Pragmatic business agenda emerges

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At last month's EWEC conference in Madrid, it became increasingly clear that with the falling price of wind power the economic imperative is

succeeding the environmental imperative as the main market driver. Despite this move into the mainstream, debate was heated throughout the week on whether European policy for wind energy growth should be based on mandated premium purchase prices or a market for trade in green power tags

As the 21st century ushers in the era of renewables, wind is establishing itself as a major energy force to be reckoned with. Large power projects, reduced costs, huge capital investment and wind-generated electricity traded across national borders will characterise the European wind industry in decades to come, delegates at Europe's premier wind energy conference heard. Yet while few argued with this vision, opinion was far more divided over the means of achieving it.

The European Wind Energy Conference and exhibition, EWEC 2003, was held June 16-19 at the Parque Ferial Juan Carlos centre in Madrid. Some 2500 people attended the largest and most businesslike wind event ever held in Europe. The conference was well structured, with a nearly clean line drawn between business and technical sessions, making it easier for delegates to pursue their specific interests than at previous events organised by the European Wind Energy Association (EWEA).

The vision for wind's role in the era of renewables was outlined by EWEA vice president and conference chairman Eddie O'Connor, boss of Irish wind developer Airtricity. The 20th century was the era of hydrocarbons, but wind could be the energy building block of the future. Already it out-competes coal on price and on windy sites, competes head to head with gas, he said. And within 40 kilometres of the shores of northern Europe lies a wind resource equivalent to the entire EU demand. "I see a [European] Union without barriers to the movement of electricity, with sufficient electrical infrastructure to allow us to track the Atlantic storms and have them yield up some of their energy," said O'Connor.

Corin Millais, EWEA chief executive, stated that government policy was fundamental to the industry -- and that the European institutions are the defining policy landscape. But wind faces stiff competition to be heard in Brussels. He stressed that the industry throughout Europe must work together to create common strategies and policies. "To speak with one voice is the most powerful sound," he said. "One of our main messages now is to establish our economic credibility as an industry sector."

Heated debate

Yet the formation of a common industry strategy to get that message across as the basis for shaping a European power market where wind can compete on fair terms appears as remote as ever. Heated debate over preferred policy mechanisms raged throughout the four days of the conference. The crucial issue was whether or not Europe should harmonise its support mechanisms -- and if so whether that support should be along the lines of a "command and control" market, with fixed price feed-in tariffs as championed successfully in Germany for nearly a decade; or a system of tradable green certificates that is far more compatible with today's liberalised power markets and has sparked huge development activity in Britain since its introduction last year.

Time and again, speakers pointed out that fixed price systems -- particularly in Europe's three leading countries, Germany, Spain and Denmark -- had delivered most of the existing wind capacity in Europe. Other speakers said the German market is unsustainable, Denmark has ended its fixed prices, and market forces are needed in Spain to reflect transmission constraints in pricing signals. Yet Claude Turmes from Luxembourg, a Green member of the European parliament, commented: "Green certificates are great on an academic level but it is extremely difficult in real life. They have to demonstrate that they will function. Their share in European renewables is not even 8%; other systems account for 92%."

Mechtild Rothe, a German member of the EU parliament and long time champion of renewables, also supported fixed prices. She said existing EU policy for renewable energy, including targets for 22% of Europe's electricity from renewables by 2010, was not ambitious enough. She called for a comprehensive European strategy. "We cannot go ahead with only national energy policies and hard earned compromises on a European level. We need a real single European energy policy that takes care of more than liberalisation of European energy markets," she said. What is more, Europe should provide an example to other parts of the world in renewable energy deployment, and establish a "masterplan" to support renewable energy technologies in developing countries, said Rothe.

From the European Commission's Directorate General of Transport and Energy (DG Tren), Beatriz Yordi claimed the majority of countries are "in line" with Europe's 22% target for the existing 15 members. But the imminent addition to the EU of ten new states means the target for the enlarged EU 25 will be 21%. "We are now waiting for reports from member states on the instruments that they will put in place for achieving their targets," she added. "We are neutral for the time being on the system of support." The EU executive, the European Commission, is to conduct a review of support systems and national progress towards meeting the targets. "So in 2005, if necessary, the Commission will propose an EU-wide harmonised system for the support of renewables," she said.

Policy scenarios

Also from DG Tren, Roberto Gambi outlined three possible scenarios for future national renewables support. The first would be a continuation of today's fragmented market -- in which trade of green power between countries is proving impossible -- with a variety of existing and planned policies; the second scenario would involve "clustering" -- a bottom up process where a group of countries starts trading and harmonising their support based on the similarity of their support schemes; the third -- and the option favoured by the Commission and advocated by EWEA's policy director, Christian Kjær -- is complete harmonisation. The Commission wants to see a community wide support framework for new capacity by around 2010, and to include all eligible capacity by 2017.

