One of the issues that we face when looking for power projects offering the best carbon reductions is selecting the right location for a project. This has always led us to look at the developing world, because that’s where emissions are rising, and rising fast. In effect, the world is no longer developed or developing, there are really about 5 grades from developed, transitioning, developing, under developed and least developed.
There’s little carbon benefit from developing in Europe and it’s very expensive because power prices are so low. The evidence for this is obvious; the installed capacity in EU and USA is suitable for our requirements and so the cost of achieving carbon emissions is the destruction of energy producing assets and the new build of renewable energy assets to provide the replacement power. We have practically done as much of this as we can handle without some sort of utility scale storage system (watch this space). In real terms, the emission reductions you can achieve in the developed world costs the whole value of the new plant. This is an expensive way to finance carbon abatement.
In the developing world, on the other hand, power prices are higher – $100 US up to (at worst) $350 US per MWh. There is significant demand for additional electricity (aggregate demand is growing at roughly 5-10% per annum) so you can saturate demand and prices still stay high. The developing world is going to build new plants to meet this demand, regardless of the carbon impact, so influencing the developing world to choose low carbon power is critical. The commercial side of renewables is highly supported by the electricity price and, with a bit of persuasion like an upcoming treaty, governments can be persuaded to offer a little bit more support for more expensive renewable choices over cheap fossil burning alternatives.
Of course, there’s always issues with grids and power intermittency that hold back the effectiveness of renewables as carbon reducing replacements for cheap fossil burners, but in many developing economies there is abundant sunshine, plenty of biomass and hydro potential too. It’s not unrealistic to think many emerging economies could attain 40% of installed power capacity through renewables. By building renewables to meet growing demand in the developing world, rather than replacing fossil burners with low carbon alternatives (like in the EU and USA), we can choke of rising carbon emissions at a much lower price.
But within the scope of targeting the source of developing world emissions growth, you face another challenge. Do you identify locations that already have shovel-ready sites for acquisition, or do you seek out brownfield /greenfield prospects and develop them from the ground up? The answer is, unsurprisingly, the same as for any new build: Location, location, location.
Shovel ready sites represent lower investment risk…
There are about nine distinct steps in taking a greenfield or brownfield site to shovel ready. It starts with a prospective location. There’s the obvious need to option, secure or rent a specific site and then clear the site and prepare it for building work. But beyond the physical clearing, there is a lot of complex technical administration. Planning permits, grid connection permits, environmental impact assessments, carbon accreditation and so on. The upshot is, you’re looking at an average cost of $5000-10,000 per MW planned for a substantial project (30-50MW) before you’re ready to actually raise finance and begin building on it. As an investment, there are obvious added risks in creating that kind of asset. The initial acquisition costs might be lower, but with so many steps to complete, there’s risk from delays, permit issues and so on.
There is also a market risk. For example, in Chile, there’s no shortage of shovel ready sites. Developing a greenfield/brownfield site in Chile means, once it’s shovel-ready (or nearing it) there’s more of a challenge in selling the asset to a renewable developer. This means, unless you’re prepared to raise more finance and develop the site yourself, there’s a risk of becoming stuck with a shovel ready asset that’s difficult to sell. This is why in our Chilean operations, we’ve always sought to locate shovel ready projects rather than develop raw sites, i.e. why take on the risk of a greenfield/brownfield development when you could easily locate a project already at the shovel ready stage?
There’s no doubt demand for renewable projects is rising in the developed world. Carbon trading looks like it will receive a much needed boost after the forthcoming COP21 talks in Paris, so projects that generate the best emissions reductions (CERs) are making better financial sense. Additionally, more institutional investors are keen to divest from fossils and acquire renewable power assets. But those factors in themselves won’t suddenly mean we see money flooding into renewable projects in higher risk locations (like sub-Saharan Africa) or into greenfield/brownfield projects in markets (like Chile) where there’s ample supply of shovel ready sites. The issue is, as in so many investment driven assets, confidence. A developer needs to be confident that there will be buyers at the end of the journey, and that means developing a site to shovel readiness has to be in a location where you’re confident that the site is saleable, or you’ll be able to raise the finance to develop it into a power facility yourselves. And that means two factors are critical, firstly, the supply of shovel ready sites and secondly, the availability of power purchase agreements (PPAs) in that location.
Chile has been great for Solar 350 and we have one site under term sheet agreement, but we are waiting for the government to allocate 20 year power purchase agreement. There is lots of potential (and lots of projects) and Solar 350 has 40% of the project finance pledged already, so things are going well… but as our operations in the Atacama Desert expand, would we develop our own Chilean greenfield sites with a plethora of projects available at shovel ready or close to it? The answer is no. But in Mexico, the answer is yes. Why?
Mexico: An ideal location for greenfield site development, and renewable projects…
We’re currently commissioning a series of 20 – 50 MW solar projects in Mexico. These will be developed from greenfield land through to shovel ready and potentially beyond. The carbon price in Mexico is $3 per CER, so decent return compared with EU markets (against an average for CER futures of $0.61). Profitability is substantial, and as per our strategic approach to development in Chile, we’re also locating projects at the point of shovel readiness, and treating them with our Dealstream 1 and Dealstream 2 configurations we’ve have very keen interest from investors.
The reason we’re commissioning greenfield and brownfield site development in Mexico is because it makes sound commercial sense. Unlike Chile, there’s a shortage of Mexican shovel ready sites. And unlike locations in sub-Saharan Africa (another place with great solar DNI), there is a good carbon price in Mexico, strong PPAs, developed infrastructure and a strong banking and finance sector.
Mexico is a great location for solar, too. The geography receives high DNI (direct natural irradiance) and the economy is enjoying strong economic growth. Mexican PPAs are characterised by high electricity prices (around $100 per MWh) and moving from greenfield to shovel ready creates very attractive assets for further investment. A shovel ready site in Mexico offers the potential to develop solar installations for a cost of between $5000 – $8000 per MW and sell for $100,000-200,000 per MW. The value creation potential is further enhanced by the high amount of carbon a Mexican project can offset (power demand is high and every MW of solar can replace coal on a like for like basis, providing large numbers of CERs) and of course, this is within a carbon market where there is a price floor and a CER value that’s close to six times the European trading price.
The Mexican outlook…
Mexico really offers the best global location, right now, for taking brownfield and greenfield sites to shovel readiness. A developer there has more options, once the site is shovel ready, there is the opportunity to sell the asset on. And because of the favourable economy and demand for solar, the option to raise finance and develop the site yourself is also very attractive. Now that we’ve been appointed as official representatives of Artannes Capital (a key step on our journey to full FCA regulated status – we are not regulated yet, but it’s on its way), we’re extremely confident that we can both develop sites to shovel ready, finance these developments, and take them on into installed power facilities, offering our investors a wider range of renewable assets. We’ve built a team of specialists with experience of developing raw sites to shovel readiness (most of which have worked with our carbon abatement company Carbon 350, so not only are they experienced and capable, but trusted too) with a main focus on the Mexican opportunity to meet the demand for these new projects, which we anticipate will be very strong.
Alongside our commissioned power projects in shovel ready locations, this is an important step to expand our offering, but more importantly, it’s a chance to apply more commercial carbon reduction logic and make a real difference to rising global carbon emissions from the rapidly growing economies of the developing world.