Some days the economic news seems to emanate from the Twilight Zone. When the official summit document from Wednesday's meeting of EU leaders seeking to avert another financial crisis includes a reference to repaying a portion of Greek debt with the output of a huge PV array that might not be completed for several decades, if it is built at all, I don't know how else to describe it. And that's before considering the perplexing economics behind the Helios scheme, which apparently entails Germany or other EU members investing or lending--after lenders have just agreed to take a 50% haircut on previous Greek debt--up to €20 billion to build a 10 GW PV installation in Greece to generate power that would be sent to central Europe via transmission lines that don't all exist yet. Either I'm missing a key element of the plan, or the EU ministers didn't quite grasp the details involved.
Let's start by stipulating that the idea of generating solar power in a sunny location like Greece and sending it to darker northern countries like Germany probably makes a lot more sense than investing billions of Euros installing additional solar in the latter, where it will be lucky to produce annual output equal to an average of 10% of its nameplate capacity, compared to 25% or more in an ideal location. That's the same logic behind the much larger and better-known Desertec plan, which would accomplish much the same goal from installations in North Africa and the Middle East, if it ever gets built. The problem in the case of Helios, as the Greek project is called, isn't the basic engineering concept but the financial one necessary for it to function in the manner suggested in the EU document.
In order for Helios to generate significant value to offset part of Greece's borrowings from the European Financial Stability Facility (EFSF) and other EU institutions, it would follow that Greece should actually own either the Helios installation or the rights to most of the power it would generate. Yet it's also clear that Helios could only be built with massive non-Greek investment of either equity or debt. If equity, then wouldn't the foreign investors own most of Helios and its output, leaving Greece little from which to repay its debts? And if debt, wouldn't that mean Greece was repaying one debt with the proceeds of another, rendering this scheme just a circuitous form of rollover?
Perhaps the Greek government assumes it will end up with a large carried interest in the project merely from contributing the land upon which it would sit, and for streamlining the permitting process for building it. But what proportion of most PV projects is attributable to land, especially in competing, high-sun regions such as those involved in Desertec? I'd think it was pretty low compared to the value of all the solar and electrical hardware, which Greece can't afford to buy on its own. And once we determine how much of the project Greece would actually own, then we would need to calculate the revenue out of which debt repayment could be remitted. If they're counting on power prices close to today's German feed-in tariffs, which were just slashed again, I think they're going to be very disappointed at the end of the day. My guess is the power would be worth no more than around 10 €-cents per kWh at the source, to allow it to compete in the German wholesale market after accounting for transmission costs. At that rate a 100% share of twenty years of 10 GW of PV under Greece's average temperature-adjusted insolation might generate an undiscounted €25 billion, but that's before repaying the project's up-front investment and all other expenses.
Not so long ago the prospects for projects like Helios were mainly determined by the interaction of oil prices and climate policy, with strong global economic growth essentially a given. That proposition has recently been inverted, with oil prices, climate policy and energy development all being driven or constrained largely by economic factors. In this context Helios looks potentially useful as a development project that could provide some construction jobs and eventually generate some corporate tax revenue for Greece on the profits from exporting green electricity to the project's effective owners in central Europe. That could give the Greek economy a bit of a boost. However, the line in the EU communique in which , "Greece commits future cash flows from project Helios...to further reduce indebtedness of the Hellenic Republic by up to €15 billion with the aim of restoring the lending capacity of the EFSF," seems to reflect the same sort of thinking that brought Greece to its current situation.
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Showing posts with label sovereign debt. Show all posts
Showing posts with label sovereign debt. Show all posts
Friday, October 28, 2011
Thursday, September 15, 2011
Renewable Energy Faces the European Debt Crisis
With all the bad economic news and political turbulence in the US, it's been easy to lose track of the sovereign debt crisis in Europe, which appears to be spreading from smaller, peripheral countries like Greece to affect the banking systems of core European Union members like Italy and France. To read Paul Krugman's column in last Sunday's New York Times, Europe could be on the verge of another financial crisis on the scale of the one triggered by the collapse of Lehman Brothers in 2008. Aside from the global economic consequences of such an event, it would send ripples throughout the energy sector, affecting both conventional and renewable energy markets and participants. While such an outcome is far from certain, it's a worrying scenario to contemplate.
