Battery Storage Project Doesn't Live Up to Hype

A new 200MW battery storage project in Co. Offaly has been hyped up in the media as a project that will "boost use of renewable energy and reduce dependence on fossil fuel-fired power plants."

From the Independent :

BESS (Battery Energy Storage Solutions) involves the storage of power from the grid which is then resupplied on demand. It will allow renewable energy generated at night to be stored, which would otherwise have to be curtailed due to a lack of demand.

The power can then be released back into the grid, avoiding the use of conventional oil or gas-fired power stations to generate electricity.

The 200MW proposed by Lumcloon could provide power for the equivalent of 170,000 homes.

In reality, the storage facility will not generate any electricity. It will not provide power for any home nor will it reduce dependence on fossil fuel power stations. In fact, it will increase dependence on fossil fuels during periods of low wind. 

According to the planning application, the main purpose of the storage unit is to provide a quick injection of power to restore balance to the grid when there is a fall in system frequency. A fall in system frequency could occur when there is too much wind generation in the system and not enough conventional. According to the Lumcloon Energy website, the facility will need to respond within 5 seconds.

The storage unit is an appliance, like a washing machine, in that it will be a consumer of electricity. It could be called on at any time to inject power, so it will need to be fully charged at all times. So while it will be able to charge at night when there is surplus wind energy, it will also need to charge during periods of low wind thereby increasing dependence on fossil fuel. Therefore, it will be useful during periods of high wind, but a drain on the grid when there is no wind.  

Ireland's only pumped storage facility, Turlough Hill, is also a net consumer of electricity. It has a fixed regime, where it stores electricity at night when it is cheap to do so and exports electricity during the day when prices are higher. Lumcloon is similar but different. Turlough Hill trades in the single market like any other generator. Lumcloon, on the other hand will be paid for providing "system services".

These services must be provided to the grid when requested by the grid operator at short notice , unlike electricity which is bid into the market in a competitive pricing system in advance. They are high quality sophisticated high voltage and frequency services.

A grid run on low levels of renewable energy and supplied mostly by conventional generation plant [i.e coal , gas, hydro, nuclear etc] , does not need to provide such services as they are embedded in the product conventional generators provide.

The storage unit will not sell electricity back to the system ( and receive a price for this product the same as an hydro or wind plant would ) , instead it will receive special remuneration set by the regulator and this remuneration is an additional cost to the system and will have to be recovered from the consumer. 

So the net result from this project will be additional costs to the consumer and it will have little impact (or even none) on the reduction of fossil fuels. A long way from the hype in the media.

Delay in New All Island Electricity Market Raises Questions over Future of Power Stations

The new All Island Electricity Market (I-SEM) was set to come into operation in May this year but has now been delayed by six months. This raises questions over what will happen to two power stations set to close this year. Both Huntstown CCGT in Dublin and Kilroot in Northern Ireland failed to secure capacity payments in the recent I-SEM auctions and signaled their intention to close down by the end of May. This would be disastrous for both Dublin and in particular Northern Ireland, which, with no replacement generation ready, would face the prospect of prolonged blackouts for the next year at least. With all the focus being placed on renewables and battery storage, there still has been no proper impact assessment (nor media coverage), now needed more urgently than ever, on how the Irish grid will cope without these power stations.

The blame for the delay in the I-SEM has been put down to software problems. Which is something this blog highlighted a few years ago - the increased administration costs and problems that could arise from the increased complexity of operating a grid designed around wind energy. 

Wind Energy, Diseconomies of Scale and Market Cannibalization

How the Irish Wind Industry is Becoming a Loss Making Industry

by Owen Martin

This blog's recent analysis of the financial statements of wind companies showed that most of the newer wind farms around Ireland were making losses. One possible explanation for this is that the wind industry suffers from the opposite of economies of scale - diseconomies of scale. Economies of scale are defined as the cost advantages that an organization can achieve by expanding it's production in the long run. Diseconomies of scale occur when the long run average costs of the organization increases. It may happen when an organization grows excessively large. In other words, the diseconomies of scale cause larger organizations to produce goods and services at increased costs. 