The second scenario appears to be gaining credibility as the most pragmatic and perhaps only way forward for the renewables industry. Gambi stressed that harmonisation does not have to be linked to market trade mechanisms and that trading is not necessarily linked to complete harmonisation of support schemes. "We can start thinking about trading without complete harmonisation, which could take time," he said

While no-one sought to refute the success of feed-in tariffs in making Europe the world leader in wind energy, several speakers stressed that while Spain still retains huge development potential, Germany's impressive growth is unsustainable, not least on economic grounds. Thorsten Herdan from German engineering federation VDMA pointed out that good sites are getting rare, financing institutions are changing their attitude to the wind business and administrative restrictions are preventing development of inland sites, while offshore development is still some way off, he said. And the "efficiency" debate is just starting on whether Germany's emissions-reduction goals for wind would be better served by developing projects outside its borders, where the wind resource is far better than within its mainly landlocked borders

policies without pain

Countries should get the right policies in place from the start that integrate energy and the environment, advised Northern Ireland energy regulator Douglas McIldoon. He warned against highly competitive markets that minimise the cost of fossil fuel without heed to the environmental damage they cause, requiring governments to then adopt second best policies to "retrofit" the environment. The result is that renewables are "built-on" to these markets, without concern for whether they are cost effective or not because they are regarded as a luxury. "Shouldn't we have energy policies that are environmentally proofed from the start?" he asked.

McIldoon warned against "masochistic environmentalism," which he described as "a fundamentalism that says we have to suffer more pain before we can make the world a better place." The public needs to be enthused, not abused or alienated, he said.

Market liberalisation is the vehicle for achieving carbon reductions, McIldoon continued. It grants autonomy for producers in meeting their obligations and empowers customers by giving them more choice in their electricity supply -- how much renewables and from where. But, he warned: "The more we liberalise, the more we need to regulate, especially with renewables -- and making things unnecessarily complicated is a failure of policy."

Intervention in energy markets is acceptable, said Javier Péon Torre from Spain's energy commission, pointing out that nobody questions the need to intervene in public services such as healthcare and education. Consistency of policy, rather than more competition, is what renewables need to flourish, he argued.

Vision from the top

A session with chief executive officers (CEOs) from some of the top global companies in wind provided a breath of refreshing pragmatism from the interminable policy debate. It was standing room only in the conference hall as delegates crowded in to hear the industry's chief movers and shakers outline their visions for the future.

The panel members brought into sharp focus the divided views on policy. While most CEOs saw the industry moving in the direction of greater consolidation, bigger projects, bigger wind turbines, downward pressure on costs, and wind out-competing all technologies except gas, Aloys Wobben, of German wind turbine supplier Enercon was a lone voice on the platform, maintaining that cheaper machines were not the answer.

Anders Christensen from blade manufacturer LM Glasfiber summed up the majority view. In an increasingly competitive landscape, the industry can expect significantly reduced cost of energy from the wind, he said. "Size does matter;" costs of turbines are decreasing due to the increases in size. Other factors driving down costs are greater flexibility, rationalisation to improve operational performance, economies of scale and a lean global supply chain, said Andersen.

The heads of Vestas, NEG Micon and GE Wind agreed that wind turbine costs would probably fall between 3% and 5% year on year. But this needs a combined industry effort, said Svend Sigaard from Vestas, adding that he expected 50% of the reduction for Vestas' turbines would come from increased efficiency and the other 50% from economies of scale. Wobben took a different view. "Our plan is not to decrease costs," he said. Labour and other costs will rise, he warned. Moreover, larger machines do not mean reduced costs per kilowatt hour, he maintained. "Sitting here and saying we can have price reductions is a wish, not reality." Instead, the industry should be concentrating on optimising the design of wind turbines for increased performance, reliability and longer lifetimes, he said.

The CEO's expectations for wind energy's share of the market were upbeat. Ian Mays of Renewable Energy Systems, a project developer based in the UK, predicted that wind would be a utility first choice for all new generation by 2020, providing 15% of EU electricity, of which 50% would be offshore. By 2050, wind's share could have risen to 50% of EU electricity, he said, of which 60% could be offshore. The market with the biggest potential for growth is the UK, followed by Spain and France.

Project sizes will be larger. Mays pointed out that the time and resources spent by companies on getting siting permits for small wind farms is much the same as for large wind farms. "There is a role for small projects, but the contribution that they make to achieving our targets is going to be relatively modest."

