With some 150 MW of new generating capacity coming online -- more than treble the annual average -- 2002 should have been the best year ever in the history of Dutch wind power. Instead it is ending with many predicting the total collapse of the wind sector following a radical review of the market support structure by a centre-right government, itself in a state of collapse. How the Dutch dream turned sour so quickly is the story of a bad bout of political panic and a market that became the victim of its own extraordinary success.
The reason for this year's record breaking capacity growth is not hard to find, says Diederik Samsom, former Greenpeace campaigner and now director of green electricity retailer Echte Energie. "Look back to 1998, hardly any turbines were being built. At the time everybody said it was because of the legal difficulties of getting planning permission. This year more than 150 MW was built. The legal difficulties have not changed, what's changed is that enough money became available to make it profitable to build wind farms." In other words, the potential returns made wind investment a risk worth taking.
In June Dutch wind power purchase prices effectively reached high German levels, with power contracts being signed for EUR 89/MWh. The investment market responded accordingly. "The margins were not huge but they were big enough to cover the risk for smaller projects -- and you have got to remember, with annual wind variation, those are considerable," says Samsom.
Uniquely, Holland's buoyant wind market of yesterday was sustained neither by fixed price subsidies, nor by a mandate for a standard amount of renewables in electricity supply portfolios (a renewables portfolio standard). It was driven by consumer demand for green electricity, stimulated by a EUR 0.06/kWh eco-tax on "grey" power, which meant green could be sold at the same price or cheaper than grey. Currently, some 1.3 million Dutch electricity consumers have gone green, while a report by the Dutch Energy Research Centre (ECN) estimates the potential market at three million. Indeed, seven years after saying goodbye to direct subsidies, the Dutch faith in a market-oriented approach to renewables support seemed finally to be paying dividends.
But soaring demand for green power also led to soaring green power imports -- in 2001, the Dutch imported 7600 GWh of green power, some 35% of total power imports compared to 1.6% in 2000. What's more, a green power production subsidy from state coffers of EUR 0.02/kWh meant that Dutch tax revenues were flooding to producers abroad -- with no net increase in European renewables investment.
Faced with a total budget deficit of EUR 2.2 billion, Jan Peter Balkenende's centre-right coalition cabinet, formed in June, immediately set about plugging the loopholes created by its predecessor by cutting back renewables funding. Despite pleas from the renewables sector for more considered tweaking of a basically successful system, the new government axed tax breaks for green investment, slapped a EUR 0.029/kWh tax on green power sales -- half the tax placed on grey power -- and replaced the EUR 0.02/kWh production incentive with an "environmentally friendly electricity production" (MEP) incentive, to be paid only to Dutch producers. This is to be funded from a EUR 34 annual charge on every power bill (box).
At first, with a promise that MEP subsidy rates will be guaranteed for ten years, the Dutch wind industry extended the proposals a cautious welcome. It felt that uncertainty about long term continuity was already damaging investment and a ten year plan would stop the rot. Establishing acceptable rates was all that was required, said Ad Brogtrop, of renewable energy agency Projectbureau Duurzame Energie.
But the MEP incentive has been set so low, says the wind industry, that it fears it is facing a market meltdown. For onshore wind it is EUR 0.024/kWh (compared with the US production incentive for wind of EUR 0.018/kWh) and EUR 0.05/kWh for offshore production. Added to a grey power price of EUR 0.021/kWh and a provision allowing electricity retailers to pay green power producers up to EUR 0.029/kWh from eco tax revenues which would otherwise be remitted to the tax man, the market price of wind in the Netherlands has arrived at EUR 0.074/kWh onshore and EUR 0.10/kWh for offshore production.