There are a number of causes of this but the most relevant to the wind industry is Market Cannibalization. 

Implies a situation when an organization faces competition from its own product. A small organization faces competition from products of other organizations, whereas sometimes large organizations find that their own products are competing with each other.

If we take the wind industry as a whole, each wind farm is competing in the same market and their product is the same (wind energy). Therefore each wind farm unit is competing with each other. This is a particular problem during periods of high wind and low demand, when only a certain percentage of wind can be allowed into the grid. Eirgrid must then decide which wind farms need to shut down or curtail output. It is also a problem at the micro level when turbines are located too close together and each turbine is competing for the same but limited local wind resource (wind wake). 

As more wind farms are built, cannibalization increases at the macro and micro level (among wind farms and individual wind turbines). There must then be an ideal amount of wind capacity, say for example half of average demand which would be around 2,000MW, where cannibalization is very small.  At this point, most if not all wind farms are profitable. Cannibalization increases with each additional wind farm built beyond this point. As all the good locations get used, bigger and more expensive wind turbines are deployed in an effort to increase output, as well as increased numbers of turbines resulting in them being placed ever closer together . However, this increases costs per unit as both the local wind resource and electricity demand remains the same while the cost per turbine increases.  We are now at around 3,000MW of wind and there is evidence that wind farms built since 2010 are making losses so probably the ideal amount of wind is somewhere around that 2,000MW mark. 

http://www.economicsonline.co.uk/

In the case of, for example IT companies, market cannibalization can be planned or unplanned. Apple plan their market cannibalization so that their latest iPhone out-competes the older versions. In this way, they attract both existing customers looking to upgrade their phone and new customers who are looking for a new phone. The sales of the older models decline but the sales of the newer model outstrip past sales of the older models. However, in the case of wind energy in Ireland, the cannibalization is unplanned. It is as a result of over-saturation in a market with limited market share available for each new wind farm unit. 

This is a problem which nobody has really examined and is most peculiar to Ireland since it has a very small grid. Therefore, it really makes no sense to pursue wind energy any further until a full assessment has been carried out and possible solutions like battery storage are trialled. 

EU's Flawed Position on Climate Change Exposed by Trade Policy

Guy Verhofstadt, the European Parliament's representative on Brexit, uploaded this video made by the Economist, in support of liberal policy in the EU. The video claims that populists favour domestic production over imported goods implying that liberals such as Guy do not favour domestic production. This is not true because the EU have for example banned US beef and have had tariffs on other non EU beef products for many years to protect EU farmers. But there is a bigger issue here. Guy is a strong advocate for a global climate policy :  

A global climate policy would require a reduction on emissions from shipping and air travel, which would mean more focus on local production of food and goods. So the liberal EU policy of favouring the importing of goods from thousands of miles away over domestic production would naturally result in a global increase in carbon emissions and indeed in pollutants such as sulpher and nitrogen oxides. 

There are signs that the EU will be lifting more tariffs on non EU trade in response to Trump and the populist movement. Recently, the EU signed a provisional trade deal with Mexico which is 5,000 miles away from Ireland.  Countries like Mexico are not expected to meet it's greenhouse emission reductions targets so importing goods from these countries will also increase the carbon footprint there as well as globally (in the seas).  

EU liberal policy will have the unintended consequence of driving global emissions up, not down negating the actions they take on climate here in Europe. 

ESB - A Financial Perspective

This post will be a longer examination into the financials of electricity generation plant around the country (mainly wind). It will get a bit technical in places but I will do my best to explain terms used. 

ESB is the largest energy company in Ireland and is 95% owned by the Irish State. Last year, it recorded a loss of €31 million after writing down the value of their generating assets by € 276 million. The operating profit before the impairment was € 490m, the lowest profit in the past five years.

