It’s been hard to write anything for a number of reasons: (i) the renewables industry has been caught in a weird lull, with reduced investor appetite and no major news to change that so far, despite sustained activity (ii) there’s been louder stuff happening in the world, that burn up all the attention and don’t encourage rational discourse anyway, and (iii) accompanying this is the increased tribalism of all discussions, which has made dialogue really hard. This blog has been described to me as propaganda because I work in the renewables sector, and frankly I don’t have the stamina for cheap (pointless?) point-scoring exchanges.

There was a time when I thought that fact-based discussion on a topic like energy would be possible, but it has become quite hard. The sector is complex and diverse enough that you can find genuine arguments and statistics in favor of almost any proposition. It is undergoing massive transformations, so even talking about what was, what is, what will be or could or should be can lead to honest disagreement even when it’s just about different perspectives.

The reality is that energy is very often strategic, and it’s always political, linked as it is to economic well-being, and to basic human needs, and people inevitably bring their political preferences into it - or their perceptions of who’s talking about it.

We are right now in a weird period where there is no apparent fighting in the war against Iran and proxies, and no massive shortage yet of energy and associated products, even though the Straits of Hormuz has been closed for several weeks and appears nowhere near re-opening (the markets apparently have a new cute acronym for that: “NACHO” “not a chance Hormuz opens”).

We’ve lost around 15% of world oil supply, maybe 10% of traded natural gas, and material chunks of a lot of other critical feedstocks like helium, fertiliser and others, and yet most people are still behaving as if nothing was really happening. The economy is still mostly humming along, corporate profits and stock markets are at record highs, and oil, even if it is more expensive than before the war, is nowhere near the levels that would be expected to be necessary to bring demand down to the level of available supply.

(note - this shows only the 2022 peak, but the current peak is still lower than that, so we’re nowhere near the highs of 1979 of even the 2010s)

One reason is that prior the war, stocks of many of these commodities were actually very high, so we have been drawing down on inventories from such high levels, without triggering immediate warnings of insufficient stocks. This will end as some point. But in the meantime this feels like a second-tier shock. Oil prices have been increasing over the past 2 weeks, and we may be coming soon to a more panicky phase - but as I write we are still very complacent, with Brent below 110$/bbl)

So other than watching the coming train wreck with morbid fascination, what else can we say? I’ve tried to collect a few big picture items:

• Europeans (not all the same ones!) are facing simultaneously higher energy prices for oil and natural gas and record negative prices for electricity (with record numbers of hours and days when these are happening).

  

  Source - Julien Jomeaux

  High prices for oil and gas translate into higher prices for transport and industry, and into higher prices for electricity - but only when gas-fired plants are required, which is frequent in Italy and the UK (still a large gas-fleet) but rarer in Germany and almost absent in France (lots of nuclear+ hydro) or Spain (lots of renewables including hydro). The negative prices happen as soon as there is sufficient solar to crowd out the more expensive power sources, which means a lot of the day-time from March (or even earlier) until autumn. What this tells us is that we need more batteries, to at least manage the daily fluctuations in solar (as is now happening in Texas, where power prices are very low).

  

• Short term policy reactions to energy shocks tend to focus on reducing the pain on consumers, which does not really work as the point of high prices is to reduce demand, and protected consumers means not enough reduction and thus higher energy prices to get the unavoidable result (remember, we have a physical shortage of oil and other goods).

  There is a bit of beggar-my-neighbor aspect to it - let the demand destruction happen to others. In any case, these short term policies certainly do nothing to solve the underlying problem of dependency on imported energy at volatile prices. Which begs the question of when to implement different policies… In crisis, alternatives to oil would be profitable but they need years to happen, so only more subsidies for fossil fuels “do something” ; outside of crisis, fossil fuel-based energy looks cheaper and policies to move away from that are attacked as useless and expensive. Destroyed demand tends not to come back, but it’s a very painful, inefficient and slow way to change our energy use.

• Solar is now cheap enough that it will keep on being built whatever the price of alternatives are, so we now need to focus on what’s needed in addition to solar. The answers are flexible production and interruptible demand, and batteries score high on both counts, but only for short periods. Wind, especially offshore, can help as its production profile is quite complementary to that of solar, both on a daily and yearly basis.

  

  On the demand side, policy-makers seem to focus mostly on baseload demand (things like heavy industry, hydrogen, or, these days, data centers), which is exactly the kind of demand which is not (or at best, less) interruptible. With free energy for several hours per day, it should be easy enough to find activities that generate money, but our lack of imagination tends to lead us towards industries that we know need electricity (usually on a large scale), not towards those that can prosper in the emerging new electric world where demand increasingly needs to adapt to supply and not the other way round.

• Part of that is the continued focus of all on “big things” - big power plants, big industrial uses, big transmission lines. But renewables and batteries are fundamentally decentralized systems, and adaptable demand is something that can most easily be done for small scale activities. This is happening, but is not very visible. Talking to people in or around the industry, there is an amazing number of new initiatives, mostly local and small, that aim to work within the new system. New forms of storage, new business models with flexible energy use, optimization of revenues from existing assets. This is the future - and is is changing the system in the present, but it is hard to grasp. It has become visible in places like Pakistan, though - From the first graph below you’d never guess that Pakistan installed something like 10 GW of solar in 2024 and probably >20 GW in 2025.

  

  

  Source: Pakistan Energy Review 2025. Data in second graph for years 2020 to 2024. The power system is being revolutionized bottom up, with people importing and installing Chinese solar panels to avoid the unreliable grid, and reducing apparent power demand.

  What is needed is clear price signals (so subsidies and other attempts to limited price volatility do not help) and regulations that at least do not kill these initiatives just because we don’t exactly know where they fit. And this is accessible to a lot of peoplevia the simple combination of an electric cars and solar panels. If you have a house, add a battery system and a heat pump and you can be largely energy self-sufficient, at a competitive (and fixed) price. These things will continue to happen even if policies don’t encourage them (which does not mean that policies do not need to help - accelerating these trends would be a good thing).

• It all comes from China, but so many things come from China that this is really a lesser problem. If China subsidizes solar panels and batteries, that is good thing as we get them cheaper than we otherwise would. Once we have installed them, we are independent for 10, 20 or 30 years (as opposed to one week or one month for a fuel tank). There’s a lot of other components to everything in our life that are just as worrisome dependencies (beyond the infamous rare earths, think chemicals for medicine, metals and parts for many good, phones, electronic equipment, etc), so focusing on this one, which helps eliminate a much bigger and more immediate threat, is frankly absurd. The past 5 years have shown that trade dependencies, if used as weapons, get eliminated very quickly. Think Russian gas, chips to China, or even rare earths, currently being solved. Trade weapons are one-shot instruments. Should China cut off all solar panel and battery exports - all those that were bought before that will still work for a long time, so any damage would only be on future capacity, not on current energy production.

• Another “big” thing that is overplayed and over-hyped is data centers. They matter, they grow, they even count in GW! Even without taking a position on whether it’s a bubble or not, my personal view is that demand from data centers will end up being much less than expected, from a combination of improved efficiency (when energy is your main input, you work hard to reduce how much you need - and progress on that front has been spectacular)) and actual energy capacity bottlenecks - those that will be built are those that have access to electricity, and the only source of electricity you can build at scale quickly is renewables. Gas turbines are sold out for several years, and things like diesel generators and small turbines are not very efficient. Right now it appears that cost is not a consideration, but it will soon be one (again), and then access to well-priced renewables, and operators that make their assets work when electricity is cheap (i.e. when renewables are plentiful, see above) will have a major edge.

• In the meantime, the renewables industry seems to want to become as “serious” as the traditional utilities and oil&gas (and finance) industries. Some of that comes through as focusing lobbying on the same whiny quest for subsidies and preferred treatment. This is annoying, unnecessary, and ultimately counter-productive. It gets used against the industry (“you still need subsidies”) and it does not even help, because it just generates endless tinkering, and not the stability which is worth much more. And people tune out or just see it (occasionally rightly) as propaganda.

Altogether, I think a lot of good things are happening below the radar - and I actually thing that it’s a good thing that it’s under the radar. What is not visible may get fewer obstacles on its way. Trust human ingenuity - a lot of it today is focused on finding smarter ways to produce and use energy.

As a final note, let me predict that I think a real political realignment could happen where the opposite sides are (i) big corporates and big organisations, under the pressure of financial owners, treating labor and regulations as costs, causing massive externalities vs (ii) small players and entrepreneurs, who need their neighbors as clients and suppliers and value a level playing field wit the same rules for all, enforced. Artificially protected oligopolies, large faceless organisations where the wealth only accrues at the top vs competition and diversity and human-scale activity, and more distributed value. Energy is one of the sectors where this dividing line will become increasingly visible.

Both from Caiso (California’s system operator)

The increasing impact of solar is obvious, going from 40% of the peak to close to 100% on its own. With wind, renewables are above 100% for several hours.

As Mark Jacobson of Stanford University documents regularly on Linkedin, this is not a one-off:

And it’s not even a spring/summer thing - the 100% were reached as soon as mid-February this year in California.

