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From GraspUseful resource
By Invoice Schneider
“My very own private expertise turned me from being ‘mildly agnostic’ about intermittent renewable energy to being a robust opponent of such schemes. And out of doors of some ephemeral political argument about ‘saving the planet’ … intermittent energy schemes, whereby the technology capability is linked to both a regional grid or massive energy person that depends upon predictable power, needs to be prevented in any respect prices.”
That is an power story, a private one – and it begins again once I first noticed the choice on my utility invoice whereas residing in a suburb of Boston again in 1999. I may elect to pay extra for “inexperienced” energy, about 20 % extra. “Shopping for a cup of espresso to avoid wasting the planet” appears cheap. I checked the field.
This was how an “Common Joe” thought~23 years in the past. By some reckoning, that’s a complete technology. Since then, media have actually carpet-bombed the web, airwaves, and print, with story after story after story of how, if we don’t DO SOMETHING!!!™ the world will warmth up, the oceans will rise, and all of the poor island nations within the Pacific will flood and stop to exist.
My views have modified quite a bit.
So how did I’m going from being mildly agnostic in the direction of the notion of man-caused international warming local weather change – however nonetheless pleasant in the direction of numerous “inexperienced power” schemes comparable to wind, photo voltaic, and tidal energy – to grow to be a staunch defender of dense power, together with <shudder> fossil fuels? And a foe of things labeled “inexperienced power” by media and advocates?
A Wind Energy Venture
In early 2008, I used to be requested by the Asset President of the metal mill I labored at in New Zealand to assessment a proposal for a PPA (energy manufacturing settlement). At a excessive degree, the proposed PPA was easy. Key phrases included:
- Time period: 15 years, with renewal clause
- Value per delivered MW: NZ$79, with escalator clause
- Provide foundation: take or pay, 100% of technology web site energy
- Proposed technology web site: 21 generators at 2 MW nameplate capability every, complete nameplate capability 42 MW
- 12-month wind examine end result: “lower than pristine” rating; anticipated annual common technology capability, 14 MW
- The duty was deceptively easy: assessment this proposed PPA.
100 MW complete demand, sourced as follows.
- 60 MW delivered from two melter gas-powered cogeneration crops
- 20 MW contracted underneath a hedge settlement
- 20 MW remaining, sourced by way of the spot market
The 14 MW common capability from the proposed web site appeared like it could be capable to substitute the spot requirement, with a bit left over that must be onsold to the grid. Straightforward! My firm will get to tick the field of being seen to assist renewable power. Oh, and the positioning the wind farm was to be constructed on, was adjoining to a mine web site that the corporate leased from indigenous folks (Maori) and was owned by the identical people who leased the mine web site.
Let’s assessment how the stage is ready.
- At 100 MW energy demand, the mill was one of many largest energy customers within the nation
- Political strain from authorities for giant power customers to assist renewable energy was palpable
- The technology station growth web site was owned by an indigenous group from which the mill additionally leased a mine web site (extra political strain to ink a take care of the PPA builders)
However that beginning worth is much greater than the positioning annual common. I began reviewing the proposal paperwork, immediately realizing I wanted assist.
Wind Venture Assessment
I engaged two educated people: one who had labored on the web site for 16 years and was out there to seek the advice of on the venture from a web site demand perspective (“inner demand advisor”); and one other who had expertise in each constructing and working numerous forms of technology stations (“exterior provide advisor”).
Every of us tore into our respective parts of the proposal. I reviewed business phrases, and the 2 consultants reviewed venture danger, price danger, and provide danger points. A persistent pair of complications have been pricing & escalator clauses, and safety of provide dangers. This assessment took nearly 4 months to finish and included a number of conferences with the builders of the wind farm (the identical people who proposed the PPA to my employer).