Following impairment reviews of the generation assets ESB recognised an exceptional impairment charge of €276 million in relation to Moneypoint (€142 million), Aghada Unit 2 (€69 million), Synergen (€30 million), Poolbeg (€21 million), Marina (€1 million) power stations and €13 million across five wind farms

Moneypoint is a critical piece of infrastructure. Without it, the 400kv lines in the west of Ireland will have insufficient voltage to carry the power eastwards.  The impairment now means that Moneypoint coal power station is practically worthless. However, it must be noted that Moneypoint has been around since the 1980s.

Two of their power stations are to close altogether - Marina and Aghada (steam unit)

Capacity contracts were not accepted for ESB’s open-cycle gas unit at Marina and the conventional steam unit at Aghada and, after many years of excellent performance and service to electricity customers, once I-SEM starts in May, there will be no commercial basis for the continued operation of these units. 

The loss of the steam unit at Aghada will increase emissions from the site as this generator would be more efficient than the open gas cycle turbines built there around the same time in the 1980s (there still remains a separate and very efficient CCGT at Aghada built in 2010).

The published accounts do not show a breakdown of operating profit into fossil fuel / renewables (which seems to be a trend among the large energy companies), which would have been very useful.  But there are indications that the renewables part of their business is not performing as might have been as expected. 

Return on Capital Employed (ROCE) 

The Return on Capital Employed (ROCE) is used as an indicator for the Return on an Investment i.e. how much one pound spent on assets generates in profits. I have calculated it by taking the Operating Profit (profit before interest and tax) and divided by total assets less current liabilities.  The sweet spot seems to be in the 14-17% range and this crops up in successful companies from across different industries. Successful Irish companies like Ryanair, Kingspan, Glanbia and Kerry Gold have ROCEs in the region of 14 - 17%. In the UK, Marks and Spencer's recent report shows an ROCE of 14%. 


The ROCE for ESB seems to be around 6% historically. The highest I can find was 10% in 2007 when the prices of fossil fuels peaked. It now stands at 4.6% for 2017, which is historically low.  It has dropped every year for the past three years from 6.5% to 6.1% to 4.6%. Low wholesale prices are of course a contributing factor. However, the average wholesale price rose from €41.82 in 2016 to € 47.48 in 2017 so we should have in theory have seen an improved ROCE ratio.

Comparable companies like SSE and E.ON have recently reported ROCE ratios in the region of 10% so ESB's ratio is comparatively low.

Interest Cover

A company needs to have enough profit left over from paying normal business expenses to cover interest payments on their loans. From Investopedia:

The interest coverage ratio is used to determine how easily a company can pay their interest expenses on outstanding debt. The ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by the company's interest expenses for the same period. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable.

ESB in 2016 had a healthy interest cover of 3.5. However, this has dropped below the safety threshold to 1.1 in 2017.


Financial Statements

I will only be taking a look at the Generation part of ESB's business. ESB also have a retail and grid development business. The financial statements for the gas power station and wind farms are published on the CRO website. Only financial reports for 2016 and 2015 are currently available. There was a deterioration in profits in 2016.  Presumably, things got even worse for the company in 2017. 


Gas power

A look at the most recent accounts (2016) of ESB's gas power station in Dublin shows that it was still making good profits despite the low gas prices. Dublin Bay (400MW) made net profits of €28m and €43m in 2016 / 2015. The drop in profits was presumably due to a drop in wholesale prices of 18%. It had very healthy ROCEs of 19% and 29%.  With accumulated profits of €41m by the end of 2016, the power station was doing very well. In 2015, a dividend had been paid out of € 37 million. It proves that the business model for gas generation is still very strong. The power station was built in 2002 so a very strong performance after 13-14 years of operation. 

Of course, it is based in a high demand centre and is generating power to the grid most of the time. I was unable to find financial statements for any other power stations. I presume most of the other ones wouldn't have been as profitable.

Wind power

I looked at the financial statements of nine of ESB's wind farms in the South of Ireland. A total of 175MW of wind generation. 2015 is a good year to begin with as most of the farms had high load factors, equal to or above the national average of 33% (except for one - Derrybrien). All wind farms made an operating profit, however two made net losses, most notably Garvagh Glebe, a 26MW wind farm in Leitrim which made a loss of € 480,000 despite having the highest load factor at 42%. This was because of very high interest payments - which were about 45% of turnover. 

