Market developments

2014 was the warmest year since 1880, when records began. Of the 11 warmest years on record, 10 occurred since the turn of the century in 2000. 1 This serves as a reminder of the importance of reducing greenhouse gas (GHG) emissions, in which renewable energy plays a key role.

Even if the debate over the cause of climate change continues, it is surely common sense to reduce the consumption of the planet’s finite fossil fuel energy resources. This can be achieved by using the progress in renewable technologies, such as wind and solar pv, which have energy and GHG emission payback periods of 3-6 months 2 and 6-17 months 3, respectively. This means that beyond the first few months of operation, these technologies deliver genuine GHG emission reductions and energy savings for their remaining operational life of between 20 and 30 years.

In October 2014, the EU agreed a greenhouse gas emission reduction target of 40% below 1990 levels, to be achieved by 2030. This represents a doubling of the current 20% target set for 2020 and demonstrates that the EU remains committed to tackling climate change. To meet this emission reduction target it is estimated that about 45% of electricity will need to be generated by renewable technologies. The challenge of achieving the EU targets adds to the fund’s confidence in growth potential.

In this evolving landscape of support for renewables, the fund’s role as an experienced and reliable financial partner becomes increasingly important to the developers of small- to medium-sized renewable energy projects.

Case study – Wind farm Ransonmoor (photo)

WIND FARM RANSONMOOR, UNITED KINGDOM

In February 2013 Triodos Renewables Europe Fund diversified its geographical spread by make an investment in the United Kingdom. Ransonmoor is operational since 2007 and has three Gamesa G80 wind turbines and two Repower MM80 wind turbines.

 

Triodos Renewables Europe Fund will continue to focus on opportunities in areas with relative modest support programs, demonstrating the sustainability of the projects employing proven technologies. The capital costs of proven renewable energy technologies continue to improve the competitiveness of renewably generated power. The fund therefore sees justification for lowering the dependency on regulatory support mechanisms in the sector and thus increasing the sustainability of the energy system.

Regulatory support mechanisms make up a substantial part of the fund’s revenues. It is the fund’s view that the regulatory revenues for which the projects in the portfolio have already qualified, will remain stable in the coming 20 years. During 2014 we have seen a reduction in the long-term projection of European electricity prices. This has been driven by the reduction in global oil prices and a proposed regulatory change in many European countries. Both these changes have been considered in the long-term price projections upon which the fund’s value is calculated.

Whilst approximately half of European electricity is generated using oil, natural gas and coal, the cost of which all strongly correlate to global oil prices, the wholesale electricity market has seen only relatively modest reductions in the same period in which oil prices have dropped by 40%. This difference is largely driven by the way electricity generators purchase their fuels (combining both long-term and short-term delivery). If the slump in oil prices persists for an extended period, however, we can expect further impact on European electricity prices.

The second impact on future electricity prices is the introduction of new EU energy market regulatory regimes. These new regimes will affect wholesale electricity market prices in several European markets. The so-called Capacity Market mechanisms will provide supplemental income for fossil fuelled power producers so as to ensure security of supply. This supplemental income will allow them to bid into the wholesale market at a lower level, thus lowering the prices in the wholesale market. The Capacity Market mechanisms are part of a package of measures aimed at supporting the continued proliferation of renewable energy projects.

The renewable energy projects in the fund’s portfolio sell electricity and therefore have exposure to the wholesale market. The fund’s portfolio mitigates exposure to price volatility in the wholesale electricity markets by a range of measures, including deriving revenue from regulatory support and power sales agreements incorporating fixed prices. As a result, the long-term energy price outlook only has a moderate impact on the portfolio’s value.

The countries in which the fund has investments (see chart Country allocation) with country allocation have ratings that vary from AA to AAA. These countries have clearly indicated a grandfathering approach 4 to the renewable support mechanisms. The reduction in the level of support mechanisms for new projects, however, is also in line with the objective of the fund, being a demonstration of sustainability with lower capital expenditures per MWh required. This is considered a positive sign of the improved profitability of renewable energy projects, meaning less dependency on government support. It is therefore expected that the majority of the portfolio will continue to perform in line with its long-term target return.

1 Source: www.giss.nasa.gov/research/news/20150116/
2 Source: CSE, Common concerns about wind power May 2011
3 Source: www.epia.org/index
4 Grandfathering – an ongoing commitment to honour the support mechanism for which the project has qualified with no retrospective amendments.

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