Camden Advisory

Posts by tmourgues

  • A tale of 3 countries: renewable energy financing in Bulgaria, Romania and Serbia.

    The Green agenda for the Western Balkans adopted in Sofia in November 2020 targeted full decarbonisation by 2050. Behind this apparent potential bonanza for renewable energy investors, the real situation is much less rosy, as Governments have been slow to take the necessary steps. However, things are moving in the right direction, although at different speed throughout the region. In this article, we aim to provide an overview of the situation in 3 Western-Balkan countries and analyse the opportunities opened to investors over the next 5-10 years. 

    Bulgaria

    Overview

    In 2020, installed renewable energy capacity amounted to 5 233 MW (40.3 % of the total), including hydro for 3 207 MW (24.7%), photovoltaic for 1 246 MW (9.6%), wind for 701 MW (5.4%) and biomass for 78 MW (0.6%), out of a total of 12 986 MW all sources included. In 2021, wind generated 1 434 190 MWh (3% of total generation) and photovoltaic 1 487 946 MWh (3.1%).

    The Bulgarian Energy strategy 2020-2030 defines the main objectives of the country for the energy sector, in alignment with the integrated plan on energy and climate for 2021-2030 which envisages Renewable Energy to provide for 27% of the gross end consumption. Between 2020 and 2030, the net installed capacity of renewable energy sources is expected to increase by 2,645 MW, from which photovoltaic plants will contribute 2,174 MWp, wind capacities 249 MW and biomass 222 MW. 

    Support schemes  

    Government Support to renewable energy projects have encountered different phases. The 2007 Renewable and Alternative Energy Sources and Biofuels Act established a feed-in tariff (FiT) scheme. The eligible producers could enter into PPAs with the public utility EAD or other end-suppliers which guaranteed to producers the sale of all their generated output. The FiTs were to be reviewed by the Bulgarian Energy and Water Regulatory Commission (EWRC) according to a formula defined by law and which limited the any decrease in FiTs by 5% per year. This was not an extremely advantageous scheme as per international practice PPAs usually guarantee a certain level of price stability throughout the contract duration.

    In 2011, given the new EU obligation to reach 16% of energy consumption generated by RES by 2020, a new law- Energy from Renewable Sources Act (ERSA)- improved the investment climate through the obligation to maintain the FiT specified in the PPA for its whole duration (20 years for solar, geothermal and biomass, 15 years for hydro up to 1MW and 12 years for wind).  These amendments had such a major positive impact that Bulgaria rapidly reached its targets, followed by a pause decided by the Government in 2013.

    From 2012, regulatory instability slowed down investors’ appetite: retroactive temporary grid access fee (2012); 20% fee on FiT (2014), which was later declared unconstitutional; reduction of output that can be sold with the benefits of FiT to the average production of plants of the same category (under deduction of auto consumption); compulsory monthly Fit revenues payment of 5% to the ESSF (2015, lifted in 2021). These measures resulted in many legal proceedings and disarray on the market.  The situation progressively stabilized after 2015.

    In 2018, producers with installed capacity above 4 MW were allowed to terminate PPAs and enter into feed-in premium agreements to be paid under the Bulgarian Energy Security System Fund (ESSF), with the ESSF compensating the difference between the FiT and the market price as determined by the Regulator and depending on the energy source.  Since 2019, FiT applies only to small producers (installed capacity under 1 MW).

    Romania

    Overview

    Total electricity generation installed capacity amounted in 2020 to 20,696 MW, of which 31.4% in hydropower (6,703 MW), 14,6% in wind power (3,023 MW), 6,7% in solar power (1,391 MW) for a total of 21,3% of renewable installed capacity out of the total capacity.  However, a significant part of this capacity is theoretical as it corresponds to aged facilities that are no longer in position to function effectively and should be decommissioned. More accurate is the energy output breakdown: it climbed by 5.3% in 2021 to 59 TWh, with 38% thermal, 29% hydro, 19% nuclear, 11% wind, and 3% solar.

    Romania set the 2030 renewable energy end consumption target at 30.7% (excluding hydro), despite the European Commission recommending 34%, as Romania has a great unused renewable potential (wind potential is estimated the highest in Europe with 14 GW). To reach this target, Romania intends to install around 7 GW of new capacity, of which around 3.7 GW of solar projects. The phasing out of coal mines by 2030 should also provide the opportunity to install 735 MW of solar PV plant on depleted mines and disposal sites as per Just Transition plans.

    Support schemes

    Wind farms developed rapidly between 2008 and 2013, through an advantageous subsidy scheme based on green certificates issued according to yearly quotas and that green electricity producers could sell to electricity providers through market mechanisms. The system was changed in 2013, as Romania seemed on track to reach its 2020 targets and also to prevent fraud and increase predictability. These changes ended the attractiveness of renewable energy investment in the country and new capacities were no longer installed after 2015. The poor state of the transmission network is also a limiting factor for the development of renewables, especially in the western part of the country.