The 2008 financial crisis is a good place to begin looking for the implications of a potential 2011 credit crunch in Europe. Start with oil, which in the fall of 2008 slid from around $100 per barrel to below $40 by mid-December of that year. Of course oil prices had already retreated from a high of $145 that summer, as the weakening US economy and collapsing housing market slowed US demand for oil. Yet it's worth noting that despite their generally more efficient use of energy and higher consumer energy prices, the countries of Europe together import slightly more crude oil and petroleum products than the US does. And as I've noted before, the economies of the EU's Euro area have been partially sheltered from high oil prices by the strength of the Euro relative to the US dollar, in which most oil transactions are settled. Even without a full-blown financial crisis, a sharp drop in the Euro/dollar exchange rate resulting from sovereign debt worries would create a regional energy price spike that could further hamper the EU's growth and reduce its energy demand. OPEC appears to be preparing to trim output for just such an eventuality.
Next consider what happened to renewables, such as wind and solar power. Lending to renewable energy projects in the US dried up in late 2008, as credit became harder to obtain in general, and participants in "tax equity swaps" retreated. Without the generous renewable energy supports in the 2009 stimulus, wind turbine installations might have ground to a halt, and the expansion of solar manufacturing that has recently hit a rocky patch might never have occurred. European projects and suppliers weren't affected to the same degree, thanks to a combination of higher direct subsidies for renewables and robust lending from EU agencies such as the European Bank for Reconstruction and Development.
Those protections look less dependable in a new crisis. European governments have been busily cutting renewable energy subsidies, and growth is already slowing, squeezing local firms like Germany's Q-Cells between a weaker domestic market and low-cost import competition from China and elsewhere. It's anyone's guess whether commercial lending to the renewable energy sector and loans from groups like the EBRD could be sustained in another financial crisis focused on the Eurozone.
A sudden contraction in European funding for renewable energy projects would be felt around the world. Suppliers in the US and Asia have relied on European sales of wind turbines, solar panels and components for much of their planned growth, and the further decline in equipment prices that would follow a big demand drop would leave all but the best-capitalized, lowest-cost competitors scrambling. And even as renewable energy growth has shifted in recent years toward developing countries and away from North America and Europe, Europe has remained the most important market for many of these technologies--particularly for solar PV and offshore wind power--just as Europe has retained the strongest focus globally on reducing the greenhouse gas emissions implicated in climate change. Every aspect of the global energy business has a big stake in the success of Europe's leaders in navigating through the current crisis, but none more than the renewable energy sector.
The 2008 financial crisis is a good place to begin looking for the implications of a potential 2011 credit crunch in Europe. Start with oil, which in the fall of 2008 slid from around $100 per barrel to below $40 by mid-December of that year. Of course oil prices had already retreated from a high of $145 that summer, as the weakening US economy and collapsing housing market slowed US demand for oil. Yet it's worth noting that despite their generally more efficient use of energy and higher consumer energy prices, the countries of Europe together import slightly more crude oil and petroleum products than the US does. And as I've noted before, the economies of the EU's Euro area have been partially sheltered from high oil prices by the strength of the Euro relative to the US dollar, in which most oil transactions are settled. Even without a full-blown financial crisis, a sharp drop in the Euro/dollar exchange rate resulting from sovereign debt worries would create a regional energy price spike that could further hamper the EU's growth and reduce its energy demand. OPEC appears to be preparing to trim output for just such an eventuality.
Next consider what happened to renewables, such as wind and solar power. Lending to renewable energy projects in the US dried up in late 2008, as credit became harder to obtain in general, and participants in "tax equity swaps" retreated. Without the generous renewable energy supports in the 2009 stimulus, wind turbine installations might have ground to a halt, and the expansion of solar manufacturing that has recently hit a rocky patch might never have occurred. European projects and suppliers weren't affected to the same degree, thanks to a combination of higher direct subsidies for renewables and robust lending from EU agencies such as the European Bank for Reconstruction and Development.
Those protections look less dependable in a new crisis. European governments have been busily cutting renewable energy subsidies, and growth is already slowing, squeezing local firms like Germany's Q-Cells between a weaker domestic market and low-cost import competition from China and elsewhere. It's anyone's guess whether commercial lending to the renewable energy sector and loans from groups like the EBRD could be sustained in another financial crisis focused on the Eurozone.
A sudden contraction in European funding for renewable energy projects would be felt around the world. Suppliers in the US and Asia have relied on European sales of wind turbines, solar panels and components for much of their planned growth, and the further decline in equipment prices that would follow a big demand drop would leave all but the best-capitalized, lowest-cost competitors scrambling. And even as renewable energy growth has shifted in recent years toward developing countries and away from North America and Europe, Europe has remained the most important market for many of these technologies--particularly for solar PV and offshore wind power--just as Europe has retained the strongest focus globally on reducing the greenhouse gas emissions implicated in climate change. Every aspect of the global energy business has a big stake in the success of Europe's leaders in navigating through the current crisis, but none more than the renewable energy sector.
Labels:
EU,
financial crisis,
offshore wind,
oil prices,
pv,
renewable energy,
solar power,
sovereign debt,
wind power
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