Drawback 1: “Sole Shopper” and “Take Or Pay” From a business perspective, being the one “buyer” to a vendor comes with important danger. What occurs if the vendor experiences monetary or operational challenges? From an operational perspective, we’d return to purchasing on the spot market. Politically, nevertheless, the vendor can be tied to us, like a David being tied to a Goliath (for anybody studying this who is aware of in regards to the ANZ Financial institution/Opes Prime incident that occurred in Australia in the course of the GFC, you’ll in fact relate). So maybe this association might be thought of to be operationally “okay”, however politically it carried a substantial adverse within the courtroom of renewable power public opinion.
Subsequent, let’s take into account the requested contract time period, 15 years. The proposed energy buy settlement (PPA) is a long-term one, the place my firm has been solicited to buy the entire power the counterparty has to supply – on a “take or pay” foundation. For these of you who should not acquainted with the contract time period, which means if the vendor has electrical energy to supply, the customer should both purchase all that’s provided or pay the worth of what was provided however not accepted, at any given time. Subsequently if the generator is providing all 42 MW at a specific time and the positioning can’t settle for greater than 20 MW (given the opposite provides and obligations listed above), we might both must onsell it or else pay for the amount that we weren’t capable of settle for.
If we don’t settle for all of the out there electrical energy generated by the provider at a specific time, we pay out for power not used – probably a major overspend subject – and if we don’t obtain sufficient power (once more at a specific time), we have now to supply it from the spot market. Or, we may settle for the excess power and try to onsell it, fairly probably at a major loss.
In any case, this implies we must make use of an individual who would handle energy deliveries and attainable gross sales towards this PPA, or else danger paying important charges the place “an excessive amount of” energy was generated. Most regional grids handle energy deliveries in five-minute increments or much less, and naturally, wind velocity varies. So on this subject alone, there can be important potential for overspending and/or having to take care of overhead prices of a minimum of one (1) FTE.
Drawback 2: Era Effectivity/Wind Profile What about that “lower than pristine” rating of the 12-month wind examine? It meant that regardless of the wind farm technology web site having a nameplate capability of 42 MW, the annual common it may generate was ~14 MW. On an annualized foundation, the capability issue for the positioning was ~33%. Not very environment friendly, however the contract solely requires the shopper to pay for energy delivered, proper?
However the price of constructing that facility must be amortized throughout its anticipated energy gross sales. A 33% capability issue implies that there are far fewer electrons to earn again the funding to the consortium and permit the builders to earn a revenue – therefore the excessive preliminary strike worth.
Right here’s the place the subsequent discovery comes up. Usually, one sees wind farm builders and advocates claiming that wind is an efficient backup if different energy sources fail (for baseload turbines, which means there may be an “unscheduled outage” the place for no matter purpose, the technology station is meant to be on-line however just isn’t sending energy to the grid).
However for the nation of New Zealand, its baseload energy was over 60% hydropower, in schemes various from small river-based hydro all the best way as much as the huge Manapouri Energy Scheme within the South Island close to Fiordland. In 2008, on the time this proposal assessment was performed, NZ was experiencing a major drought, and spot energy costs have been >NZ$500/MW. Upon examination of meteorological knowledge, our workforce realized that in New Zealand, “wind follows rain” – that means, if it isn’t raining, the wind isn’t blowing a lot both.
Relatively than with the ability to depend on wind appearing as a dependable alternate supply of energy throughout drought circumstances, it was statistically very probably that the proposed wind farm wouldn’t be producing a lot energy throughout a drought.
Provided that “wind follows rain”, our firm would have been at appreciable danger of being pressured to pay contract charges for energy generated from the wind farm far in extra of the 14 MW common, whereas shedding virtually each single greenback of those overpayments by promoting right into a flooded spot market. Oh, and don’t overlook, that preliminary strike worth included an annual escalation clause, which had no bearing on market costs.
After all, this was as a result of the venture wanted to make a revenue for its traders, and even with an NZ authorities program that allowed it to deal with prices as tax losses, a assessment of funding knowledge confirmed that the venture wouldn’t break-even for the primary ~7 years of its existence, and wouldn’t be worthwhile at an funding degree with out authorities tax subsidization till the top of the contract time period.
