Renewables in the Western Isles

On a trip to the Western Isles yesterday, where there's an emerging interest in marine renewables (specifically wave) as well as plans to push forward on some of the wind projects.  The largest, the Barvas Moor windfarm operated by Lewis Wind Power, is still on hold, but others are progressing.

One interesting observation was that the bay at Siader (pictured, rather badly), where a 4 MW wave-powered breakwater is to be built by Wavegen and npower, is to deliver the same peak output as the now-operating 3 x 1.3 MW Nordex turbines at Arnish Moor.

Sad to see the Arnish fabrication yard all shut up against the weather but hopefully that will be back in business soon.

Relative costs of carbon abatement

Here's a thought from the skeptical environmentalist school.

If we're worried about carbon abatement (and I am), shouldn't we be looking for best value least cost solutions? If so, let's look at the relative costs of abated carbon from difference sources:

Roughly speaking, a marginal MWh of power in the UK, as provided by gas-fired CCGT, involves 0.4 tonnes of CO2. A MWh from coal is responsible for around 1 tonne of CO2, and nuclear and renewables are effectively zero carbon (not including embedded carbon in construction, decommissioning and operation). There's an interesting factsheet here...

The current carbon price in the ETS is around €22/tonne, so a permit to emit this MWh from CCGT (in principle somehow magically making it carbon neutral, or at least "allowing" it), would cost around £12/tonne or around £5/MWh. For coal, the same permit would cost c. £12/MWh.

Now, I realise that the ETS doesn't correctly internalise the carbon cost yet. Or put another way, the current ETS price isn't sufficient to make generators indifferent between renewables and fossil-fired generation.

Under the Renewables Obligation, onshore wind gets an effective subsidy of 1 ROC/MWh, and a ROC is currently worth around £50. So the additional cost of a wind-generated abated MWh is around £45 relative to gas and £38 relative to coal. Wave and tidal power will get 2 ROCs per MWh from April 2009, and offshore wind 1.5 ROCs, making these premia nearly £100/MWh. There are good strategic national reasons for encouraging these technologies, not least that as fossil prices go up, having renewables capacity offers security of energy supply and also that these businesses, specifically offshore wind, wave and tidal, could be nucleated in the UK (which has world-leading resources in these areas).

At the moment, there's a lot of heat and not much light about Carbon Capture and Storage. At the moment, CCS looks as if it will benefit from the ETS value of the the carbon not emitted - but this benefit is nothing close to the value of RO. How about including CCS in the Renewables Obligation, to help meet these targets and provide a more attractive incentive mechanism?

Turnberry conference

Just back from the Turnberry Infrastructure Journal conference. The photo was taken from my hotel room and shows the snow on Arran's Goat Fell this morning. Lovely.

Lots of interesting presentations and people to meet - developers, manufacturers, funds, but (shockingly) nobody from Government (except the European Commission).

Eddie O'Connor wasn't short of opinions, and when you've just sold a £1 billion business which you've built over seven years, you've got a right to be heard!

Lots of infrastructure funds were there, showing a real interest in renewables of all kinds, although a real warning shot to the UK industry that clarity of incentive was vital to attracting internationally mobile capital.

Lots of reminders, too, about how much additional renewables capacity is going to be required to meet the 15% of all energy from renewables targets. Roughly 40-45% of electricity from renewables would do the trick (cue Eddie on the need for an offshore SuperGrid).

One last thought: Chinese demand growth is equivalent to a new Germany in demand each year. Astonishing, but what a market opportunity.

Novera in play

Over the past few days, Novera has announced that it is in talks which may lead to a bid for the company at a price of 90p. 3i has just broken cover to day that it's the possible bidder. Now, there's many a slip twixt cup and lip, but let's see what this means.

A bid at 90p values Novera at £111 million. According to the company's website, there was a cash balance of c. £10.8 million at 31st December 2007, making the wind and other renewables assets worth near enough £100 million.