As I’ve pointed out before, this is increasingly managed via the large and growing battery systems, which can now deliver up to 10 GW in the evenings, and significantly reduce the need for gas-fired generation during the evening peak, as shown in the graph below (same source).

But this is not actually what interests me today. When you look at the first two graphs above, what strikes me the most is that while peak demand in the early evening has grown a little bit (from 28.1 GW to 30.2 GW, so barely 7.5% in 7 years), and demand at night has also grown a bit (from 20.7 GW to 22.1 GW at 4am, ie + 6.8%), mid-day demand has actually plummeted from ca. 25 GW in 2018 to ca. 20 GW only in 2025, a ca. 20% drop.

So two conclusions:

• Despite all the hype about AI and date centers, it’s still not significantly impacting overall demand (Amory Loving of the Rocky Mountain Institute has a good recent paper about the risk of a bubble in new generation capacity caused by the AI hype and that won’t actually be needed):

In 2023–24, artificial intelligence (AI) was suddenly hailed as the vital foundation of the next economy. Big Tech giants, aided by 36 states’ subsidies, are investing a trillion dollars in data centers for AI services. Forecasted electricity use soared, but actual national use hasn’t. In 2023, US grid electricity fell; in 2024 it rose 2%, the fourth-fastest rate in the past decade, as data centers’ share (little from AI) crept up from 4.4% to 4.5%. Electricity growth was real in a few hotspots, but was widely misreported as a national trend.

• There’s something else at play: demand is actually there, but it’s been covered by behind-the-meter supply and no longer gets to be included in system-level demand. It’s striking that demand is missing in the middle of the day, right when there’s the most sun: the logical conclusion is that it’s fulfilled by residential solar. That phenomenon is obviously hard to measure, and will only get bigger as (i) more people instal storage systems together with their solar panels, and (ii) the C&I (commercial & industrial) sector does the same - putting solar panels + storage on/within industrial or commercial buildings, and procuring their power locally and increasingly, outside the grid.

That last trend is going to be highly disruptive, as it’s now driven by self-interested economics (which increasingly work even without subsidies, given the fast-dropping prices for both solar system and batteries), and it’s completely dispersed. It’s not about utility-scale plants (which can be anticipated and managed by the system - including delayed or blocked), but about apparent demand elimination, and it empowers individuals and small players against the large corporate or public bodies that have traditionally called the shots in the power sector.

The logic of the grid used to be that it is easier to manage residual imbalances at the grid level, after setting all local differences off (if the transport capacity allows it), rather than doing that locally and inefficiently (where you need to manage lots of local positive or negative balances individually), but the cost of the new technologies, and the flexibility of battery systems, upends that logic and makes the local level optimization increasingly competitive, especially for parties that function at the (higher) retail price level - especially as grids are increasingly congested and do not fulfill that role of balancing local discrepancies as well currently, due to the scale of the investments needed and the hard work of permitting what’s needed.

The risk is that this leaves the grid system with an hollowed out demand base, and permanently responsible for occasional backstop services while not providing a lot of volume anymore. It may never come to that - in fact, most residential and C&I demand is not constant, and it follows a strong day/night pattern that matches very well with solar complemented by batteries. California is also showing that, at least in some places, seasonality will not be an issue either (although that’s likely to remain a more difficult topic in places like Northern Europe, even if wind will help there).

In any case, we are moving towards a new world, where utilities and the grid face a completely new situation, where local demand will increasingly have as a credible alternative to go off-grid, and individual / local demand could become an arbitrage opportunity for enough self-reliant local parties that it puts serious price pressure on the old incumbents.

I expect more renewables+batteries and cheaper electricity, whatever policies we see. That in turn will make electrification more compelling and may finally drive power use up over time.

Ørsted claims that the project is no longer economically viable, but that does not make any sense, given that they bid the price they needed to build only last year after all the market turmoil in 2022-23, so they should have known better, and have really no excuse this time.

To explain this: the usual behavior of utilities in these price auctions had been to get detailed quotes from contractors in order to determine their construction costs and thus their bidding price, and then, once they have actually won, to go back to the contractors and say "now we have won and have an actual project to build, give us your best quote" and squeeze them for an additional rebate. With construction prices steadily going down over the years, this was a logical approach to auctions, and a profitable one. It even made sense in auctions where construction could not start very quickly after winning the auction because of permitting or grid constraints - the likely gains outweighed the uncertainty.

But the market turmoil of 2022-23, with supply chain shocks, increased interest rates and volatility in power prices, caused havoc in the business model of the sector and caused a general increase in the cost of generating electricity from new projects. So those parties that had obtained tariff before 2022 and not locked in construction and financing costs at the time found themselves with suddenly very unattractive business cases, and many projects were abandoned, in particular in the US and the UK . The cost of doing so was relatively low, in particular compared to the cost of building the projects with now-weakened economics.

The companies could, barely, argue that these circumstances were truly exceptional (after Covid and the war in Ukraine, both impossible to predict in the relevant timelines) and that they deserved some flexibility. This could hold in the US where they had to bid for PPA contract prices long before they had all their permits, but was always flimsy in the UK, where you need to have all your permits and your grid connection to be allowed to bid for a CfD, and know that you will be able (and indeed are supposed) to build your project quickly after CfD award. With short timelines, it is possible to lock in your contract prices and financing already when you bid - which is what projects using bank finance for construction do, as banks will not take the risk of costs changing after the bid, and impose that all terms be nailed down in advance. It is even possible lock down interest rates in advance, for instance with instruments called contingent hedges where you don't pay money upfront but pay a slightly higher, but known, rate only if you do go ahead with the project.

Northland Power, which won a tender for tariffs in Taiwan in 2019 and was allocated a tariff in Poland before 2022, managed to debt-finance both projects in 2023 without abandoning their original tariffs, despite all the market havoc.

Utilities choose to not fix their contractual prices when bidding; it is their right, but it is a commercial decision on their part (effectively a bet that construction costs and cost of capital will go down) and they should be held accountable for it, and asked to honor their contractual commitment to build a wind farm, given the effort that the public body makes to ensure that it is economic for them to do so.

The fact that Ørsted is again abandonding a project in 2025 after having bid for a CfD less than a year earlier shows that they have learnt nothing, and are still taking the government (and ratepayers who support their projects) for fools. They should be punished. Currently, the main penalty in the UK for giving back a CfD is that you are not allowed to bid in the next two rounds. This is much too weak - they should be forced to build the project or stripped of their licence on the zone and forced to pay a penalty equal to a substantial fraction of that investment cost. That amount could be used to incentivize replacement bidders. I'd even go as far as banning failing developers from getting any offshore licence for multiple years.

The fact that such behavior effectively goes unpunished creates continuing perverse incentives, where utilities can bid unrealistic prices to win auctions, with the option to either abandon the project or whine for subsidies if the bet does not work (given how visible and politically sensitive these projects are, governments are highly sensitive to blackmail). This gets fewer projects to be built and terms to be generally less favorable to ratepayers in the end.

At the very least, governments need to impose very high bid bonds on any price auction, to ensure that these bids are realistic and projects get built at the offered price. The bonds would be drawn only if projects are not build within a reasonable, pre-set timeframe, with limited allowances for extensions for factors genuinely beyond the developers’ control (a delay in the grid, or something like a critical vessel sinking, say).

As another reform, governments should move away from auction rules that favor the biggest players only (such as large balance sheet requirements, or a track record or building GW previously, or similar hurdles that exclude non-utility players, and even often exclude large financial players like specialized infrastructure funds). Small players in offshore wind have a distinguished record of getting projects not only built, but built on time and on budget. They are definitely better than the utilities on that front - the main reason for that being that these small players rely on bank finance i ntheform of non recourse debt for construction, and lenders in the sector have done a good job of understanding construction and operation risks, and ensuring that they are mitigated properly, and there is a large ecosystem of competent contractors and consultants that have shared experience and a large body of common knowledge to work from. (Project financiers have a market share of 50%, as opposed to the 10-15% or less of Ørsted or other large utilises who think they have the most experience…)

As an aside, bank-financed deals tend to offer smarter contracts to the supply chain instead of squeezing them for the lowest price like the utilities tend to do - contractors take more risk, but it is risk they understand, and they get paid fairly (ie better) for it. Developers get cheap debt, and the resulting lower cost of capital makes their bids competitive. So you get a healthier supply chain, in Europe (banks tend not to like Chinese contractors) as an added bonus.

Smaller players can also actually afford large bid bonds linked to construction (as for banks it's a risk they are already taking), so this would not be penalising for them.

The signal given by Ørsted (and other utilities that abandoned projects before) is detestable, and their behavior actively detrimental to ratepayers and to public policies to decarbonize. They need to be punished harshly, otherwise this will happen again - indeed, they are already doing this AGAIN, after getting better terms last year after already doing it in 2023.

There was another article on that panel in EnergyWatch, but it’s behind a paywall. I can send the article bilaterally on request, it does have juicy quotes, I’ll just include one here:

Guillet asserts that Power Purchase Agreements are basically a poor substitute for CfDs, and he knows that people get angry when he says this.