Remaining word: when our workforce met with the builders, we requested them what they have been ready to do (if something) to handle draw back provide danger. The one and solely reply we acquired at every dialogue was a variation of, “effectively you’ll be able to all the time purchase energy on the spot market”.
Situation Abstract
For the “privilege” of shopping for renewable power, our firm was going to must handle the next prices/dangers:
- Excessive preliminary strike worth, with annual worth escalation (and the preliminary strike worth was “considerably greater” than both the cogen energy contract, the hedge contract, or the long-term common spot worth)
- A “lower than pristine” wind supply that on common would generate ~33% of nameplate capability
- A “take or pay” clause that might, in five-minute increments, have our firm paying for something between 0 MW provide and 42 MW provide, the place something lower than 20 MW would have us uncovered to purchasing on the spot market, and something in extra of 20 MW would have us uncovered to promoting into the spot market (or else simply paying for energy that we didn’t use)
- Managing wind energy provide shortfalls in a spot market that might be pushed up by lack of rainfall
- Using an FTE to handle deliveries and purchases/gross sales from undersupply or oversupply
- Zero accountability on the PPA counterparty to help with oversupply or undersupply
Political Correctness Points
However saying “no” to the proposal got here with each renewable energy political danger and indigenous relationship political danger. So there was no manner our workforce may recommend the corporate merely decline. The corporate was a member of the NZ Main Customers Power Group (MEUG), comprised of the nation’s largest power customers. MEUG members have been underneath huge political strain to assist renewable power.
But as was alluded to above, the proposed strike worth of this PPA was far and away “out of the cash” (which in these a number of discussions between our workforce and the builders, the latter flatly refused to budge on both strike worth or price escalator metrics, citing this pricing as completely vital for the venture to realize financing from traders).
Actually, we have been in a bind. However we needed to ship a suggestion to the Asset President that might each cut up these very effective hairs, and on the identical time be one thing that might acquire approval from him and his management.
And recommending “Sure” to the proposal, or recommending “No” to it, was not within the playing cards.
This quandary is a traditional negotiating problem, the place at first look one finds themselves within the unusual place of neither a negotiated proposal nor a BATNA being achievable. So our workforce turned to see the place we may probably create leverage regardless of not having something apparent.
Planning the Escape
The workforce started with the basic query, “Why Our Firm?” Why not anybody else?
The reply: as a result of there was no different single firm within the area massive sufficient to have the ability to take that a lot energy (assuming in fact, their web site was producing at or above the wind profile projection).
Approaching us was due to this fact not solely logistically simple (promoting 100% of their technology to 1 buyer) but in addition had the perceived “insurance coverage” of our web site being a big sufficient energy person to be uncovered to the political danger of not being “seen to assist renewable power”.
In that regard, the positioning choice was equally shrewd, since their web site can be leased from the identical Indigenous group that our firm leased a mining web site instantly adjoining to that facility (aspect word: this facility was later offered within the wake of the GFC, however on the time there have been no plans to dump it).
However take into account: upon assessment of this case, we surmised that the builders went to a lot hassle to attempt to power my firm to associate with the proposal, as a result of, because it turned out, they’d no different viable choice:
- No different firm massive sufficient to sew collectively a single “deal” within the area
- Demand and grid limitations and line losses meant that the builders must strategy a number of different attainable purchasers to promote their energy if we stated “no” to the scheme, and people smaller firms would neither face political/reputational dangers of “saying no” to renewable energy or technology from indigenous-controlled land
- Smaller firms wouldn’t be capable to afford the asking worth, which the builders completely needed to codify in contract throughout your entire potential provide to realize funding
- And eventually, promoting into the spot market got here at a major draw back danger over the long run (which was why my firm allowed itself to buy 20% of its necessities on the spot market)
Nonetheless, we wanted one thing to offer cowl to reap the benefits of this vulnerability from the counterparty, slightly than “simply say(ing) no”.