The average ROCE was 6%, in line with the overall average for ESB Group. Another Leitrim wind farm, Blackbanks, had the highest ROCE at 11%. Blackbanks has a smaller 10MW output and interestingly has smaller (0.85kw) turbines than nearby Garvagh which has 2MW turbines, yet the smaller wind farm had double the ROCE of the larger one (remember that ROCE is based on profit before interest). This seems to fly in the face of conventional wisdom that says the bigger the turbine, the bigger the return.

Combined operating profits in 2015 for the nine wind farms was € 9.2m and net profits was € 2.1m. Depending on how you measure it, this gives an operating profit of €52,000 per MW and net profit of €12,000 per MW for 2015. Compare this with the gas power station in Dublin which had an operating profit of € 127,000 per MW and a net profit of € 107,000 per MW in the same year. Gas power was 2.5 times more profitable in 2015 than wind before interest and and nine times more profitable after. Operating profit, however, is the best way to compare the two generation sources as the gas power station had paid off most it's loans by 2016 and so had very low interest payments. Therefore, gas, which has fuel input costs, is two and half times more profitable than wind, which has no fuel input costs (and wind gets priority on the grid). This fact deserves a separate article on it's own but presumably the much higher load factor for gas has a lot to do with it.

By the end of 2015, accumulated profits from all these wind farms was € 14 million. One dividend of € 1.5m was paid out by Mount Eagle wind farm in Kerry. Again, this wind farm has the smaller older style wind turbine. 

In 2016, the average load factor was still decent at 31% but the ROCE had switched to negative. All wind farms made a net loss apart from two. Combined losses for the year were € 5m. Over the two years, combined losses were € 3m. 

In 2016, interest cover went from positive to negative. Average interest cover over the two years was 1.09, which falls short of the recommended baseline of 1.5. The ROCE would need to rise to at least 10% to reach a safe interest cover and to 15-16% to reach an ideal one.

The worse performing wind farms were the larger ones built in 2010 and 2011. The larger 2MW turbines on average cost 4.5 times more than the smaller older models for 2.3 times the capacity.  In fact, these newer wind farms had high accumulated losses by the end of 2016 of € 6m and some had notes in their accounts stating that they were dependent on financial support from ESB group, which indicates that the higher output from their bigger turbines was not enough to compensate for the additional associated costs.

Two dividends were paid out, € 1m from Mount Eagle and € 1.5m from Blackbanks, both older wind farms with smaller 0.850KW turbines. They were both in good financial health by the end of 2016. 

In total, ESB group had loans outstanding of €170 million to all nine wind farms by the end of the year. 

In 2017, total impairments for wind farms was € 13 million. In Northern Ireland, the value of a wind farm in Tyrone had been written down by nearly €5m :

A review of the Hunters Hill 20 MW wind farm in Co. Tyrone, Northern Ireland was undertaken at year end. An impairment loss of €4.9 million has been recognised in the income statement in respect of this wind farm. This impairment has arisen as a result of a reduction in load factor.

ESB Networks division were also investing heavily in the grid infrastructure required to support renewables :

The focus of the 2017 investment in the transmission network was on continuing the reinforcement of the system to facilitate the connection of new renewable electricity generation. 

Capital investment in the networks businesses continued in 2017 with €644 million (74% of total capital investment) invested in the networks infrastructure in ROI and Northern Ireland (NI)

Conclusion

ESB's traditional generation model in Ireland has changed from investment in reliable power generation to renewables. However, there are signs that things have not turned out quite as planned with wind energy, in particular the newer and more costly wind farms have built up considerable losses. In essence, the older profit making gas generation fleet is subsidizing the newer loss making renewable generation. The older and smaller wind farms may well be benefiting from better sites, but it could also be the case that the smaller 1MW technology is more efficient. These smaller wind farms have by and large turned out to be good investments.  The same cannot be said for the more recent wind investments.

