Minimizing externalities

The electricity generation has important externalities issues. An externality happens when the price of a good doesn’t reflect all the costs that are generated in its manufacturing. That is because some of affections of the product manufacturing has no cost for the company because the price is zero, for instance, there are no price for the clean air or for a not-nuclear-risky generation. In the electrical generation, the product is very homogenous: electrical energy, measured in kWh. But, obviously, it is not the same for the planet how you obtain this energy. But the market, the wholesale market by own, doesn’t reflects all of these affections. So, in electricity markets, both negative externalities and positive externalities happen at the same time. In these two pages, I will analyze the two most popular methods of internalizing the benefits of the positive externalities of the renewable generation: Feed-in Tariffs (FiT) and Renewable Portfolio Standards (RPS), and I will focus on two country examples: Spain (FiT) and the US (RPS). There are also methods for internalize the negative externalities as the carbon cap and trade for CO2 emissions, but I will not consider them in this article.

So, the promotion of the renewable energy, as solar, wind or biomass, is an issue of how to internalize their positive externalities into the market. These benefits are well known. The clean or renewable energies, do not pollute, do not contribute to climate change, do not imply resources depletion, do generate local employment, do promote the national industry, do improve the energetic independence, and more. All of these benefits are not include in the Levelized Cost of Energy (LCOE) or the price of the electricity. Because of that, these technologies are not competing in the same conditions as the conventional generation. That makes that the price of them is above the average price of the electricity in wholesale market, and as a consequence, the utilities do not want to build this expansive plants or to purchase expensive energy to others. This is because the benefits of the renewable energy do not go to them, but to society. That is a market failure and that is because they need the regulation or the support from the Government.

In a market, even the Government can not control the quantity and the price of a product at the same time. If you fix the price for the renewable generation (as FiT does) you do not know what will be the amount of renewable generation that you will obtain. The same, if you fix the quantity you want (as RPS does); you do not know what will be the price for this generation. The price plus the quantity is the key point, because that will be the cost for the electricity customers who are also your voters. So you have to be careful with that because otherwise you can make your citizens to pay so much for the electricity if the price plus the quantity is too high or you can make them not to gain the benefits of renewals if the renewals were not developed due to low prices which do not make the investments profitable. The two methods are good if they are well designed, but that is not the common case.

The Feed-in Tariffs
In the Feed-in Tariffs option, the government decides what will be the price of the renewable generation. That has enormous advantages for developing the market because it is very easy for developers, investors and financial institutions to know what will be their retribution and the Internal Rate of Return (IRR) for their investments. It is easy to calculate the IRR and if the FiT is well calculated -the price will be a bit more than the cost of capital- then the development of renewable is smoothly and a reasonable cost for ratepayers, being the society awarded with the benefits of clean generation.
Spain has become a power in renewals thanks to FiT. The government support has been very strong and determined. Spain has been successful implementing some FiTs, for instance in the case of wind, but has made huge mistakes in solar PV. Spain started to use FiTs in 2000, and ten year later, the 35% of the total generation is using renewals (2010).

In the following graph you can see the average cost of electricity in the wholesale market (black line), the LCOE of wind power (blue line) and the FiT (yellow and red line). As long as the FiT is above the cost, the investment is interesting. This FiT was well calculated to make the investor obtain a 5-7% IRR.

Spanish Fit in wind

In the following graph you can see the objective in wind (red bars) and the actual development (blue bars). As you can see, the development has been constant and progressive.

Spanish wind development vs objective

That is the successful example. But what did it happen in solar? In the following graph you can see the average cost of electricity in the wholesale market (black line), the LCOE of solar power (red line) and the FiT (yellow line). As you can see, the FiT was much more than the cost, so the investors obtained more than 11% IRR.

Spanish Fit in solar PV

What was the result? An over investment in solar PV power. Government wanted 400MW and they obtain more than 3,000MW. That implied a huge cost for citizens, and, as a result, the FiT has been reduced dramatically.

Spanish solar PV development vs objective

Renewable Portfolio Standards
With this method, the Government fixes the quantity of renewable generation that it wants, but not the price. That makes that the developer, the investor, and the most important, the financial institution that is going to put the money on the table, they do not know what will be their IRR before they start to promote a plant. So they have to deal with a lot of risk if they want to build a renewable plant. That is crucial, because at the end, the development of the renewals results too slowly.