“PPAs provide the price stability you need, but you get it from a weaker counterparty and typically with contracts that have different features,” he says and continues:

“PPAs should not be prevented, and of course it should be a free choice for companies to do so. But basically it will lead to more expensive electricity.”

Vattenfall did have a post on LinkedIn about our panel, but they must have been annoyed by the above (I specifically discussed the Vattenfall-BASF PPAs on Dutch offshore wind farms during the panel) because they seem to have cut me off from the videos of the panel…

Photo: WindEurope

The RenewablesNow interview

Companies with a high cost of capital, such as oil and gas players, are not natural investors for the renewable energy sector, according to Jerome Guillet, Managing Director at financial advisory firm SNOW.

Speaking at WindEurope 2025 and in a follow-up conversation, Guillet stressed that while the exit of such players from the renewables sector is generating negative noise, it is ultimately not a bad thing. “Thank God the oil companies are getting out of the sector,” Guillet said on a panel during the wind industry’s recent annual event in Copenhagen.

Renewables need long-term, stable, cheap capital, he argues. “The cheaper the capital, the cheaper the electricity,” Guillet, who previously founded Green Giraffe, said. Companies with expensive capital need higher returns and could drive up the cost of clean energy.

Guillet said that oil and gas investors are right to oppose allocating capital to renewables because their capital is better suited to high-risk endeavors like oil and gas production. If society wants to discourage oil and gas development, it should be done through regulation and taxation, not by steering fossil fuel majors into renewables. “It’s a very inefficient way to correct things,” he said.

He also pointed out that oil and gas majors often entered the renewables sector by overpaying (as they were rewarded at the time by investors), only to later exit when investor fashion changes and financial returns disappoint. "They come in, overpay, complain it's too expensive, and then leave noisily, making negative comments about the industry that get a lot of visibility and sell the assets in the meantime," he commented.

Instead, low-risk, low-cost-of-capital investors, such as utilities, pension funds, and financial investors focused on stable returns, are the appropriate owners of renewable assets, particularly once projects are operational. Oil and gas companies could participate during the risky development phase, but the problem is that renewable development is not that expensive, Guillet told Renewables Now. “It's hard to deploy billions in renewables development. This part is high risk, high returns, but relatively small amounts.”

According to the finance expert, contracts for difference (CfDs) are a good mechanism to ensure long-term stable prices in order to reduce risk and encourage investment. He said he has been pushing for CfDs, which are now being promoted by European institutions, for a decade.

However, he added that "there's a lot more details" and one key element is the capture price—the actual market price projects receive based on when they produce electricity. According to him, developers should bear the capture price risk – the risk that the instantaneous price when they produce is worse than the average price – to encourage production when electricity is valuable. “You don't want to add more solar in places where solar is already doing so much production that you've got surplus,” he said.

“When it was small volumes, it was tolerable and you produced whenever you could. But now that it's a large part of the production, you can't have renewables having a free ride on the system anymore,” he warned.

Regarding power purchase agreements (PPAs), Guillet said that they involve more counterparty risk, but at the same time, some electricity buyers want to be able to purchase electricity directly.

“The thing is, if people want one or the other, they shouldn't be able to switch completely freely. [...] So you pick one or the other, but then you need to stick with it for the duration. It should be hard to terminate either PPAs or CFDs.”

Guillet further said that financing has never been a challenge for renewable energy projects. The real bottlenecks, he explained, come from regulatory aspects like permitting and tariffs. “As long as [projects] secure permits and obtain a tariff or PPA, they will be financed,” he stated.

On permitting, Guillet said at WindEurope that Germany showed that if you simplify permitting, you get projects. However, not all countries are working to solve this issue, even in Europe. Guillet mentioned that even in France, there are often hostile decisions, and in other countries, rules are constantly shifting between more and less favourable.

This is the short version of an article that I started writing 4 years ago and never completely finished, but which is still relevant. The goal was to show the real-world consequences of certain market design choices.

The table below presents the key assumptions and results for the financing of an offshore wind farm under different tariff regimes, from various CfDs, to pure merchant and structures using corporate PPAs. The numbers were realistic in 2021, and obviously are outdated today, as costs, interest rates and power prices have all moved significantly. Since the most interesting result is the relative numbers rather than the absolute ones, we have not updated the table with more recent assumptions, as the conclusions would be identical.

The project’s cost structure does not change between the different scenarios, but its financing does, driven only by the evaluation by debt and equity providers of the power price risk, all other factors being equal. The tariff regimes influence how much debt lenders are willing to provide, and under what terms, and the cost of equity that the owners require for the corresponding residual risk.

Debt amounts are constrained in two different ways:

1. the cost side: the “gearing”, or “leverage”, as banks will require a minimum fraction of equity to fund the project that depends on the perceived risk (the higher the risk, the lower the fraction of debt that will be allowed); and

2. the revenue side: the “DSCR” or debt service cover ratio, which looks at how much revenue is expected in each period, and how much of that can be allocated to repaying debt (the more certain the revenues, the higher that fraction can be and the lower the DSCR will be)

The above table shows the numbers that could be realistically achieved in 2021 - they have not changed much today, as far as the ratios are concerned - for each risk profile. “Merchant” pricing (selling directly on the spot market) is the riskiest strategy, and thus allows the lowest amount of debt and the least favorable terms. PPAs are seen as less risky from a price perspective but bring in counterparty risk (that the buyers will go bankrupt or terminate the contract). CfDs are seen as the least risky. Longer durations are seen as riskier but also offer a larger revenue volume to repay debt so can lead to increased debt amounts.

Equity remuneration requirements move in tandem with debt perceptions (the riskier profiles lead to higher IRR expectations).

The first key result is that a CfD allows a project to bid a significantly lower price than if it has to rely on a corporate PPA: project owners need a PPA price of 66 EUR/MWh over 15 years and a CfD at 50.5 EUR/MWh over 20 years (or 59 EUR/MWh over 15 years) to receive risk-appropriate returns on the equity they invest.

This was proven in real life with the HKZ project, where Vattenfall gave away the equivalent of 10% of project revenues to BASF to secure a PPA for the electricity generated by the project, which did not get a proper CfD.

The second result is that merchant projects are even more difficult to finance, which means that investors relying on spot prices will effectively need to rely on high (and likely very volatile) prices to get the returns they expect. The utilities’ and oil&gas majors’ bets on “zero bids” and other merchant strategies for offshore wind (as have happened in the Netherlands, Denmark and Germany) are either deeply misguided (they will never get decent returns, knowing that their long term market price outlooks are usually quite conservative) or extremely cynical (betting on sustained high and/or volatile prices). The continuing link between natural gas prices and power prices suggests that parties that are experienced gas traders could see paths to long term profitability by benefitting the most from price spikes like those that occurred during the 2022-23 crisis.

From the regulator’s perspective, merchant projects do not provide any price protection for consumers even though their cost base is fixed - renewables projects will make “super profits” during price spikes. But they appear to be “subsidy-free”.

And if they lead to PPA-backed structures, the benefits of the fixed price will go to the buyer - which these days is most likely to be one of the GAFAs (Google, Microsoft, Amazon). Thus relying on PPAs rather than CfDs is akin to indirectly giving subsidies to some of the richest corporates on earth…

There are other elements that matter in the design of a tariff auction, and I’ll get to these in a separate post, but the core element here is that a CfD (like a PPA) is a swap of short term prices for long term prices, and having a regulated counterparty has a value that can translate into (i) lower cost of electricity for consumers, and (ii) increased stability of prices for them.

This is a topic that has been on our minds for a while now - and one of the reasons we write relatively rarely these days: it seems that nothing one writes will change anybody’s mind, once they have settled on a position.

You belong to a tribe

The notion that people want to belong, adopt a tribe that they are comfortable with (usually because they share their opinion on an issue they care or know about), and then take on the positions of that tribe on topics they know less about, is not new.

For a long time, we were hoping that energy policy could be different - it is fundamentally “real”, driven by physical laws and hard economic realities (things like the price of oil or steel, interest rates, etc), and so in principle, it should be possible to at least agree on some basic facts on the ground, before moving to things that depend on personal and political preferences (appetite for risk, short-term vs long term view, fairness vs efficiency, etc).

But the reality of the energy world is that it is incredibly complex and thus you can easily find real facts that support, or appear to support, almost any position you want to take, and the tribal behavior noted above applies in that sector just as well - and maybe even more strongly because everything about energy policy is political, whether people acknowledge it or not. It touches fundamental human needs (heat, transport, cost of living), core economic issues, sovereignty, geopolitics, and our approach to others and to natural resources.

