be willing to pay higher prices and accept lower returns. No wonder project prices up going up, causing more nuanced market observers to ask if the French market is overheating.
The dangers of soaring project prices in this scenario are twofold. First, if utilities are running the show, with goals beyond simple profit, independents whose sole interest rests on the bottom line stand to get squeezed out. That is bad news for consumers: fewer competitors on any market is no recipe for good service and well-priced goods. Second, players on overheated markets tend to become blind to risk.
Nuclear or wind
For all its fixed premium prices, the French wind market is far from risk free. For starters, the country is run on nuclear power, so the underlying pressure for carbon-free generation is not as great in France as other EU countries. That raises serious questions about the government's real commitment to building renewables. It could change its mind, just as Spain's government has done (page 37), especially once it realises that high penetration levels of wind and nuclear are an economically disastrous mix. Few have woken up to the extent of that barrier, as this magazine has been at pains to point out (Windpower Monthly, June 2006). No prizes for guessing which way France will jump when nuclear push comes to shove.
Big risk also lies in wind project permitting, a notorious barrier in France. A new zoning system is yet to be tested in practice (page 52-54). As project prices rise in the market rush, investors seeking assets at competitive rates have to buy further down the value chain and snap up smaller developers and portfolios with a greater proportion of projects without permits. Not only will some of these fail, the day will come when investors see richer pickings elsewhere. When markets boil over, those who get carried away in the general froth, over-borrowing, or simply paying too much, tend to get badly burned.
For consumers the risk lies in the bubbling French market consolidating into the hands of fewer, bigger players to the detriment of the feisty competition needed to drive innovation and keep prices down. Worse still, wind could come up against that nuclear glass ceiling, never to realise its full potential.