    Politically the Government put the emphasis on the development of gas and nuclear energy rather than of renewable. As heating, which is currently 40% derived from wood, should be replaced with gas (large gas fields are to be developed in the Black Sea), gas receives far more political attention than renewables.

    The situation may evolve in the right direction with the EU 2021–2027 Multiannual Financial Framework and the Recovery and Resilience Mechanism, possibly triggering access to EUR 80 bn for Romania and linked to the Green Deal and the concrete steps to reach full decarbonisation by 2050.

    Concretely new schemes have been introduced in 2021 to replace the green certificates mechanism, notably authorization of long term PPAs and introduction of Contracts for Difference (CfD). CfD could mobilize before 2024 3.5 GW of solar PV and onshore wind with auctions to be held by end 2023. Offshore wind projects should also receive some kind of support.

    SERBIA

    Overview

    Total installed capacity amounts to 8,500 MW.  Electricity generation of 34 028 GWh in 2020 is mainly sourced with coal (70% of the total), followed by hydro (25,3%) and wind (2.3%). Other sources are negligible.

    Serbia currently has more than 550 MW of newly-built renewable capacity on the grid, all in wind farms.

    Although Serbia is not a member of EU, it has to apply EU rules in the energy sector as a necessary step on the road to EU accession. The 2016 Energy sector development strategy which did not put much emphasis on renewable has been updated in February 2022 with the Energy Security of Serbia Plan aiming to reach full decarbonisation by 2050, with a share of renewable of about 50% compared to 26% in 2020. The national Energy and Climate Plan (NECP) is still at draft stage, but it contains the preliminary target of 40% emission cut by 2030.

    Support schemes

    The State utilities ElektromreĹža Srbije (EMS) and Elektroprivreda Srbije (EPS) have so far played a dominant role in electricity generation. No support has been available to solar IPPs after 2016, although the capacity has remained to a paltry 10 MW.

    In general, reforms have been slow due to the reluctance of EPS to move toward renewable and the lack of interest of the general public in renewable energy. Limited implementation of EU regulation, artificially low energy prices for end consumer and lack of transparency also tend to deter investors.

    However, the Government intends to develop renewable IPPs. A March 2021 renewable energy law should help to unlock some barriers. According to this law, small scale facilities (power plants below 500 kW and wind power plants below 3 MW) can benefit from feed-in tariffs. For larger projects, auctions based on feed-in premiums will be held according to quotas. 

    A first auction is scheduled in 2023 for 400 MW and over 1,000 MW in the next 3 years, with a goal to reach 2 GW capacity in 5 years. Government would provide the land to the investors. 650 MW of floating solar power plants are also planned.

    In parallel to IPPs and possibly in cooperation with strategic investors, the government plans to create a State-owned company called Green Energy of Serbia in charge of generating renewable energy.

    CONCLUSION

    The rapid survey shows that after several years of stagnation, a momentum is starting to take place although at different pace in all 3 countries. Ambitious capacity development programs have been announced and should be implemented from 2023. For sure, obstacle and barrier remain as Governments have to establish their credibility beyond the financial opportunity to access EU subsidies, and the investment climate require improvements. But these are overall good news for investors.   

     

     

     

      

  • PPPs and smart infrastructure

    What are smart infrastructure and smart cities?

    Smart infrastructure is no longer just a buzzword but an operational reality. This has been made possible by technological advances in recent years in areas such as data collection processes, data treatment (artificial intelligence) and communication networks which are all part of the internet of things (IoT). 

    According to the Royal Academy of Engineering of the United Kingdom, “A smart infrastructure is a smart system that uses a data feedback loop to improve decision-making regarding a matter. A system that can monitor, measure, analyze, communicate and act based on data collected by sensors.”

    Based on the definition, the Royal Academy makes a distinction between semi-intelligent infrastructure (data is collected but the system does not make any decision ; typical example would be city traffic map); intelligent infrastructure (data is collected and supports human decision process; for example, traffic information is provided to the drivers to help them adapt their itineraries); and smart infrastructure (data is collected based on which the system takes decision autonomously). Typical examples of smart infrastructures are smart networks (for example an energy transmission network) or smart buildings (when operations such as heating, lighting or security are handled by automated systems).

    Why the global surge of interest in smart infrastructure?

    According to Nexus, the benefits are:

    • Self control
    • Cost efficiency
    • Reliability
    • Safety and resilience
    • User interaction and empowerment
    • Sustainability

    Compared to traditional infrastructure, smart infrastructure is able to adapt to changing needs and environment, to communicate individual knowledge to the network and to optimize the decision-making process in a way the human mind alone would not be able to achieve.