The energy sector is undergoing massive change and becoming more complex

In that context, a few things stand out:

• the energy transition is a major change, and people are (often for good reason) afraid of change. “Better the devil you know”. There are legitimate worries about the cost of new things, and similarly legitimate anguish about how things will work in the future. To give a simple example, people know what it takes, and what it costs, to fuel their car, they are familiar with the availability of gas stations, the maintenance, the resale value of their car, etc. but they don’t know (until they have actually tried it) how all this works for an EV. This can be overcome, but it should not be dismissed as unreasonable

• more ominously, that major change impacts, mostly in a detrimental way, some of the largest and strongest corporations on the planet. It is sadly naive to expect that they will let that happen without a fight - and these companies have the ear of top public officials, large PR machines and even some legitimate arguments. Corporations are generally law-abiding entities, but they will certainly do their utmost to ensure that the laws that apply to them are the most favorable, and if that takes pushing biased narratives and facts, or even outright lies, they will not shy away from that. Given their prominence and influence, these feed public opinion and shape the debate

• on topics that people do not know, it is possible to shape opinions and sow doubt. “Offshore wind kills whales” has become part of the narrative in US states where no offshore wind exists (and cannot kills whales…), brilliantly neutering people’s willingness to do better (which exists despite the above-noted fear of change) - by generating well-meaning doubt about whether it’s really better. On complex topic that most people don’t really understand in detail, it is possible to use a simple factoid to anchor wider positions (“how do you do surgery when there’s no wind” “we’ll run out of rare earths”). The complexity of energy infrastructure can be used to create moral relativism, and suggest that all solutions have drawbacks anyway, so we might as well stick with those we know and that work - or whose negative consequences we are used to

Zero-sum games vs positive sum games

A wider point is that it looks like the current political battle lines are largely coalescing around different visions of human interactions - basically those who think that they are all zero-sum games, and those who don’t. Or maybe call it a narrow sense of “fairness” against a narrow sense of “efficiency”.

The first category thinks no improvement is possible unless taken from others (and they feel they have been taken from, and thus anything that looks like it’s positive for the other side is bad for them). The second category believes it is possible for everybody to be better off, under the logic of “let’s create the most overall wealth/opportunity/wellbeing in the smartest way, and then redistribute it fairly” - except that a lot of the policies of the past 40 years seem to have focused on the first part (wealth creation) and (willfully or not) forgotten the second (fair redistribution), which is at the heart of the beef the first group has against the second: they have been played, repeatedly, in the name of “progress” and all talk of a greater good are bullshit.

At some point, as wealth became the measure of success and the ultimate goal, wealth creation (non-zero sum) turned into outright wealth capture (zero-sum). In that context, selfishness pays, and you need to protect yourself from the selfishness of others, or be taken advantage of. In particular, you need to be wary of people that promote efficiency or a better future, as it becomes synonymous, more often than not, with sacrifice for you and profits for them in the short term and no improvements later. When one looks at promoters of renewables in that light, it becomes easier to understand the hostility.

That takes us back to the overall complexity of things, and the yearning of people for simple (maybe simplistic) solutions.

One side has simple solutions, and a similarly simple hostility to whatever is proposed by the other side. So what is that other side to do? Accept the current zero-sum nature of the fight, and join that fight with all the energy and, maybe, bad faith necessary to win? Or try to stick to a higher ground which may no longer exist, may not be competitive as such, and is fundamentally undermined by the logic of the first option?

Or refuse the alternative and give up the fight?

Centralisation vs fragmentation

We are actually optimistic in that we see the energy transition as inevitable, because it makes economic sense even in a narrow sense (i.e. even before accounting for the externalities of each solution) and it will happen. It can be slowed down, but it will happen even faster than most people believe. And to be cynical, the people who vote for the status quo are those who will disproportionately bear the consequences of delays and other zero-sum policies, even (and maybe especially) when “their guys” are in power.

In the meantime, the new energy system is becoming more decentralized and it is increasingly possible to have a positive impact at the local level - indeed most changes will be very local and small scale, whether on the generation, storage or demand side, and it is possible to do so whatever the political context is. We are continually impressed by the multiplicity of start up and initiatives happening all over the place - they matter and they will make a difference in aggregate.

They will also make the system more complex than ever - and thus even more subject to simplistic discourse, which should thus mostly be ignored.

We’ll continue to try to write evidence-based pieces, and to acknowledge (maybe even revel in) the complexity of things, but we’ll probably do so sparingly to avoid the unavoidably heated rhetoric of rapid fire commentary.

Note: the image above is from a Ukrainian newspaper in 1994 and was used as the cover of Jérôme’s PhD dissertation on the independence of Ukraine…

Amonts the “certainties” from this year: demand for power is exploding thanks to AI and data centers, nuclear is back, and US oil&gas is saving the energy system (and giving the US an unsurmountable competitive advantage). The FT is a good example of that (here, probably behind paywall).

And yet…

So I’d like to list somewhat different highlights:

• the first is the incredible growth of solar, and the corresponding surplus of electricity we have more and more of the time, as visible through negative power prices

  

  Source: GEM Energy Analytics

  

  Source: EMBER. More graphs in one of my earlier posts here

• the second is the incredible growth of storage, which is the obvious, and working, answer to the first point - it’s just very difficult with such growth rates to match the two exactly

  

  Global energy storage systems installations in 2024 (in GW). Source: Energy Trend

  

  Source: NYT “Giant Batteries Are Transforming the Way the U.S. Uses Electricity”

• the third is that this is the last gasp of nuclear - maybe some people hope to see Flamanville being finally connected to the grid in France, and multiple PR stunts by Microsoft, Amazon et al. (which are just announcements of developments, i.e. highly conditional commitments to purchase electricity) as the start of a renaissance for the sector, but it’s more like a last gasp - in fact 2024 is most likely the year where wind+solar overtook nuclear in the USA, as well as coal.

  

  Source: EMBER (In the same link one can see that in Europe wind+solar have now overtaken all fossil fuel generation).

  Flamanville is likely one of the last nuclear plants to be built in Europe. Hinckley Point may be completed at some point in the future in the UK, but even in France the next ones are in doubt, with decisions on future investments postponed.

  By the time any new nuclear plant in the West gets build, the transformation of our power systems towards renewables dominance will be over.

• the fourth is that demand is actually still shrinking. Despite all the breathless announcements about AI and data centers, overall demand is mostly stable in the US (increasing by 2% in 2024 after decreasing by the same in 2023), and shrinking fast in Europe

  

  Source: Energy Charts

  Some are blaming European deindustrialization (and collective suicide caused by crazy green policies and/or naivety about Russia, even if these are two contradictory and inconsistent arguments) but the trend predates the war in Ukraine. The reality is that we are continuously improving industrial processes while moving towards services, and a service economy is less energy intensive than a more primitive one. Even in emerging markets energy intensity is going down fast.

  

  Source: Our World in data

• the fifth is that nobody talked about lithium or copper or other critical raw materials for renewables. We’re still talking about oil (but, as the FT noted in their story, even in a year of massive geopolitical turmoil, oil prices did not move much, and, if anything, went down), but the breathless scaremongering about other minerals being unavailable for the energy transition has disappeared together with the collapse in prices, which reflects the normal adaptation of supply and demand in a cyclical sector like commodities to earlier changes in demand.

  

  

  Sources: Trading Econmics (Lithium, Copper)

That brings me to the last trend - the utter rejection of renewable energy by the markets. From public announcements, it seems that everybody wants to exit renewables (see my earlier story on that topic), and in particular stock market investors are loudly cheering the fact that oil&gas companies are reducing their investments in the sector. As it were, I tend to agree that oil&gas companies are not the most relevant investors into renewables - they have expensive capital, as required for their riskier core business, and the returns in lower-risk renewables are more adapted to investors like pension funds or specialized infrastructure funds. But the message “renewables are not appropriate for oil&gas companies” has turned into “renewables are bad investments” in public perception, leading to an unseemly (and in all likelihood, ultimately costly) rush to the exit by players that should know better.

Specialized sectorial players are mostly continuing their ongoing investments in a low key manner, but they are also avoiding splashy new announcements, leading to the continued dearth of buyers. In fact, renewables are so oversold that they have become an amazing buying opportunity, and the handful of remaining players willing to take bets on the sector will earn oversized rewards in the near future. (If anyone reading this has money, I’d be happy to help you find the best opportunities around 😇).

At the heart of that is the fact that renewables briefly became the darlings of the stock markets in 2021, leading to a bubble that has now burst, due to a combination of an unfavorable macro shock with the trifecta of war in Ukraine, inflation and increased interest rates, plus more directly hostile politics from the populists. The resulting pain is leaving a sour taste - plus noisy glee from political opponents. Volatile capital markets are not necessarily the best to finance a sector that requires long term price stability (best offered by bank lending and specialised equity from dedicated funds).

Meanwhile, incumbents (utilities), long used to dominating the debate and government policies have been caught on the receiving end of the anti-renewables propaganda they spewed in the past, and which have been weaponized wittingly or unwittingly by the political opponents of the greens, usually the rightwing populists, who are ascendant right now. So the current debate on energy is highly polarized, mostly tribal, and renewables are on the losing side in the public debate. It does not matter much because the march of solar and batteries is relentless and irreversible, but it makes policy making harder, and investment decisions scarier.