The problem with this reasoning, says Samsom, is that it makes no allowance for market operations. No renewable energy producer, he says, gets much more than half the EUR 0.029/kWh eco tax consideration because retailers use the remainder to pay for sales and marketing. More generally, the government is asking people to invest in an inherently risky undertaking for little or no profit. "That's just not the way the market works, and for better or worse the Dutch have chosen to go for a market-based approach to renewables funding. Of course they could create a state funded company and build all the wind turbines they want, but I don't see it happening," says Samsom.
Rates too low
That message was delivered loud and clear to government by a delegation of market players just before the scheme was put before parliament on November 11. "They had to take note when representatives from some of the biggest institutional investors in the Netherlands said that they would never get board room approval for new wind projects at these rates," says Samsom.
Essent, the Netherlands largest power company, says it cannot build wind farms in the Netherlands at the proposed rates and if they are implemented it will shelve its plans for the 40 MW Delfzijl Zuid wind farm. The reaction from offshore developers is the same. Mathieu Kortenoever of renewables agency E-Concern challenges not only the government's assumptions about how eco-tax revenues will work in the market, but also its assessment of investment and operating costs. E-Concern is a member of the consortium behind the Q7-WP offshore 120 MW wind farm. Q7-WP will not go ahead with these rates, says Kortenoever. "For the level of return the ministry assumes is reasonable, investors will go to much more conservative investment options."
Eric Bakker, BP's director of wind energy, confirms Samsom's analysis. Having completed along with Chevron the 22.5 MW Nerefco wind farm this year, Bakker has put 25 MW of other projects on hold "specifically because of the current turmoil," he says. "Within BP, wind is not a PR exercise. To get approval for a wind project I have to compete with other business propositions such as exploration projects or chemicals projects. To get approval for a Dutch project now I would need double digit returns, the proposed five to six per cent is simply not enough to cover the political risk involved -- and that risk has increased substantially in just the last 12 months."
It seems the industry's arguments may well have registered in government circles: "It was certainly a serious session and the minister had indicated beforehand that he would listen to the sector's arguments. The tariff calculations are based on certain assumptions, but of course you can challenge the premises of those assumptions and that is what the industry did. The minister is now looking to see if any changes are necessary," says a spokesman for energy minister Hans Hoogervorst. "I think it's been taken on board," says Samsom. "I've certainly had very interesting phone calls from the ministry."
Political risk factor
The question is whether it is too late. "What the government doesn't seem to realise is that every time it changes policy, the political risk factor gets higher and the cost of wind goes up. We've had five changes of policy in four years. Now there is so much uncertainty in the market that everybody wants to see everything in triplicate and the uncertainty surrounding the actual implementation of the MEP regulations has just made that worse," says Samsom.
"I know of one fully permitted wind project of six 1.8 MW Vestas turbines on the Flevopolder which needs to have financial security in the next few weeks if it is to go ahead. It won't get it because nobody is offering energy contracts right now. With the new eco tax on green power, as a buyer I can afford to pay around EUR 71 MWh -- and as one farmer told me recently, he would be better off growing potatoes at that price."
There are also serious problems with the proposal that only turbines built after January 1, 1996 are eligible for the production incentive. Earlier wind farms will have to be retro-fitted if they are to qualify, which Kortenoever predicts will be very messy in permitting terms and also represent a serious destruction of capital, with turbines being decommissioned before the end of their economic lives. Samsom even contemplates turbines being moved to Germany -- the price differences will be that great.
BP is one company that is already looking further afield. "We have entered the Dutch market and would love to do more there, but at the moment the conditions are not right," says Bakker. "Having experience in a market drives down costs, but not if the policy changes every six months. In the Netherlands they have significantly increased the risk level by decreasing the attractiveness of green electricity and increasing the risk for investors. At the moment, Germany is much more attractive, and whereas just six months ago we were thinking of investing around a hundred thousand in Dutch projects, that is now tens of thousands, if that."
"I think the government needs to assess what they want to achieve, obviously they want to prevent Dutch money flowing abroad, but is their objective also to reduce the attractiveness of the wind industry?" he adds, "because that is what they have done."