Enter the only supply/sole supplier association and “Provider Administration 101”: each single purveyor of provider administration and provider danger administration rules will say, in unison, that being a provider’s sole supply of earnings isn’t a great place to be in, particularly as a bigger firm being the shopping for celebration.
Counter-Proposal
I took inspiration for the counterproposal that I provided as much as the Asset President from one of many well-known Trials of Hercules: on this instance, Hercules was instructed to empty a bit cup of water. What Hercules didn’t know was, the cup was linked to the Seven Seas, so no human may presumably drain the cup.
So when the time got here, I sat down with the Asset President and outlined a abstract of the entire above, together with the attainable political and indigenous reputational hurt/danger that might associate with “simply say(ing) no”, in addition to with an acknowledgement that from each price and safety of provide factors of view, neither may we “signal on the dotted line”.
Subsequent, I outlined the builders’ place, as to why they have been basically married to our firm as a shopper and nobody else.
Lastly, I requested his permission to supply up the next counterproposal, on the premise of avoiding the 100% sole buyer danger.
- Our firm can be keen to buy 50% of energy generated from the scheme
- We’d honor the beforehand proposed strike worth, worth escalator, and take or pay requirement (of fifty% of their technology)
- However with this caveat: they must on-sell the opposite 50% of their capability first, and present us copies of duly executed agreements with different counterparties masking that whole 50% previous to our firm signing up for the remaining 50%.
This counterproposal was authorised by the Asset President, as said above, as we have been fairly sure that the builders would by no means be capable to meet the check contained within the caveat.
End result and Epilogue
In mid-Q2 of 2008, our workforce introduced the counterproposal outlined above to the builders of the Taharoa Block C Wind Venture. We shook palms with their workforce and left the assembly not lengthy after.
A web based search of this venture will flip up a number of makes an attempt to develop this wind farm, however to-date none have completed a lot as damaged a single spade of grime on the positioning.
As our workforce met with the builders of this venture over the time period of the assessment, it grew to become clear to me that their whole enterprise case rested on the presupposition that, as a big power person, we might be pressured to “signal right here please” and basically be the big company sufferer of a scheme of power graft. Like so many proposals the place firms are led to imagine that “supporting” the present authorities zeitgeist (one can identify any variety of poisons right here, from environmentalism to renewables to range) will give them some type of reputational benefit, the place the true benefit is proscribed at greatest and the draw back – by no means talked about up entrance – is appreciable (in each monetary and reputational harm).
There are numerous different explanation why so-called “renewable energy” – that’s, intermittent energy schemes the place the “gasoline” is presupposed to be “free” and “clear” however can’t be saved or managed by people – are unreliable and completely wasteful as capital funding packages, besides by numerous mandates and subsidies doled out by governments. Maybe I’ll write extra on these things sooner or later.
My very own private expertise turned me from being “mildly agnostic” about intermittent renewable energy to being a robust opponent of such schemes. And out of doors of some ephemeral political argument about “saving the planet” (that comes lengthy on perception however very brief on element), intermittent energy schemes whereby the technology capability is linked to both a regional grid or massive energy person that depends upon predictable power, in my view and expertise, needs to be prevented in any respect prices.
——————
Invoice Schneider is a Procurement and Contracts chief with greater than 30 years’ expertise throughout a number of trade verticals and international locations. With twin citizen of the US and New Zealand, in addition to a everlasting resident of Australia, his profession has concerned belongings owned and operated by Procter & Gamble, Boeing, Rio Tinto Aluminum, Bluescope Metal, BHP Billiton, and Glencore, in addition to firms within the banking, energy technology, and services administration areas.
A local of New Orleans, he initially studied Christian Training at East Coast Bible School as an undergraduate, later attending Tulane College to earn an MBA in Common Administration.
His feedback signify his personal opinions and never these of any firm, contract agency, or shopper with which he could also be related.
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