But it’s usually darker before dawn, and I expect that this is where we are in that cycle. It’s time to anticipate things and move to the buy-side!

We are living through interesting times for the German power market: the country is currently in full swing to redesign its power market to bring the EEG into line with EU mandates by end 2026 – and the recently announced general election will heavily influence coming decisions, given very confrontational positions, particularly between CDU and Green party, with party frontmen Friedrich Merz and Robert Habeck drumming for nuclear or renewables, respectively.

But there are common denominators, too. To discuss the market redesign, the (still sitting) government had introduced the Climate-Neutral Electricity System Platform (PKNS). The PKNS was designed as a forum for discussion which includes stakeholders from politics, science, business and civil society to develop relevant suggestions for Germany’s future market design. The forum is organized across four working groups: (i) ensure funding for renewable energy production; (ii) expansion and integration of flexibility options, (iii) funding of reserve capacity and (iv) local price signals. At the same time, Germany’s regulatory body for the power grid – BNetzA – plans to redesign network charges to industrial clients, starting 2026.

The importance of getting these reforms right, cannot be overestimated given the sluggishness of the German economy and the ever-more-noticeable climate emergency. Given how politized energy policy is in Germany generally, and in the context of a general election, it will be challenging to distinguish sound economic arguments from political noise.

Let us thus take a shot at identifying some reasonable guidelines for German policy makers.

As a first step,  we need to define have a view of the status quo and of a target for the reforms. As a ‘simple’ target of the reforms, we suggest an “efficient electricity system”, i.e. a market that achieves carbon-efficient, reliable delivery of electric power to all consumers within a jurisdiction at the lowest possible total cost.

The current system is

• already very reliable (12 minutes of average outage in 2022, compared to 21 minutes in 2006)(that should not be compromised) ,

• not as carbon-efficient as it should be (171 Mt to date in 2024, or 486g of CO2 per kWh produced in Germany)(That is better than the 333 MT in 2004, or 632g/kWh, but still far from France’s 16 Mt (32g/kWh)), and

• not as cost-efficient as it could be (In particular, its relative cost efficiency has significantly declined over the last few years, as shown on the map below)

Map source : Julien Jomeaux

Let’s look at power market prices first. As in any market, price is set by supply and demand – with the critical difference in the power market that supply and demand must meet each other at every instant. Given that demand is not yet very sensitive to price (more on this below), that means that supply needs to adjust to demand, with a premium for flexible capacity, and inevitable bursts of volatility (peaks of prices, or negative prices) to force supply or demand to adjust. This also means that the market price is set by the more expensive plants to provide the requisite demand, which is still, often, a gas-fired plant, making power prices very sensitive to natural gas prices.

Even though it has been decreasing for most of the past 20 years, it is generally expected that electricity demand will increase in the coming decades, as electrification is the cheapest (and often the only) way to decarbonize sectors like transport (electric vehicles), petrochemicals (electrolysis of hydrogen), steel and cement, and the increasing digitization of our economies – and the development of AI, boost the need for large numbers of computer servers  Everything else being equal, that will increase prices. So, we are stating the obvious: supply must grow. In a power system where only renewables get built, and thus an increasing fraction of supply cannot be increased on demand, the tools that allow us to time-match supply and demand will have to get better – that is generally referred to as “flexibility”.

Here comes our first piece of advice, regarding supply:  renewable energies do not need subsidies, nor priority access to the grid. In the vast majority of cases, they can be produced at the lowest levelized cost of energy (LCOE) – and low marginal cost, within a reasonable regulatory framework.

In fact, giving them special treatment is increasingly harmful in two ways.

• First, it creates political headwinds against the sector and its supposed cost as a burden to the economy.

• Second, given their already high penetration, just building out more renewables without taking into account when and where the additional production will be brought online can actually be destroying value. New power supply should be ranked at its value to the system. We believe that a concept such as Levelized Cost of Load Coverage" (LCOLC) as developed by German economist Veronica Grimm can be beneficial in this context to quantify the value of new supply to the grid.

Thus our second piece of advice to achieve a carbon-efficient Electricity System: let the European Trading System for carbon emission do its job in the German power market. If it creates a level field (still a work in progress given the exemptions and the difficulty to control imports of carbon-rich products), it is the friend of renewables expansion at this stage – and any micromanagement beyond its uniform mechanism will rather be harmful to renewables – and if it were only in terms of political cost.

What utility-scale renewable power projects need, like any other infrastructure investment, with heavy upfront investment i.e. like any nuclear or coal-fired power plant, railway line, large building, etc… is competitive cost of capital.

To achieve low capital cost, an infrastructure asset will require predictable cash flows – and that, in our view, is most efficiently achieved for power generation with no fuel cost via a fixed long term power price. Given that no market exists for such prices (contrary to fixed long term interest rates, for instance), it must be created, and the best way to do that is via the allocation of two-sided contracts-for-differences (CfDs) on competitive terms. CfDs are contracts where a price is agreed for the duration and the grid operator, or another regulated entity pays the difference between that price and the spot market price (if spot it higher) and receives it (if spot is lower. This provides revenue stability for producers, allowing them to attract cheap funding, and in turn to have a low cost of production. It also provides cost certainty for consumers – in that case all ratepayers in the market benefit from having a fraction of overall generation at a fixed price for a long period. 

Third piece of advice: offer well designed”differentiated CfD-contracts” to any utility scale new built, taking LCOLC into account at least by way of a proxy. One way to achieve that proxy may be to give a specific advantage in the evaluation of price for specific bidders in CfD auctions, linked for instance to location (example for Germany: higher in the South, lower in the North), time (higher in peak demand times by hour or season), technology (as Germany is intending with its call for 10 GW of H2-ready CCGT (and we are not judging here if that makes sense)) or other indicators that reflect a market imbalance that should be corrected rather than amplified.

Residential solar has now become so large that it drives power prices significantly. The problem is two-fold: hardly any households in Germany have smart meters and no-one has an incentive to align own production and consumption in line with the needs of the overall Electricity System. Thus our fourth piece of advice: speed up the role of smart meters – the current target date for 100% smart meters is 2032 – which is much further away than is necessary – and achievable.

We’d suggest lowering the technical requirements and to simply subsidise the initial installation, if it happens by end 2026, and is linked to any generation system in the household. Germany has around 50 million meters, about 99% have not been upgraded. Let’s say a plain EUR 50 paid to any household who can evidence by end of 2026 that they have installed a smart version. Just the grid build-out that can be avoided that way probably costs way more than the EUR 2.5 billion investment (and would take a lot more time).

This will allow business models that help residential households to time their demand more flexibly. Being flexible is in many ways much easier (and therefore cheaper) for households than for industry – many domestic power uses are temporary and easily moved around to a decent extent (think heating your water tank, washing your clothes or charging your electric car). This could also encourage local storage systems that allow households to benefit even more from their installed solar panels. For residential, we believe that – with smart meters – the economic incentives for building storage will be sufficient with any additional compensation mechanisms.

Our fifth piece of advice then is around utility-scale storage (stand alone or integrated in supply projects):  we suggest tenders run by the grid operator (as storage will always be most efficiently managed at the widest level, where all local imbalances in demand and supply have been netted off against each other already) based on availability payments against a certain target IRR for a defined total of MWh. The upside of being able to benefit from (local) power scarcity prices, will provide economic incentive for investors to build in the right location to secure economic upside.

Our sixth piece of advice is then to BNetzA – the direction of your consultation is absolutely correct – but taking the steps focused on the residential market first will minimize the need for industrial market participants to increase their flexibility. For the rest, our advice is to incentivize industrial offtakers to by a relatively simply discount scheme, similar to what has long existed in France with demande effaçable(cancellable demand): you get a lower price for your electricity at all times if you agree to be cut off by the grid, with limited notification periods, in times of system stress. If you can additionally increase your demand upon request, you also get a discount. The discount should be less than what it would cost the grid to build additional capacity or the penalties it has to pay to curtail supply. Companies that can adapt their production processes or install storage and profit from the discount will help improve the system in a cost efficient way.

As a final note, let us share our views on two aspects continuously under discussion: capacity markets and corporate PPAs.

Capacity markets are a form of insurance against exploding power prices in times of high demand vs low supply, which are always politically sensitive. But this insurance tends to come at a very high price: it distorts markets  and the insurance premium usually is quite high (and it can also be used as a political tool by claiming that plants are paid “not to produce” most of the time).It is cheaper to have investment in just a few “peakers” – which only get compensated per MWh and only do so when power prices are extremely high (with a well-known business model that has historically been financed willingly by banks). To give a simple comparison: when you arrange a wedding, paying the pub a flat fee for unlimited drinks for the whole evening will usually turn out to be more expensive than just paying drinks as consumed – simply because the pub owner usually know their business and the flat fee will be high enough). Of course, capacity markets may be easier to defend for regulators (just as you may agree on the flat fee regardless, just for your peace of mind at your wedding), and utilities will tend to lobby for them (which tells you something about their profitability…) but the discussion should be had.  