You can see the example of the US. The US was the first country in building renewable plants in the 80’s, but now, only the 10% of the total generation is renewable (being 7% big hydro). So they have thirty years of expertise in renewable and only 10% as a result.

The US uses the RPS. That is an objective that some states try to achieve. For example, California has a RPS of 33% renewable in 2020. This objective becomes an obligation for the utilities, which have to provide a 33% of their portfolio using renewals.

Not bad, but then why have they achieved so few renewable generation up to now? Because two things: first of all, they make auctions to know the price of generation (trough Request for Proposals) and due to the competition, many of the bidders offers a price below the real cost, thinking that when they will build the plants, the technological development will made the cost reduced. But that not happened, and now there are a lot of projects that will not be ever built because the developers offered a very low price. Second, because, in fact, the utilities are not penalized if they do not comply with the RPS. So they do not have real incentives to buy more expensive energy that will make their ratepayers to pay more. As a result, the real price of renewals is not revealed.

We have seen to examples of trying to internalize a positive externality. But it is not easy because it is extremely difficult for a legislator to put a price for all of these things that are not in the market. Nevertheless, from the errors, we learn, so, these experiences will improve Government thinking. Benchmarking is also good thing to do for legislators to learn from the errors of the neighbours.

Ecological Footprint Branding

The other day I was taking my class about Sustainability in my Certificate at UCLA. During the class, many topics were discussed. One of the things that amazed the most the class is the amount of trash which is generated by developed countries citizens, specially americans. Every 15 seconds, 60,000 plastic bags are consumed in the US, 2,000,000 plastic bottles every hour and about half a millon cell phones every day. So, the figures are amazing.

Only the 1% of the total material that the customers buy, remains for a long, the rest is waste, specially packing. For every pound of product destinated to sell, 15 pounds of trash are generated. So, you can imagine how sustainable we are.

Ecological footprint branding

That made me to have an a idea. All of these figures probably are striking for everybody, and the problem of the overconsumption is a behavioral problem, so Why do not educate people about how are they consuming? It would be so easy as requiring by law that all the products have a sticker with their ecological footprint. Imagine a steak with the information of how many water is necesary to produce it, how many CO2 has been pumped and how waste has been produced in its manufacturing. That will do customers to be aware about what effects are they producing in the environment, and also it will push companies to be more sustainable since they will compete to improve their green marketing.

If you are interested in how our loose regulation is destroying the planet, I recommend this smart video:

RFP, las cartas sobre la mesa

Las politicas de promoción de las energías renovables son un caso muy interesante de estudiar desde el punto de vista económico. ¿Como internalizar las ventajas sociales que implican de forma adecuada? En España y en Europa, las feed-in tariffs han sido la estrella estos últimos años, pero los gobiernos han aprendido que pueden ser peligrosas. Un ejemplo claro es el español con la fotovoltaica, en el que un error (no de cálculo, sino político) en el precio de generación fotovoltaico o prima, provocó una sobreinversión sin precedentes. El gobierno, que confió en las previsiones de las asociaciones fotovoltaicas (que iluso), más algunas triquiñuelas de pasillos y despachos (el actual ministro tiene mucho que ver cuando estaba en la oficina económica), puso un precio muy por encima del coste real de generación, y de 400MW que buscaba, consiguió más de 3.000MW en un año. En otras palabras, murió de éxito. Tampoco vamos a hacer sangre del árbol caído, porque después llegaron Italia, Francia y Rep Checa y cometieron el mismo error, y encima con el precedente español.
Claro esto es fácil de decir ahora a posteriori, pero no me hubiera gustado estar en la piel del funcionario o político que tuvo que decidir la tarifa para los siguientes años. ¿Cómo asignar el precio, sin datos de los costes reales? Porque los costes, de saberlos, los sabrían las empresas promotoras y los epecistas, y si acaso, porque ¿cómo saber lo que va a costar algo que nunca se ha hecho?. En fin, no es fácil poner una feed-in tariff.
Por ello los americanos, que de competir saben mucho más que nosotros, emplean otro método, el de los Renewable Portfolio Standard, forzando, sin mucha fuerza por cierto, a las utilities a servir a sus clientes un porcentaje de generación renovable. Y como Poncio Pilatos se lavan las manos, la pelota para el tejado de la utility que tiene que fijar los precios que va a pagar.
Las utilities, que por cierto, actuan como monopolistas con los clientes y como monopsonistas cuando compran energía (muchos vendedores y un solo comprador), hacen una subasta para comprar energía renovable. Como cuervos a un pastel acuden todos los developers y ponen sus precios, tanto ajustan que incluso ofertan por debajo del coste actual, pensando que quizás en un par de años, cuando construyan el proyecto, los precios habrán bajado. Ello ha dado lugar a un montón de ofertas temerarias y PPAs firmados que no se van a realizar nunca, una situación que ‘nadie’ quiere (si obviamos la hipocresia política). Estas subastas son las llamadas Request for Proposal o RFP.
Sin embargo, la estrategia ultimamente esta siendo un poco distinta. Las utilities hacen RFP pero sólo por una pequeña parte de la capacidad que quieren comprar, digamos 50MW y después por otro lado, firman PPA bilaterales con las empresas por valor de muchos más MWs. ¿Que curiosa estrategia no? gastarse un dineral en consultores y hacer un proceso tedioso y largo de RFP para sólo firmar pocos MW en PPA y luego firmar muchos más bilateralmente.
Está claro lo que hacen, más sabe la utility por vieja que por utility. Con el RFP consiguen una referencia de precio más o menos ajustada a la realidad, ya que casi el resultado de la subasta es el propio coste con algo o nada de margen. Con esa referencia, saben cuánto le tienen que pagar al developer serio con el firman un bilateral por cientos de megas, sin pagar de más por ello y con la garantía de que al ser rentable para el developer, el proyecto se va a acabar realizando.
Asi que nota para el próximo Secretario de Energia, (el que tenemos poco va a durar, aunque espero conocerle personalmente en Octubre), feed-in tariffs sí, pero el precio que lo ponga una subasta competitiva por una pequeña parte de la capacidad. Eviten lobbyes y colusión y tendrán un desarrollo renovable sostenible.

Blowing hard at WindPower 2011

Windpower 2011 took place this week at Anaheim, California. There were all the people related with wind: developers look for investment opportunities, turbin manufacturers trying to sell their wind mills to developers, component suppliers trying to sell to turbine manufactures, economic develop. agencies looking for developers and some crazy inventors with the most incredible gadgets in wind power generation.
We exploited the occasion for improving our knowledge about US market and networking with the best. The most interesting meeting was with Oklahoma folks. We had the opportunity to know the Governor, Mary Fallin and chat with her and with her team. From the Spanish side, they were Dan Foley (CEO of Acciona), Martin Mugica (CEO of Iberdrola Renewables), Alfred Ritcher (Director at Gamesa), Javier San Miguel (Director at Cener), Aitor Sotes (CEO of Ingeteam) and my good friend Aitor Eizmendi (Business Developer of Sisener).
Oklahoma wind power
Oklahoma is supposed to be one the most interesting states to develop wind power. Its wind resource is very high (it is in the wind belt) and belongs to the eastern grid connection, (unlike the independat Texas, who belong to ERCOT). This is because Acciona has built a wind farm there and the rest of the companies are interested in it. However, they had the same problem that many other states in the US: a low inside consumption due to the low population and a lack of capacity in transmission lines to export the electricity to great places of consumption. We explained to the gently Governor the solution we made for dealing with the same problem in Spain. We showed the changes we did in order to deregulate the sector (not socialize the cost, ;-)) and to establish the new Red Electrica de España (REE) as the independent owner of the transmission lines and the system operator. I hope they appreciated our knowledge in the matter and we had opened a new way to solve the endemic trouble.

We also arranged a meeting with Kansas, Arkansas and Missouri, to explore the same business opportunities in wind power generation. The four states are neighbours and I imagine they want to follow the sucess way of Texas (with the 26% of wind power capacity in the US). Nevertheless, it is important to take into account thet the electricity regulation in Texas is totally different from the rest of the US. They have a liberalized market and a high consumption. It is important to transmit the message to Governors, regulators and economic development folks that without the correct regulation, it is very difficult to develop the sweet renewables.

Missouri meeting at Windpower

Arkansas meeting at Windpower

Apart of this, the exhibition had few people that the prior year and the sense of the market is that is a bit stopped and probably will continue like in the short run, due to  the fall out of cash grants at the end of the year, as everybody expect about.