Capital requirements will be "enormous" over coming years if growth targets are met, said David Jones from Shell WindEnergy. "They are becoming power plants now, not small individual projects. Where the capital comes from is going to be similar to where capital comes from for power plants." That will be a combination of equity from utilities and companies like Shell, and project finance, he said. Wind is still only a niche market in the project financing sector with a small spectrum of banks involved. "But that is broadening and deepening quite quickly. There is a lot of pent up demand from banks wanting to invest money. "As the markets improve, there will be a migration of debt funding that historically has gone into large power and infrastructure projects, coming into wind."

Most CEO's preferred to steer clear of the debate about future support mechanisms. But GE Wind's Steve Zwolinski stuck his head above the parapet. "I see a market where liquid green credits replace subsidies. The faster we can get there, the healthier the industry will become." When pressed on the issue from the audience, most of the panel agreed. "The aim should be to achieve cost competitiveness without subsidy," said Jones. Sigaard added that achieving a Europe-wide trading system that all countries could agree to is too complicated for the near term, so subsidies or premiums will be needed until CO2 certificate or trading mechanisms are in place.

Wobben again disagreed. Green certificates will create problems and are the wrong direction for the industry. "I don't believe we should go this illogical way in the short run," he said. Better to penalise polluting energy sources to make renewables more attractive, he said.

The panel made an attempt to reason with Wobben. Pushing up the cost of the whole of the rest of the fuel mix to allow renewables to compete is not a practical option, argued Jones. "What we can control is the cost of wind energy. The challenge for us is to narrow the gap as much as possible. All support systems should be viewed as transitional elements." Christensen agreed. In the current political climate, he does not foresee a policy which will push up costs for the consumer by fully internalising the external costs of fossil fuels. "The pragmatic solution is a certain amount of support and goodwill to the renewable industries. If your aim is to remove all subvention to coal and oil and penalise their external costs before you move on, it will take ages and we haven't time to wait for this."

But competition should be within the sector, rather than against coal, gas and nuclear, which all have a history of support, said Estaban Morrás Andrés from Spain's dominant wind plant developer, Energía Hidroeléctrica de Navarra (EHN). "The most important thing is to create the conditions so that in the sector we will be competitive. The future is reduced prices because for companies with a mandate to buy wind energy, the best wind project will be the cheapest."

Consolidation of wind turbine manufacturers will continue, the CEOs stated. Mays believed the number of turbine suppliers would come down to four or five from the dozen or so serious players on the market today, though six or seven would be better for the industry, he said. Zwolinski saw just three or four global players, "then a group of large but more local players, and then a big variety of very small players, because there are regions in the world where small scale equipment still has a big market."

Grid issues

Discussion about the need for more transmission, better grid infrastructure and fair access to networks was a recurring theme throughout the four days. Conference chairman O'Connor's vision for the future of wind embraced a new grid transporting electricity from offshore wind farms to centres of demand and across national borders. He pointed out that the North Sea is criss-crossed by oil and gas lines. "High voltage electricity, such as generated by wind power, is inherently cheaper and more readily transportable than gas," he said. "Wind can and will replace gas, provided a proper grid, analogous to that for gas, is built." Restrictive rules on electricity transfer across borders must be removed. "Once built, the relevant grid will be good for another 100 years."

The grid is essential for achieving a reorganisation of the energy mix, said Klaus Rave from Investitionsbank in Germany. But Europe needs to rethink the way it is managed, how it should be expanded and how loads should be managed to enable countries to exploit their wind resources. Expansion of the grid -- particularly in the North Sea -- could be financed via the European Investment Bank and other special funds, he suggested. "Without a new philosophy for restructuring the grid, we won't meet the targets for renewable energy," he warned.

The VDMA's Herdan agreed. To increase the percentage of clean energy in Europe, grids need to be created that are specially designed to take electricity from renewables. But the cost must be borne by everybody -- not just by renewable generators, he said. EWEA's Kjær added: "We have to find some way of ensuring that the cost of building grids is passed on across all the customer base. That is the big conundrum of a liberalised market." Kjaer pointed out that in the past it was governments that paid the bill for building gas pipelines. "They cannot do that today in a liberalised market."

The industry needs good regulation for reinvestment in the grid, said European parliamentarian Turmes. He pointed out that when large coal and nuclear plants were built, investment in the grid was "socialised," meaning that "everybody paid for it." Today there is more welcome transparency for connecting to the grid, but distortions still remain, he said. In France, it is as costly to transport electricity for 200 metres as for 1500 kilometres. "This is a gross distortion." The only long term solution is ownership unbundling. "It is an illusion that companies which have grid and generation assets will not use the grid to protect their generation assets."

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