Similarly, we would like to point out the downsides of corporate PPAs. They essentially allow strong offtakers (think Microsoft, Google or, to a lesser degree, BASF) to secure the best, cleanest and cheapest power at the lowest cost (based on their quality as financially strong counterparties, renewables projects can achieve the best possible financing terms). That cost is still higher than what the regulator can achieve via a CfD (see here the BASF example). But, unless these solutions are behind the fence, these corporates still benefit from the grid – both technically and in terms of a back-up. Plus, they leave the rest of the economy more exposed to “worse” energy, including price shocks from gas prices etc. So, while we fully understand the corporate reflex on offtaker and developer side pro corporate PPAs, we believe that far too little notion has been put towards the systemic effect of such arrangements.

Overall, we believe that this handful of relatively straightforward measures could materially enhance the transition towards a low-carbon Electricity System at low cost. The Energiewende gets a bad rap in the English-language press, even though it has helped create a competitive renewable energy industry from scratch – something the whole world benefits from, even though mostly German ratepayers pay for it. Our proposed reforms would help reduce that last item.

And yet - they brought this on themselves, through a combination of hubris, ignorance, and reliance on lobbying rather than good business acumen.

The problem is that their behavior  has been so "efficient" that they have successfully pushed away the competition, either through undisciplined behavior in auctions, or outright lobbying to exclude smaller players from the sector, and there is no room for others to pick up the pieces (for instance many countries have pre-qualification rules that impose large balance sheet and operating MW constraints that even large financial investors cannot meet, given their fund-based structures). The worst part is that a lot of their lobbying demonstrates that they (or at least their C-suite) do not understand their own business model...

So how did we get there?

For many years during the 2010s, the sector managed to deliver both growth in volumes and a sharp decrease in costs. This came from a combination of an increasing understanding of the risks associated with the sector (installing large industrial equipment in the middle of the sea is never going to be simple), benign macroeconomic conditions (with low interest rates) and healthy competition.

The sector was split between utility-managed projects, and developer-managed projects. Utilities tended to finance projects on their own balance sheet, managing construction and operation risks themselves, and targeting cheaper supply and installation contracts by keeping a lot of the risk internally and managing these through large and experienced project teams. Developers required project finance (or “non recourse debt”), which meant that lenders had more of a say about the contractual setup of the projects. This resulted in typically more expensive contracts, with more of the risk borne by the contractors, but the resulting lower risk for the lenders allowed them to provide attractive financing terms. With cost of capital an essential driver of the ultimate cost of electricity in this capital-intensive industry, such financing structures meant that developer-led projects could be competitive against utility projects - and indeed won more than a few auctions, including for instance the emblematic Borssele 3-4 project in the Netherlands.

Such successes by smaller players has always annoyed the big utilities. In the early 2010s the Dutch utilities sued the government that had attributed the Gemini project to a small developer, claiming that it would never be able to get that project built. But that project was successfully financed, and built on time and budget, making them look like fools.

At that point, the big European utilities did two things to try to reassert their dominance.

1. They tried to move to new markets, hoping that they could get higher prices there than in Europe.

   As they competed against one another, they ended up bidding European-like prices in markets with no supply chain, no track record, and often still incomplete regulatory frameworks, crowding out local and disciplined bidders.

   That led to projects being cancelled in the US when the economics at the time of investment decision did not match the prices offered several years earlier, and serious cost overruns in Taiwan where the first generation of projects ran into difficulties (like the early generations of projects in the UK and Germany - even with the industry's experience, it is hard to transfer all the knowledge immediately in completely new and different contexts. The technical problems were solved, as they were elsewhere, at a cost that was not really covered by the low European-like tariffs they applied for).

   As regard to the regulatory delays, the European players tried their usual approach to whine to governments to give them help in various ways (increased prices, delays, subsidies, etc.) but they severely over-estimated their lobbying capabilities, and underestimated the political obstacles to increasing regulated tariffs in the US context. The US experience, in particular, led to highly visible failures and losses which generated a lot of negative publicity for the sector.

2. They lobbied for more qualitative factors than mere price-driven auction (because they can lobby how these can be assessed) and for more "zero-bid" or merchant projects.

   Through a unhappy quirk of the regulatory framework in Germany and the Netherlands, the contracts for differences (CfD) there were going only one way (ie topping up the price received by projects when it was below the market price, but not making them pay the difference back when it was higher than the market price) - so provided a floor rather than a fixed price: regulators at the time did not imagine that prices would go down so fast and could become competitive.

   In that context, with a freeze then ongoing in Germany for new offshore wind development, and just a handful of zones on offer, the temptation to bid a price of zero just to win the only project to be built in the country over the next 5-7 years could not be resisted - the winner getting a fully permitted zone, grid connection, and access to the "merchant" market price. Once that precedent was set, there was always another desperate-enough utility to bid for such contracts. The utilities convinced themselves that they would be better placed than the smaller developers to manage such projects, as power prices are very volatile and this is a risk that is hard, or expensive, for lenders to take.

   They just forgot that their own business model relied on selling minority stakes in projects to passive financial investors with low cost of capital to improve the economics of the project, and that such investors, like lenders, do not tolerate merchant risk. They then had to pay fortunes to buyers of power to give them fixed price PPAs to make the projects financeable.

   The result was a race to lower costs as much as possible, by pushing really hard on the supply chain, in particular to deliver larger turbines. That also meant larger foundations, larger vessels to install them, and larger port facilities, forcing everybody to invest for new facilities. Turbine manufacturers, somewhat recklessly (we can talk about their Stockholm syndrome approach toward their utility clients in another post...) agreed to start working on new turbine models (20+MW) even before the current generation being commercialized (15 MW) was fully tested or installed, and even before the previous generation (8-10 MW) was made fully reliable. The resulting headlong rush; compounded by the inflation of 2022, resulted in heavy losses or even quasi-bankruptcy for them, with massive technical problems on the turbines installed over the last several years disrupting projects and triggering penalties and more losses.

   Ultimately, they put a halt to these new developments brutally, stopping to take orders and renegotiating prices brutally against their existing clients. It is quite possible that one of the main players will exit the market, leaving an unhealthy duopoly, and the dangerous temptation of Chinese turbines: small developers have lost access to European turbines, as the manufacturer just won’t engage in any sales discussions if volumes are not big enough. Some of them will try to find options elsewhere, and if the Chinese offerings prove that they work - not a certainty - then that competition is inside and here to stay

3. The utilities still don’t understand project finance for construction

   In the meantime, utilities are trying to do project finance to improve the cost of capital of their projects, but they don't really “do” project finance - they still want to manage the contracting and risk taking their way, and then ask the banks to take these risks without guaranteeing them. This leads to endless fights between project finance lenders who do not like the structures they are asked to swallow, and are less sensitive to commercial pressure, and utilities who are used to slavish behavior from their lenders, as from all their suppliers - with both side endlessly frustrated and, worse for the industry as a whole, sub-optimal structures where neither the procurement nor the financing are optimized (and the two are not designed to fit together like they can in a smart structure). 

   They should stick to non recourse refinancings post-completion, which is easier and which they do well enough.

The good performance of the sector in the 2010s, coupled with the energy crisis of 2022 (which, as an aside, for the power sector in Europe, was more caused by the failure of a large fraction of nuclear reactors of uber-utility EDF than by the Russian gas crisis), generated a bubble in "green" stocks, including Ørsted, Vestas and others.

(source: invezz, Wind energy bubble is bursting as Orsted share price collapses)

The scrutiny by capital market analysts led to a focus on short term results. In an industry with 30- or 40-year assets and significant statistical variability of production for wind, this led to severe disappointments when growth did not follow the optimistic assumptions made by some.

In parallel, the relative improved performance of oil&gas stocks following the lucky increase in oil&gas prices after the Russian invasion of Ukraine led to calls to drop the "green crap" and for traditional energy companies to focus on their core businesses.

As noted above, some of the oil&gas companies dropped out of the sector. They did so very noisily, with front page headlines of them saying that offshore wind waste expensive and did not work, presumably to avoid acknowledging that they had overpaid when they came in and made poor business decisions along the way.

The only ones staying have more rational, but highly cynical policies to bet on merchant projects in markets where they expect prices to be high and volatile, ensuring that they can make money via their sophisticated trading entities, taking advantage of the still-strong link between natural gas and power prices in a spot market environment. This allows to remunerate their expensive capital properly, and also ensures that renewables appear to be more expensive than they can be with regulated long term tariffs and low-cost of capital investors.

This feeds the ongoing political backlash against renewables, usually carried by the populist politicians but almost always supported underhand (or quite openly in the US) by incumbent energy companies.

The result is a sector where costs have increased - by about 50%, which is actually not really more than what has happened to non renewable competitors. Solar has continued to go down, and onshore wind seems to have remained more stable (the increase in performance and lower risk premia compensating for slightly increased costs) and fossil fuels plants are even move expensive given the increase in fossil fuel prices.