    To succeed, smart infrastructure should not be exclusively designed by engineers for technological benefits; on the contrary, it should be a tool to support cities master plans and long-term objectives for the benefits of all stakeholders (such as users, citizens, NGOs, service providers, City governments and others).

    More comprehensively, smart infrastructure is part of a global move toward a more interconnected society. This includes trends such as e-government, e-governance, social inclusion, distance services and smart economies. In this sense, smart infrastructure is related to smart mobility (transportation networks with real time monitoring and control systems), smart environment (pollution control), smart services, smart governance (use of technology for design and delivery of services), smart people (creativity and innovation), smart living (improved quality of life), and smart economy (economic growth through technology).

    The Smart Cities Council considers that smart infrastructure shall help cities to embody three core values: livability, workability, sustainability. This council led by private firms such as IBM or Huewei is a good example of the commitment of the private sector to support the move toward smart cities by providing technical advisory services and spreading best practices to the cities governing bodies.

    According to a report of economic consultants, the global smart cities market size was valued at USD 98.15 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 29.3% from 2021 to 2028.

    What PPPs for smart infrastructure?

    PPPs being a method for delivery of infrastructure, they can be implemented with any type of infrastructure. The smart factor from the strict PPP point of view does not require any revolution in the concept of PPPs. In On the other hand, it is important to determine in which context and under which conditions PPPs are best suited to deliver smart infrastructure.

    The traditional arguments in favour of PPPs remain true with regards to smart infrastructure: when adequately designed and implemented, PPPs allow to alleviate financing constraints, transfer risks to the parties best suited to bear them, take advantage of private sector know-how and skills to reduce cost and delays and improve quality.

    However, a particular emphasis should be paid to certain areas when talking of smart infrastructure. The specificity of the ICT is the extremely quick pace of technological change. When a road or a power plant can operate over decades with minimal requirement in maintenance, an ICT system is due to become outdated in a short timeframe.  Obviously, technology firms are in a better position than the public sector to mobilize, fine tune and implement technology.

     Cities need to understand the drivers of technological change as well as the gains and limitations of an intensive use of technology.

    Contracts should focus on the results that are targeted rather than on a precise description of the means and the equipment to be implemented. Although the result-oriented mindset is a tendency of recent PPPs, this approach is vital in smart infrastructure projects. For one, because cities may not have the expertise to assess by themselves the best technical solutions, and for two, because the pace of change will render obsolete in the future the technical solutions that may appear best at one point of time.

    For this reason, PPP contracts should emphasis emphasize flexibility and make sure that the private partner will be able to adapt the technical solutions with time. Contractual incentives, particularly in terms of remuneration, should guarantee that the private partner will constantly monitor market developments and envisage the deployment of innovation when it makes sense under all dimensions (users point of view, commercially, financially, etc.).  In this context of constant change and adaptation, a cooperative approach based on mutual trust between the city (including other stakeholders such as NGOs and users’ representatives) and the private partner becomes crucial to success. 

    Different types of PPPs may be structured in relation with to smart cities. The traditional model based on project finance, with the creation of a Special Purpose Vehicle that receives either payments from users or from the public partner are to be considered when the project involves investment into assets that are clearly identified as well as the cash-flows associated with them. It allows for the mobilization of private funding and a strong transfer of risk. Besides this traditional model, the revenue sharing model is growing in popularity. Under this scheme, an ICT vendor implements a technological solution for a City and is repaid through the cost savings generated by the solution until the vendor has achieved pay-back, including a profit rate agreed in advance.

    According to Paul Jacobson, PPPs should be examined under 2 axes: the revenue earning capacity, and the capex. The sweet spot for PPPs is formed by projects with high revenue potential and high capex. On the opposite, projects with low revenue generation and low or medium capex should rather be procured by means of EPC contract followed by a service contract if necessary.

    In practice, as analyzed by McKinsey, a considerable number of smart cities projects have already benefited from PPP contracts, especially in fields such as energy management (distribution and grid, metering, street lighting, energy efficient buildings), network infrastructure, transport (car and bikes pooling, integrated multi-modal transport, etc.), traffic management systems, utilities management, CCTV and surveillance, as well as e-governance. This list will no doubt grow in the coming years.

    Smart infrastructure has become a key component of the future of large and small cities at the global scale. PPPs are one of the best available instruments to design, finance, build and operate it to the benefits of all citizens as the expertise and creativity of private sector in this specific area under the right framework are largely unrivaled.

     

     

  • WAPPP Quarterly Magazine Q1/2022

    Wappp quarterly 7 q1 2022wappp-quarterly-7-q1-2022.pdf (1.91 Mo)

    WAPPP Quarterly magazine new issue is available. It includes PPP units presentations and a series of articles about the latest trends in PPPs.

    Thibaut Mourgues, Chief Editor