On a multiple basis, Novera's revenue for 2007 was expected to be around £34 million, making the offer price 3 times turnover. Figures for 2007 aren't available yet, but EBITDA in 2006 was just shy of £10 million on revenue of £31 million. Since the company was apparently debt free in 2006, let's assume that interest is minimal and the accounts show that depreciation was very small and there was no tax charge as tax losses exceed profits, so we can probably infer that the post tax profit was around £10 million, making the multiple an apparently conservative 10 times 2006 earnings.

Looking at the valuation from the asset side: the portfolio is dominated by the wind assets:

Status Capacity
Operating sites: Mynydd Clogau, Wales 14.5 MW
Consented sites: Lissett Airfield, East Riding 30 MW
Sites in Planning: Mount Boy, Angus, Scotland 6 MW
Sites in Planning: Fleeter Wood, Cumbria 10 MW
Sites in Planning: Glenkerie, Scottish Borders 22-27 MW
Sites in Planning: A'Chruach, Argyll and Bute 40-48 MW
Additional sites in pre-planning: 300 MW

The recent Airtricity experience suggests that buyers are prepared to pay £2 million/MW or more for installed capacity, and perhaps £1 million/MW for consented sites (leaving the other £1 million/MW to pay for the actual development costs of the project). This would amount to £29 million for Mynydd Clogau and £30 million for Lissett.

We think that Novera still has the 112 MW of landfill gas capacity it had in 2005. So looking for landfill analogues...

In 2004, Viridor paid £30 million for 45 MW of landfill capacity, and in 2006, Pennon paid £25 million for 7 MW of landfill capacity. Taking the lower basis for valuation, Novera's landfill would be worth around £60 million. (Taking the higher, it would be worth nearly £400 million, which seems extraordinary - there must be more in that deal we haven't seen).

So we've found £60 million of wind value, without the development pipeline, and £60 million of landfill value and £10 million of cash.

In the mid 2007 trading statement, net debt was around £72 million with £17 million in the bank, so if this hasn't changed, the asset value is £130 million plus the value of the development pipeline minus £90 in debt.

With the bid at £100 million, the development pipeline is being implicitly valued at around £60 million by 3i. For, say, 80 MW in planning you might apply a risk factor of 50% and value as if it's consented (ie, half the project capacity eventually gets consented). This would give you another £40 million, so you're getting the development pipeline for £20 million. If you were to risk this at 20% and apply the same valuation of £1 million/MW - you get to £60 million. On this basis, the development pipeline is worth £100 million, but it would seem that 3i is offering £60 million for it.

So either we've missed something important, or 3i is risking future developments more aggressively (or thinking they'll cost more to deliver) or 3i's getting a bargain if the deal goes through!

SSE/Airtricity - analysis

So, we know that SSE paid around £1 billion for Airtricity.

The detailed breakdown of the portfolio from SSE's website is:

• The principal assets of Airtricity which SSE will acquire comprise (net of joint venture interests):


• a 308MW (megawatt) portfolio of operating onshore wind farms in Scotland, Northern Ireland and the Republic of Ireland;
  
• a 187MW portfolio of onshore wind farms in Scotland, Northern Ireland and the Republic of Ireland which have full consent and are under construction, and on which €77m had so far been invested by 31 August 2007;


• a further 104MW of onshore wind energy capacity in Scotland, Northern Ireland and the Republic of Ireland which has full consent but is not yet under construction;


• a 50% stake in a 504MW offshore wind farm development, with full consent, at Greater Gabbard off East Anglia. Subject to a final investment decision, construction work on the first phase is expected to start later this year and turbines have been reserved;


• a 288MW offshore wind farm in Germany which has full consent;


• the 483MW onshore wind farm proposed for Clyde, between Biggar and Moffat in southern Scotland, which is at an advanced stage in the consent process;


• a 1,434MW portfolio of other onshore wind energy projects in the UK and Ireland that are in various stages of development but not yet with full consent;


• an option to participate in a 350MW offshore wind farm in Ireland;


• a 1,222MW portfolio of early stage European wind energy development projects in Portugal (587MW) and the Netherlands (635MW; offshore);


• a 6,675MW portfolio of wind energy development projects in China;


• and an electricity supply business providing power to around 35,000 mainly commercial customers in Ireland, with related trading and risk management functions operating in the all-island electricity market.