Today, the business case for offshore wind has stabilized at a sustainable, and stable new level, with costs probably at 80 EUR/MWh for good projects in mature markets, rather than 50 EUR/MWh in 2020. That price level is a viable proposition in many markets, but you'd never believe it from all the breathless commentary about cost increases... It is true that it it not competitive in all markets, due to completion by solar or onshore wind, grid constraints, or other local realities, and that that price level is hard to achieve in new markets, so people taking a more sober approach to such new markets are reducing their ambitions, but that’s more a reflexion on past over-optimistic plans than on the sector itself. In Europe, offshore wind is firmly in the game.

With the EU firmly promoting double sided CfDs (i.e. real fixed prices, not just floor prices), the opportunity to abuse market mechanisms is going down. The issue of negative prices and the dominance of solar during daytime does need to be addressed - but offshore wind, with its production profile that is quite complementary to that of solar should actually be a beneficiary.

Regulators should ensure that competition remains healthy by not needlessly excluding smaller players via artificial hurdles, such as large balance sheets (often excluding even strong financial players) or ownership of operating assets. They should put very high bid bonds on all tenders, and enforce them if participants don't deliver - this will bite utilities more than smaller players, as utilities always tend to see their own bids as options (the "heads I win, tail I whine" strategy).

Offshore wind will not happen everywhere, as it is not always cost competitive against onshore wind and solar, but it is a competitive source of electricity and does not deserve its current doldrums. Now is the time to invest - but you have to stop listening to the often clueless public statements of utilities on the sector…

— — —

The first one was here:

"We'll be back" - the oil majors and renewables

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The second one was here:

Why fans of nuclear are a problem today

— — —

Today I’m looking at the growing tensions to come between developers and regulators

Until recently, and despite the bitterness and polarized nature of the debate on renewables, there was actually a fairly strong alignment of interest between the general public and developers. Despite claims to the contrary, renewables did not increase costs for customers (and indeed protected them from the volatility of gas prices, in the case of fixed price regulated tariffs or equivalent CfDs), did not weaken the grid and did reduce the use, and dependency on imports, of fossil fuels. Offering renewables protection from short term price volatility made economic sense as it allowed them to attract cheaper capital and thus deliver significantly cheaper electricity.

The macro-level reality is that renewables have displaced, and reduced the revenues of, fossil fuel plants, and the subsidies that did exist in the early days were effectively paid by the incumbent generators rather than by consumers - thus their lasting hostility, and propaganda, against renewables. The rest has largely been noise.

But now, we are in a new situation, fuelled by the continued boom of solar. That trend is showing no signs of slowing down, boosted by record low prices for solar panels and increasingly by the self-interested demand from small to medium scale commercial users of electricity. It will continue unabated, even in the absence of favorable policies, as the cost advantage for these customers is increasingly the key driver for investment volumes rather than policies for utility-scale solar farms.

This is now accompanied by a boom in battery storage projects (BESS), and combinations of renewables+storage, in particular batteries+solar. This is resulting in power systems that are increasingly dominated by solar for large parts of the day and the year, bringing power prices down to zero or even below at times, as covered extensively by Julien Jomaux’s blog.

While we expect that demand will adapt to that (see also next section), it does mean that renewables have now reached the scale where they are increasingly self-cannibalising, i.e. they are pushing prices down at the time they can produce, and potentially cutting down their own revenues rather than those of incumbents. It then matters a lot more than before if they are to bear that price risk or not.

Under fixed price regimes, they get revenue whatever the short term price is, and this has long been recognized as an unhealthy incentive - indeed this is what causes negative prices, when wind and solar production soars, with no signal to cut it down, and the market must balance through the residual producers cutting down or demand somehow increasing. CfDs were designed precisely to reduce that problem, by ensuring that renewables producers get (and act upon) some of the short term market signals that help balance the market on an ongoing basis, while still ensuring they get, over long periods, the stable revenues that are needed to finance the upfront investment. Typically, well designed CfDs do not apply when prices are negative, ensuring that excess renewable capacity is cut down (which is technically easy) before plants for which this is difficult technically need to stop.

This creates a gap between the strike price of the CfD (the fixed price that procures should theoretically get) and the ‘capture price’ that they actually get, and that gap is now growing significantly. Solar, with its peak production during the day, when demand is high, actually had a capture price above the average price for a long time, but there is now so much solar that the opposite is happening - prices are collapsing when the sun is shining, and capture prices for solar are trending down.

Data and graph kindly provided by Xavier Daval of kilowattsol

Regulators, rightly, will not want to encourage more solar production at times when production is already plentiful (and now even excessive, at times) - and that requires that new solar producers should no longer get a positive price for their electricity when there is already too much of it - which is precisely when they will be producing… This will have an immediate impact on new investment decisions - but the scale of the problem may even require action against existing producers, which is much more problematic as they based their investment decisions (and continuing financial obligations) on the past revenue regime.

This Eurelectric presentation discusses some of the complexities of CfD regimes, beyond the mere price formula, and this ENTSO-E (association of European grid operators) report comes up with suggestions from the perspective of the grid - including, as their core proposal, to have capacity-based CfDs. Essentially, they are suggesting that wind farms or solar plants should be remunerated with a fixed yearly amount, and the grid operators would then decide when the production is actually used or not. This would definitely make projects financeable, and would help grids manage the occasional surpluses from solar, but it would certainly not incentivize developers to optimise either the location or the performance of their projects, and it would not help the development of batteries and other demand-management initiative to the same extent that current price swings will.

The ENTSO-E proposal also suggests that there may be conflicting incentives between regulators and grid as well - if the CfD payment comes from the taxpayers, the grid operators don’t really bear the cost of dumping the production from renewables, and have little incentive to improve the grids to adapt to more renewables.

Separately, there will also be an increasing tension between the logic of balancing supply and demand at the widest system level (where you only need to correct for the global net difference, which is always smaller that the sum of the local net differences) than at the local level. Projects may be incentivized by their revenue regime to include storage or other features that allow for optimisation at their specific location but this might not be optimal for the wider grid to manage.

To give a simplified example, imagine you have a zone with a surplus, and one, some distance away, but connected, with a deficit. A system-wide grid allows the surplus to balance the deficit with no change in local production. Local optimisation would push the producers in the surplus area to reduce production or store it, and would likely cause expensive marginal production (like gas-fired or diesel plants) to be started to cater for the deficit in the other area, resulting in a worse outcome overall

Market design needs to adapt to a fast changing generation fleet on an ongoing basis, taking into account the existing grid and its physical and geographical constraints, the very slow permitting process for new grid infrastructure, and the relentless growth of solar. In that context, price regimes for storage capacity is going to be one of the critical drivers of new investment (given that the solar surge is a daily phenomenon, short term storage to at least spread that generation over the evening and maybe the next morning will be a large part of the solution), and the interface between that regulatory framework and that for generation will be tricky.

We personally believe that

1. renewable developers can no longer get a blank check for bringing new capacity online without regard for how their production profile fits into the system, so pricing mechanisms that give them exposure to capture price are essential. Capacity based mechanisms have too many drawbacks and will lead to development slowing down and the efficiency of projects going down. So far banks have been willing to take capture price risk where it exists, so cheap capital still exists - and will continue to exist for projects that can show they offer more value added than just weather-driven power generation, but this may not always be a given

2. local / zonal pricing is a relevant solution to encourage investment in generation in the right places, and to signal where grid investments are the most critical

3. in the context of zonal pricing, encouraging renewables developers to build hybrid projects (with solar+wind using the same grid connection, and added storage) make sense - but they should be avoided in price regimes that cover too broad an area, as they will encourage local regulatory arbitrage rather than relevant investment

4. Storage projects should be encouraged on a standalone basis, and given the volatility of business models in a fast-changing environment, there should be some component of capacity-based remuneration to help support financing (but just like for generation, there also needs to be incentives to bring investment in the best places, and to optimise operations)

5. the management of (mostly existing) hydro projects is going to become even more politically sensitive, as they represent a huge flexible capacity, which has often be discreetly “privatized” by the incumbent operators for the sole benefit of optimizing their own fleet rather than the system level needs. Admittedly in places like France the distinction is small, and the conflicts between energy system optimisation and other uses (agricultural needs and water management more generally) do not have simple answers, but as solar becomes a larger part of the system, the requirement to manage the day-time surplus (from solar) rather than the night-time surplus (from previously dominant baseload capacity) will become unavoidable.

In this, developers should not assume as naturally as before that whatever they do is “good for the planet’ and deserves full political support. As the industry matures, and begins to dominate the system, the trade offs will be more complicated, and regulators will increasingly have good reasons not to necessarily take the side of renewables developers.

Developers and the industry more generally needs to take that into account.

The first one was here:

Nuclear energy has been great. In many places, it has produced relatively cheap electricity and (although we did not care about that when it was built) it is largely carbon-free. It still works, but it is simply no longer competitive against available alternatives, and it is going to be increasingly difficult to integrate in a system that is inexorably dominated by solar energy during the day and other renewables. (see for instance this recent academic study). In any case, it is not financeable, and given the large amounts required for each plant, they will struggle to get built, even with large-scale state support.