Nevada: el barrio rojo de California

Los pasados días 5 y 6 de Mayo fuimos a visitar Nevada en viaje oficial con el objetivo de explorar el Estado y buscar oportunidades de desarrollo de proyectos renovables. Nevada es muy conocido sobre todo por Las Vegas, que es como el gran parque de atracciones de California. La moralidad aquí es extraña: California es uno de los estados más “progres” del pais pero hay ciertas cosas prohibidas como el juego, el alcohol a partir de las 2:00AM y en la calle y el topless. Y Nevada, estado interior y muy conservador-republicano en general, permite todas las cosas anteriores y además todo ello concentrado en un sitio único como es Las Vegas. Los angelinos van a Vegas como los madrileños vamos a la playa en verano y de forma similar, a adentranos en el terreno de las cosas prohibidas, y de ahí el dicho “whatever happend in Vegas remain in Vegas”.

En el terreno energético, es otro estado que merodea a California como un niño alrededor de un pastel (o como un buitre alrededor de una presa). La población de Nevada es casi de 3 millones de personas, aunque anualmente tiene más de 40 millones de turistas. Por ello su consumo eléctrico es peculiar, bajo consumo medio pero gran variabilidad; una mala situación para las caprichosas renovables, que tienden a producir cuando quieren, pese a los esfuerzos en almacenamiento de algunas. Ello sumado a un exceso de capacidad de generación, en tiempos de recesión con demandas poco crecientes, hace que vean a las renovables como algo no para ellos. Su idea, es convertirse en productores y exportar la electricidad al devorador California. Y aquí topamos de nuevo con el problema de US: la falta de capacidad de transmisión y un mercado monopolistico. Y ninguno de los personajes de esta pelicula parece que sea el resposable. Hablamos con la Public Utility Commission, para ellos su preocupación es el consumidor (que vota a los Commissioners) y al que han de mimar y no subir los precios de las tarifas electricas. Hablamos con NVEnergy, principal utility del Estado, ellos encantados de hacer nuevas lineas, siempre que alguien se las pague claro…Hablamos también con la oficina del gobernador y con las agencias de desarrollo económico, para ellos las renovables están muy bien, sobre todo por los trabajos que generan (la obsesión americana, a ver si aprendemos en España) y la riqueza que atrae, pero claro las líneas électricas son de una empresa privada, y ellos no deben inmiscluirse en decisiones privadas y de ¿libre? mercado.

Commissioner Varela

Con el recien nombrado Commissioner Valera

Visita al estado de Nevada

Todos con los agradables y sabios representantes del condado de Nye (más John Wayne)

Representates de NVEnergy

NVEnergy folks

Las malas lenguas dicen, que además con la fusión entre Nevada Power y Sierra Pacific, cuyo hijo es NVEnergy, la situación va a ser incluso peor. Ahora ambas utilities han fusionado también sus objetivos de RPS y Sierra Pacific tiene viento en el norte, más barato que el sol, asi que la previsión es de un parón a corto plazo en Nevada. Una pena para un Estado donde renació la CSP con Nevada Solar One, y donde les gusta apostar… o mejor que otros apuesten y ellos llevarse la caja?

Trip to Arizona

On February 1st and 2nd, I traveled to Arizona to meet the main agencies and key players of the State related with Energy. Six spanish companies came with us, and the trip was very interesting since this State is supposed to convert itself in one of the leaders in renewables in US.

We met the following agencies and companies:

  • Arizona Commerce Authority
  • City of Phoenix
  • Salt River Project (Utility)
  • Greater Phoenix Economic Council
  • Carbon Free Technologies (PV Developer)
  • Quarles & Brady (Attorneys)
  • Arizona Public Service (Utility)

We stayed in Phoenix, and one the most striking thing for me was thet this city is actually the 5º city in the US. And it is growing up very faster also¡. So we can expect a growing electricity consumption in a short future. Also it is close to a really big energy consumer: California. So by the side of the energy demand, we can say it is a good place for develop projects.

What about the offer side? Arizona is the best place in US in solar resource. One of the things we forget in Europe, it is that in renewables, the main factor is the resource. (In Spain you can see PV plants in the cloudy north or even Germany-not sunny indeed- ¡weird¡). In addition, the cost of the land is lower than California and the permiting proccess is pretty simple. Nevertherless, they suffer the same problem than I have seen in the southwest: a lack in transsmission capacity and a monopolistic market organization. It is something to think about it.