Download outer hebrides energy supply company

OUTER HEBRIDES ENERGY
SUPPLY COMPANY
Scoping Study on behalf of
COMHAIRLE NAN EILEAN SIAR
Dr. Neil Finlayson
Donald Macritchie
GreenspaceLive Ltd
Nigel Walker
William Allan
Sweett (UK) Ltd
Aims and Objectives of the Scoping Study
• to explore the feasibility of an Outer Hebrides
Energy Supply Company
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development of a business case
an effective governance structure
a route map for delivery
cost benefit analysis of the use of existing grid
infrastructure
• detailed risk assessment
Background
• In 2010, the UK Government legislated to allow Local
Authorities to generate and retail electricity, and to invest in
such
schemes.
• Substantial opportunity for Comhairle nan Eilean Siar to
invest in Hebridean renewable generation scheme
• Secure a return for the community, create skilled jobs, drive
down energy costs for local customers and address fuel
poverty
issues
• Unique and ambitious UK energy supply project
Outer Hebrides Energy Projects I
Large-scale Onshore Wind
Stornoway Wind Farm
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36 3.6 MW turbines – 130MW
could produce 410 GWh of renewable electricity per year
community has opportunity to purchase 20% of generation (floating
share of generation rather than individual turbines)
project will enable the community to invest in Stornoway Wind Farm
in return for ownership (by an elected Community Trust) of up to 26
MW (20%) of generation
International Power
• Beinn Mhor wind farm
• installed capacity of up to 140MW
• expected be fully operational in 2018
Markets
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Hebridean residents and businesses
Attractive custom tariffs for local residents
• eg explore innovative tariffs based on availability of the
resource rather simple time-of-day tariffs – islands heat loss is
highest when the wind is strongest
• community tariffs
UK customers for clean renewable energy
‘anchor customers’
• Comhairle nan Eilean Siar, Arnish, Hebridean Housing
Partnership, BiFab, BASF and the NHS
• retail chains
• large municipal Green Deal projects (eg £100m Birmingham
Energy Savers project, low carbon Inverness)
• Data centres - can consume up to 100 to 200 times as much
electricity as standard offices
• Highlands and Islands Enterprise £126.4 million next
generation fibre broadband project
Energy Demand of the Outer Hebrides
• DECC estimate 2008
• estimates energy consumption as 513 GWh
Barriers
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Competition –
• SSE and other members of the ‘big six’
• mid-size renewable energy suppliers/aggregators such as
Good Energy, Smartest Energy and Co-operative Energy are
busily signing long-term power purchase agreements with local
generators
Liquidity –
• relatively low levels of liquidity in electricity forward trading
markets, posing problems for smaller independents
• makes it difficult for independent suppliers and generators to
buy and sell energy at the volume and in the timescales they
need to operate effectively
Big-six dominance - vertically-integrated generators have less
need to trade and are able to hedge between their supply and
generation activities.
Grid Connection
Case Studies
• GOTLAND GEAB
• UK Public Sector
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25% owned by Gotland municipality, 75%
owned by Vattenfall
150 employees
Scale of wind-farms and interconnector
similar to Hebrides
Gotland at least ten years ahead in windfarm implementation
Partnerships, especially with large utilities
are critical
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Well regarded UK ESCOs
Local Authorities instrumental in their
formation
Risk partially or entirely transferred to the
private sector
Wider range of energy activities than
currently envisaged for OHESC
Historically smaller in scale than is
currently envisaged for OHESC
Very large projects eg Birmingham Energy
Savers expected to emerge with Green
Deal legislation
Could UK ‘city-ESCOs’ be potential
customers/partners for OHESC?
Case Studies
• Good Energy - Mid-Sized UK Electricity
Independent
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Mid-sized private firm operating across UK
In 2011 turnover of £21.6m, an EBITDA of £2.8m and a profit before tax of £1.06m
Founded in May 2000 to develop and distribute renewable electricity within the UK
Has over 75,000 gas, electric and generation customers in total
Knowledgeable on Power Purchase Agreements, FIT, trading and, perhaps crucially,
marketing
Existing relationships with local Hebridean generators
Possible joint venture partner?
Group plans to generate around 50 per cent. ‘of its own electrons’
Medium term target of owning and operating 110MW of renewable generation assets and
to maintain this percentage as the supply side of the business grows.
Electricity Generation and
Retail - Business Functions
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Operation and maintenance of generation assets
Responsibility for scheduling decisions
Responsibility for interactions with the Balancing Market
Responsibility for determining hedging policy
Responsibility for implementing hedging policy
Interaction with wider market participants to buy/sell energy
Holding of un-hedged positions (either long or short)
Procurement of fuel for generation
Procurement of allowances for generation
Holding of volume risk on positions sold (either internal or external)
Matching of own generation with own supply
Forecasting of total demand
Forecasting of wholesale price
Forecasting of customer demand
Determination of retail pricing and marketing strategies
Bearing of shape risk after initial hedge until market allows full hedge
Bearing of short term risk for variance between demand and forecast
Cost-Plan Assumptions
Cost-Plan Results
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Marginally profitable in worst-case scenario
Expenditures need much more detailed analysis
ROC model not FitCfD
ROC multiplier makes ESCO competitive with UK Central
FiT CfD
Financing
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Partner Funding
self-funded by industry partners
often replaced post-construction with commercial debt, resulting in a lower cost of capital
Commercial Debt Provided by banks on normal commercial terms.
Project Finance
separate company is established
ring-fences the cash flows of the project, against which project finance is secured
common model for PPP
contract periods often in excess of 15 years.
EIB Lending
EIB lending for renewable energy reached EUR 6.2bn in 2010
EIB has other financing means, such as equity and carbon funds. The Bank also provides
technical assistance to develop projects.
European Energy Efficiency Fund
Green Investment Bank availability of £18bn of capital to fund renewable projects for
purposes of (a) risk mitigation (b) refinancing commitments guaranteeing other funders an
exit strategy; and (c) capital provision.
Low Carbon Networks (LCN) Fund established by Ofgem
Local Authority Prudential Borrowing
Risks
• weather risk
• forward trading
risk
• many other risks
• hedging is critical
• eg between
generation and supply
• or renewable-fossil fuel
Company Structure - Options
• High risk/reward
Owner Operator
• Medium risk/reward
Joint Venture
• Low risk/reward
Arm’s Length
Possible Joint Venture Partners
Route Map
Conclusions
A substantial new company from the Outer Hebrides could enter the UK
electricity market in 2016-2017 retailing clean, green Hebridean electricity
to local and export markets.
Innovative and attractively priced tariffs could be offered to the local
community and companies investing in the community.
Substantial numbers of skilled staff could be employed in the Hebrides
focused on renewable electricity generation, retailing and marketing,
customer support, billing, market trading and engineering.
This study indicates that OHESC appears to be a viable proposition and
presents a route map to enable the company to be formed.