If a few nuclear plants could easily be built on budget and on time in a given system, it would not be an issue, but the problem is that (i) a lot of the energy of its proponents is directed at maligning renewable energy, presenting it as unserious and insufficient (arguments of the “you can’t do vital surgery if there’s no wind” type which ignore how grids work), and (ii) more importantly, nuclear swallows an incredible volume of political capital that could better be used for other purposes, like energy efficiency, upgrading the grid or reducing fossil fuel use outside the electricity sector.

Politicians like these very large, multi-billion-euro projects that seem to solve an issue in one go, and can be forcefully and visibly decided by a handful of large-ego persons like themselves. They don’t understand (or hate) the very decentralized and uncontrollable nature of renewable energy systems, that require complex rules and don’t give them the same publicisable impact on things. Nuclear provides a concentrated nexus of jobs, TV opportunities, and VIP meetings with big stakes. So they are easily convinced by proponents that this is what is needed.

And thus we get endlessly repeating “decisions” to build new nuclear plants, to be executed over the next 20 or 40 years, and which increasingly resemble fusion energy - always 20 years away. This is because the underlying arithmetic unfortunately no longer works, and nobody is actually willing to sink the billions, or pay the inflated tariffs, that are required to get the plants of the ground - and that’s before delays and cost overruns hit (and obviously nobody sane will agree to be responsible for these in advance).

If nuclear made sense, Microsoft or Amazon or Rio Tinto would finance the construction of a few plants to feed their ever growing appetite for reliable carbon-free energy… In reality, despite all the high-powered attention, ridiculously few new nuclear plants are being built compared to new renewables, even in China. Nuclear is at best irrelevant and at worst a distraction…

This would be harmless if it did not occupy the limited time that senior politicians have to spend on the topic of energy, and get them to spend their political capital on these projects that end up going nowhere. It also means that they don’t understand what is actually happening in the energy sector in the meantime, and don’t work on the new policies that are needed to make sure that ongoing (unstoppable) transition to renewables is done more smartly and efficiently.

Nuclear proponents do understand the energy system a bit better, and they certainly see that renewables are eating their lunch (typified by the switch in discourse, beyond the “it’s ugly” and ‘what do you do when there’s no wind” arguments, from “it’s too small to matter” to “it cannot do 100% on its own”) and thus they need to attack and criticise renewables to make it appear that nuclear is still necessary or relevant.

In that - continuing to denigrate renewables, and capturing too much political attention, nuclear proponents achieve only one thing - slowing down the transition to renewables, and making it more expensive than it could be because regulatory changes are not made. They have effectively become the useful idiots of the fossil fuels industry which they still occasionally claim to fight.

And, to conclude, a fun fact that seems ignored by most: France has lost more annual kWh from nuclear than Germany since 2011, which closed its plants. Maybe the blame for weakening the nuclear case should go to France rather than Germany?

(Source: David Toke)

It’s been difficult to write anything mildly positive or just sensible about activity in the sector when it risks simply being drowned out by these negative perceptions and ignored.

The negative context has been driven by headlines focused on the offshore wind sector (some projects abandoned or delayed in the US, the UK “round 5” auction getting no bidders) and generated by high profile decisions, mostly by oil&gas players, to reduce their exposure to the sector and do so rather noisily. This has naturally been seized upon with glee, and amplified, by opponents to the sector, who remain active, if slightly more subtle than in the past.

It has had some really effects, in particular in my small corner of the market (early development for offshore wind, in particular floating offshore wind), where investors have become a lot more prudent and mostly adopted a ”wait and see” attitude to new projects and markets rather than the enthusiastic “must have” rush of a few years ago.

So, just last week, you could still read headlines like “European utilities cut renewable targets as high costs and low power prices bite” that make it sound like investment is really slowing down… when it really isn’t, and prices are getting worse, when they aren’t…

So what explains the discrepancy?

At some point people should realize that (i) investments have continued, (ii) the price increases that hit the sector have hit other sectors as well so do not really hurt its relative competitiveness, and (iii) it works…

Source - somewhere on LinkedIn, attributed to Auke Hoekstra

Source: Nat Bullard - Decarbonization

I’ve been thinking that it may just take a couple of eye-catching announcements (a new tender at lower than expected prices, a new high profile acquisition) to change the mood and suddenly switch everybody from “let’s wait” to “we need to do this” but I’m not so sure - we’ve had such announcements already (recent news about the tenders in France, Norway or Australia, for instance, or proposed acquisitions like OX2 by EQT) and they have been largely ignored outside of the industry.

But that last FT headline made me realize why - these positive stories did not come from the big players (oil&gas majors or the key publicly-traded utilities) and they are not, how shall we say, very click-bait-y… Complex stories, unknown parties, and it doesn’t bleed… Not headline material.

To me, the main story this year is actually that we are beginning to see our power systems completely taken over by renewables. In places like the UK (see above), California, Spain, and even Texas, or Germany, solar is now dominant for many hours each day. Even more interestingly, the availability of battery storage solutions is now extending the period of carbon-free, or at least carbon-light, electricity by several hours each day (and the growth of batteries is even more explosive than that of solar).

Source: NYT “Giant Batteries Are Transforming the Way the U.S. Uses Electricity”

This is naturally happening first (i) in the places that have built quite a bit of solar, (ii) that have the relevant sunny climate, (iii) during the warmer season, and (iv) during the day. But the growth in solar penetration has been phenomenal in a lot of places, and such dominance of solar is soon going to extend from a few hours per day a few weeks per year in a handful of countries to most of the day (and night), a large fraction of the year, in a growing number of systems. At some point - and this is likely just a few years away, we’ll likely have to manage increasingly often the situation where there is more electricity available than demand, and prices crash to zero (or below). I’m actually not too worried about this “problem” - we are talking about having a really useful input (energy, in a highly usable form) available at a low price: I’m sure lots of ways, old and new, will be found to make use of that resource and turn it into something valuable in monetary terms when it’s in surplus… Storage is the most obvious one, but I’m sure there will lots of interruptible activities that will grow to take advantage of low prices with high flexibility.

But the consciousness of this is not percolating yet. There’s two reasons for that: (i) the system is not crashing, so journalists have no acute reason to talk about it (you’ll note that articles usually come when some production or penetration record is broken) and the transition is not that visible - or only to specialized professionals and geeks, and (ii) this is happening in a completely decentralized way - there is no “solar super-major”, or even headlines-worthy multi-billion mega-projects that politicians would want to brag about or the press or stock analysts could follow.

Which brings me back to the utilities and oil&gas majors. They are in fact playing an incredibly small role in the transition.

We are used to these mammoth companies that control everything - big power plants, large customer base, massive political influence and corresponding headlines, and they are largely absent from the new system. Oh sure, they have renewables arms that are quite large, which may even be the largest around in their country or area of activity, but they make up only a small part of the overall renewable generation. (It’s a bit hard to find data, but this WoodMacKenzie report from 2019 noted that the top 10 owners of solar plants only controlled 6.9% of worldwide installed capacity, while a Finergreen ranking from 2017 showed that in France, EDF was the market leader with just 4% of solar capacity).

So people actually like to talk about offshore wind, because it’s understandable - big multi-billion euro investments, giga-watt scale projects, large companies developing them - but offshore wind is actually a very small chunk of the energy transition, and will likely stay that way (however much I care about the sector myself!) even in Europe…

Source: Fraunhofer ISE Energy Charts (2023), adapted by author

And even in offshore wind, the utilities are not that dominant, when competition is allowed. The recent Norwegian auction was won by parkwind and INGKA, the French one by Bay.Wa and elicio, the largest financings last year were managed by Northland Power, the biggest floating wind pipeline is probably owned by Bluefloat - all names familiar to industry players but probably not to the wider public (and not to the journalists in the mainstream business press, apparently, as they keep asking the likes of Shell, Ørsted or Iberdrola for their opinion)…

In other words, we are moving from a very centralized system, dominated by large fossil fuel plants (or big hydro and nukes where available), where supply had to adapt to demand, to a highly decentralized one, where demand will adapt to the increased availability of supply at times, in an increasingly diverse number of ways, and we’ll likely have substantial oversupply during the day - until new demand balances it out.

The grid will become used in very different ways - that transformation has been successfully happening in (relative) silence over the past 25 years and will continue.

What also seems likely is that there could be very little room in such a system for baseload production, which will need to deal with very low prices during the growing periods of solar surplus, and may soon not be needed even at night for large parts of the year - you don’t run “must run” plants 25% of the time. There is some level of constant demand from industry and a few vital other sectors, but it seems increasingly unlikely that large centralized plants will be more competitive over the year than a combination of renewables (dominated by solar), storage and some very little used flexible fossil fuel peaker plant capacity.

So, for power generation and the wider energy transition, unexpectedly maybe, small is and will be beautiful, even as the overall volumes are gigantic. For renewables, no headlines is probably a good thing (as most stories seem to be scary ones). And for offshore wind, a lack of “animal spirits” may be a pity, but the sector will remain a niche (very useful in some places) and a relative minnow compared to solar, onshore wind and, increasingly, storage.