Just a year ago we were surrounded by government targets and pressures to actively reduce carbon emissions. While practically these still stand, the situation has shifted dramatically as the Covid-19 pandemic has spread around the globe. Interestingly, some may even say that Covid-19 has provided one good cause for celebration with fossil fuel use for electricity generation at its lowest since the industrial revolution. Granted that is likely to continue to fluctuate as we weave in and out of lockdowns, but there is a sense that priorities have shifted. In a way this forced paradigm change has demonstrated what can be achieved despite protestations to the contrary.
In fact, this change in approach has been clearly illustrated more recently by General Electric. Known as one of the world’s largest makers of coal-fired power plants the company is now walking away from this fossil fuel source despite significant investment relatively recently. Instead GE is looking to focus on natural gas, solar and wind.
While all of this is significant news; the challenge now is to take this situation and look at ways to maintain the momentum to facilitate a permanent reduction. The realities are that in the last decade there has been a number of government schemes designed to promote cleaner energy generation. The practicalities of which have led to some having more success than others. In fact government clean electricity schemes and emission regulations have created both negative and positive impacts on the values of gen set assets. Let’s explore a few that impact many businesses and operations day to day and understand what their implications are:
The Medium Combustion Plant Directive (MCPD) aims to limit the release of pollutants caused by electricity generation. The regulation affects gen sets with a capacity >50MW operating for >50 hours per annum and were effective for most operators in 2019 but for some (Tranche B) not until 2025. The directive applies to all gen sets irrespective of the generation scheme. You can check the definition of a Tranche B generator according to UK Government guidelines here.
The impact of the regulation responds to critics, who rightly point out that new electricity generation markets should not be as polluting as the schemes they were designed to replace. However, the practical implications mean that any operation requires significant capex by generators to install scrubbing plants or source green fuels.
Consequently, the market value in the UK for non-MCPD compliant generation assets in the UK is now materially reduced. However, markets do still remain for standby gen sets and non-MCPD complaint gen sets in countries where, rightly or wrongly, these emission regulations do not exist.
There are a number of electricity generation schemes, but two have impacted upon the values of gen sets the most.
The capacity market went live in 2014 and was designed to provide a back-up electricity supply when low levels of renewable energy are generated.
Capacity market providers bid at auction for capacity agreements that pay for electricity generated during these peak use periods. Contracts were perhaps surprisingly awarded to coal fired generators but flexible gas and diesel standby generators also won the day despite prices recently dropping from £22.50/kw to £6.90/kw. Add to this a 2019 EU ruling, closing the scheme deeming it to be ‘state aid’, only for it to be subsequently reinstated, but without any intervening payments to generators being made – it’s been a bumpy ride for many operators.
The Renewable Obligation (RO) scheme introduced in 2002 was designed to incentivise the generation of electricity from renewable energy sources over more traditional alternatives at a reasonable cost. It provides an opportunity for smaller clean renewable energy providers to sell electricity to suppliers enabling them to meet their renewable energy obligations. The scheme rewards generators for electricity generated via Renewable Obligation Certificates (ROCs), the ROC unit rate varying depending upon the generation technology and the market price of a ROC (this is supported by an index linked base government price).
Given a government backed inflation indexed pricing structure and a scheme that operates until 2038, but closed to new entrants from 2017, generators see a long-term relatively low risk investment. Typically, generators contract with customers via power purchase agreements (PPAs) for a 5-10 year agreement where the generator receives revenue, from the customer and the government (via the ROCs), but absorbs the risk of fuel and O&M costs.
To benefit from the RO scheme, gen sets will be accredited as a fixed number and capacity. Operationally they may be location specific, but are limited to only operating in the RO scheme market and in having to maintain annual OFGEM audits and returns.
The Government has introduced the Capacity Market to provide an insurance policy against the possibility of future blackouts such as when there are periods of low wind and high demand. This is to ensure that people continue to benefit from reliable electricity supplies, but at affordable prices.
So, given the dynamics of the Capacity Market and the Renewable Obligation scheme gen set assets have two values. Firstly, as regulated income generating assets based upon future revenue streams and secondly, as gen sets for standby use largely based on kVA rating. That’s of course assuming they conform to MCPD, if not then think again.
The energy and utilities sector actually has a significant opportunity. The clean energy markets are buoyant. There is much going on, particularly with the substantial traction from government supporting the power markets and funding cleaner technologies. Increasingly Hickman Shearer is becoming heavily involved in supporting many businesses tackling this through the valuation of new tech assets and the sale of old.
So, where is this taking us? Dove tail this with the evolution in technology for batteries to store energy and their reduced costs means renewables use is expanding. Long-duration energy storage holds the potential to address the energy gaps when renewable sources such as wind and solar are not producing. There are several technologies currently out there, but we are now seeing true contenders for long-duration energy storage.
So, if you are looking to capitalise in the energy and utilities arena then Hickman Shearer offer significant experience and knowledge across many energy market capital assets including:
Valuation and sale for restructuring of (25) 1250 kw gen sets, less than 200 hours each
Valuation of a fleet of over 250 gas and diesel gen sets for IFRS financial reporting purposes
Renewable Obligation scheme
Valuation of 20MW of RO accredited gen sets
Sale of 13MW of RO accredited gen sets
Sale by negotiation of (20) unused biogas gen sets