OUTER HEBRIDES ENERGY SUPPLY COMPANY Scoping Study on behalf of - - PowerPoint PPT Presentation

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

• 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

• 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

• 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

• 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
• 25% owned by Gotland municipality, 75%
• wned by Vattenfall
• 150 employees
• Scale of wind-farms and interconnector

similar to Hebrides

• Gotland at least ten years ahead in wind-

farm implementation

• Partnerships, especially with large utilities

are critical

• UK Public Sector
• 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

• 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

• 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

• 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

• Partner Funding

self-funded by industry partners

• ften 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

• r 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.