Power Advisory Renewable Energy Investment Atlantic Canada July 14
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Transcript of Power Advisory Renewable Energy Investment Atlantic Canada July 14
John Dalton
Tel: 978 369-2465
Rothesay Energy Dialogue 2009
Impact of the Current Economic Climate on North American Renewable Energy Investment
July 14, 2009
Current investment in renewable energy How the current economic climate is affecting
renewable energy investment Impact of financial markets
Atlantic Canada markets better insulated Declining fossil fuel prices: increasing relative
costs Declining equipment costs: improving
competitiveness
Presentation Outline
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New private investment in companies developing and scaling-up new technologies increased by 37%
New renewable energy projects accounted for 40% of all capacity additions Dollar value of renewable energy was 27% greater 2008 first year renewable energy investment greater
than fossil fuel investment However, growth in generating capacity 2008 was one-
third of rates experienced in prior two years Reflecting financial market and overall economic
conditions in the second half of the year
Investment in new renewable generation projects worldwide grew by 13% in 2008
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Preventing all but lowest risk projects from securing financing
Reduced energy demand is reducing fossil prices against which renewable energy projects must compete Impact on willingness to adopt renewable policies?
Equipment prices are declining with reduced demand In particular, wind and solar
Current economic climate is affecting renewable energy investment in several ways
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…given existing credit exposure and overall market sensitivity to risk
Promoting a “flight to quality” Low interest rates for high quality debt, but significant
credit spreads for higher risk Preventing all but lowest risk projects from securing
financing
Lenders and equity investors are risk averse …
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Equity available from private equity investors, but at a premium Reluctance to
issue equity given prices
Interest Rate Spreads
Require long-term power purchase agreements with investment grade counter parties Unable to finance merchant risk
Reluctance to accept equipment risks without availability warrantees: Challenge for new suppliers and equipment (e.g.,
Clipper Wind Power) Greater conservatism with respect to resource assessment
Debt service coverages evaluated in terms of P90 for wind
Project risks must be carefully managed
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More reliant on utility RFPs Nova Scotia and New Brunswick
PEI likely to have more merchant risk given existing level of renewables Wind project development in PEI more likely for
export Lower Churchill Project significantly affected by
economic climate Lower fossil fuel prices More challenging borrowing environment Reduced power demands
Atlantic Canadian market for renewables better insulated from these conditions
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Many utility contracts don’t have a Fx index for the initial contract price Risk borne by developers
Developers unlikely to lock in Fx rates until they are awarded a contract Hedging Fx increases costs for developers Larger developers more likely to have contracts with
wind turbine manufacturers Have development portfolio and deploy turbines
where needed
Canadian renewable development adversely affected by volatility of Canadian dollar
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Reduced commodity prices are making it more difficult to finance renewable energy projects Natural gas prices are 50% below where they were
12 months ago Natural gas is the fossil fuel against which many
renewable energy projects have to compete
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New England Marginal Fuel during Unconstrained Price Intervals 2008
Note: % of intervals doesn’t equal 100%
Lower natural gas prices effectively increase cost of renewable policies
Potential impact?
Reductions in natural gas prices only partly attributable to decline in demand
US EIA forecasts 2.2% decline in natural gas consumption in 2009
Production forecast to decline by less than this Significant increase in supply attributable to
shale play production Primary contributor to the significant price
declines Likely to continue to depress prices relative
to what they would have been once demand recovers
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Equipment prices are declining
Demand for wind turbines out stripped supply leading to significant price increases
Reduced demand is leading to price declines 8,500 MW of wind installed in US in 2008 5,000 MW projected for 2009
Permissive policy regarding eligibility for grants might help offset decline
20% decline in wind turbine prices More significant declines in solar panel
pricing
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Difficult climate for renewable energy investment
Project development adversely affected by: More challenging credit market Declining fossil fuel prices
Favorably affected by: Reduced demand leading to price declines Reduced equipment prices In the US more favourable federal policies
Longer term greater focus on climate change and role of renewable energy as a response will support renewable investment
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Thank you for your attention
John Dalton
Power Advisory LLC
(978) 369-2465
www.poweradvisoryllc.com
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Introducing Power Advisory
Power Advisory specializes in electricity market analysis and strategy, power procurement, policy development, regulatory and litigation support, resource planning and project feasibility assessment. We have advised clients on the development of policies for the
promotion of renewable energy and regarding the design of requests for proposals, standard offers and feed-in tariffs for renewable energy.
We have extensive experience with the power markets that serve Atlantic Canada. We have played prominent roles in the design of these markets and assisted numerous investors evaluate the opportunities and risks offered by these markets.
Our consulting services are provided by seasoned electricity sector professionals, offering a wide breadth and significant depth of industry knowledge.
For additional information regarding our services, please contact:John [email protected] 369-2465
Power Advisory LLC 2009All Rights Reserved