In summary, it appears that Airtricity's portfolio comprises

308 MW in operation
187 MW onshore in construction on which €77 has already been invested
104 MW consented onshore
540 MW offshore consented
483 MW onshore near consent
1434 MW onshore unconsented
1222 MW in development in Europe
6675 MW in development in China

A rule of thumb for onshore windfarm development used to be around £700,000/MW installed, although recent increases to turbine, steel and associated costs have probably driven this up to £1 million/MW. So perhaps £300 million of the purchase price could be sensibly applied to the producing capacity (unless SSE is paying a premium to capture guaranteed capacity, rather than taking time and planning risk to develop its own portfolio).

If SSE is valuing installed capacity at £1 million/MW, that would make the price for the consented development £190 million (once developed). If our rule of thumb is right, there's a further £130 million or thereabouts to spend, around £60 million of the consideration might relate to this capacity.

In the past, a typical price for a fully consented offshore windfarm has been around £5 million for 100 MW consented. This might be be a sensible place to start with the development assets. This adds up to (generously) 1,000 MW, of which about half is offshore. Let's assume that onshore consented developments are worth £10 million per 100 MW, and the total value of this element of the portfolio around £75 million.

Valuing assets in the development pipeline is very hard: if we assume that they're worth 10% of the consented value, the 8,000 MW of (assumed most onshore) projects would be worth £60 million.

Finally, an electricity supply business with 35,000 customers might be worth...well, the only analogy I could find was a Canadian gas and electricity supply business which sold for C$130 per customer, which would come to around £2 million.

Summarising this analysis, we can find around £500 million of value. So, it must be that either we've woefully underestimated the future value of the development pipeline, or SSE is paying closer to £2 million/MW for installed and productive capacity.

Any way you slice it, this is a useful benchmark. It also gives a clue about how hard developers must consider it to be to drive a material development portfolio to justify a premium like this over ordinary development costs.

SSE buys Airtricity, sets a benchmark?

Just announced, SSE has won the auction for Airtricity for around £1.1 billion (according to the Herald. The deal involves a purchase price of some £800 million and the adoption of around £300 million of Airtricity debt (which you'd expect SSE to be able to refinance cheaply).

The Airtricity website claims that the company has 455 MW in operation, with 636 MW under development and up to 9,000 MW of longer term projects in planning and pre-planning. The majority of these last projects appear to be offshore and aren't specifically identified.

The Herald article quotes from SSE's own press release and says "...Among the Airtricity assets to be acquired by SSE are a 308-megawatt portfolio of operating onshore windfarms in Scotland and Ireland, plus a further 187 megawatts of windfarms that have been given consent and are under construction. There is also a proposed 483-megawatt windfarm between Biggar and Moffat in the Borders, which is "in an advanced stage in the consent process"."

Over the next few days, I'll be undertaking an economic assessment of the deal...

Mackie's - Sustainable ice cream

Mackie's Ice Cream - a proud Scottish company - now has a little logo on each and every pot of its ice cream showing that it is made with renewably generated electricity from these turbines.

Lots more details here...
Nice one Mackies.

Horizontal axis wind turbine

Visited the Bembridge windmill - the only extant windmill on the Isle of Wight.

All of the main elements are similar to most of the wind turbines currently available. The main gearbox is in the nacelle, changing the direction of rotation from horizontal to vertical, and you can just about make out the yawing gears at the top, which allow the nacelle to rotate to stay head to wind.

The blade thrust is controlled by reefing the sails, rather than by fancy feathering technologies, and you can see how the blade geometry allows for different angles of attack at different radii from the hub.

The difference is that the majority of power offtake is lower down the tower, where additional gears drive the grinding stones, rather than in the nacelles as at present. Perhaps there's something to learn from our predecessors?

Welcome to the Redfield Consulting Blog

Redfield Consulting is delighted to announce the launch of its blog, where we'll publish our thoughts on the renewables and carbon capture sectors.