There are still gains to be made from conventional baseload generation. As the grid becomes increasingly unstable in the future, there will be gains to be made for ESB in building fast acting fossil fuel generators that can be switched on quickly. If Moneypoint is converted to gas, it will certainly be profitable like Dublin Bay, but will leave ESB (and Ireland) increasingly dependent on gas lines from the UK which may not be as dependable in the future. 

Wholesale prices are recovering so we should be seeing better profits for ESB. Investing in large loss making wind farms may be negating some of the benefits from higher wholesale prices. Other benefits from investing in wind farms such as carbon credits are no longer financially lucrative as the carbon price has fallen too low. ESB's investment in wind energy should be reviewed.

ESB Financial Report for 2017 : https://esb.ie/docs/default-source/investor-relations-documents/annual-report-and-financial-statements-2017-single-pages.pdf?sfvrsn=dae93bf0_2

Daffodils Blooming Late This Year - Media Silence

Photo credit: Irish Examiner

Daffodils have only begun to bloom in Ireland in the last week due to the very cold winter and spring. This is about four or five weeks later than usual. In recent years, the media have whipped up hysteria when there was an early bloom in January, such as happened in 2012 and 2016.

But now that they are very late blooming, there is stone cold silence in the media as it doesn't suit their narrative that the world is warming dangerously.

We have installed 3,000MW of wind turbines all around Ireland in the past ten years in the hope that we could stave off climate change. But still, the climate keeps doing it's own thing, it goes through periodic changes, as it's been doing since forever, completely oblivious to what man is doing.

Brookfield Renewables Sale Part 2

Canadian company Brookfield Renewables sold two wind farms to Greencoat Renewables last week - Knockacummer and Killhill. I took a look at Knockacummer in my last post. This time I will examine Killhill.  Things don't look any better from a financial point of view.

Killhill is outside Cashel in Co.Tipperary. It has sixteen Enercon 2.0 MW turbines and was commissioned in 2014. The latest accounts show operating profits for 2015 and 2016 but a net loss for both years after interest is accounted for. In fact, since it came into operation, it made a loss every single year  and now has accumulated losses of nearly € 900,000. It had net current liabilities of €3.2m and was completely dependent on financial support from Brookfield, the parent company, to meet it's debts. There were about €37m of loans outstanding by the end of 2016. 

Im speculating, but it could be that the banks will be paid out of the sale proceeds leaving the company completely financed by equity under Greencoat. This could account for the apparently large, but undisclosed, sale price of both wind farms. 

Canadian Company Sell a Loss Making Wind Farm for a Profit to State Backed Investors

A wind farm sold for a profit in the region of €7 million last year made a net loss of € 4 million in the latest accounts filed with the companies office for 2016.

The wind farm, Knockacummer, in Cork, has a capacity of 87.5MW, was commissioned in 2013 and has thirty five 2.5MW turbines. It was sold by Canadian company Brookfield Renewables.

It paid interest of € 12m (at 7.5%) in 2016, which was 54% of it's turnover. The interest was higher than it's operating profit which turned the profit into a net loss. It also made a net loss in 2015. 

At 31st December 2016, it was carrying Accumulated Losses of € 5.7m.

It's outstanding loans stood at €145m at end of 2016. €3.8m of which was written off by Brookfield during the year. The company was financed by loans from Brookfield, which in turn was financed by external loans. 

The buyer was Greencoat Renewables. Last year, the Irish State, through ISIF and AIB, acquired a 33% stake in the company. Which could potentially rise to 49%. 

Greencoat also bought another loss making wind farm, Lisdowney, last month. 

One has to question as to why the Irish State is helping to purchase loss making wind farms. Are we looking at another NAMA in the making ?

Storms Linked to Power Station Trips

Eirgrid published this list of power station trips from the past few months:




I couldnt help but notice that most of these dates coincided with storms or very windy conditions:

5th october - Cyclone Xavier
12th october - Hurricane Ophelia
16th october - Hurricane Ophelia
21st october - Storm Brian
27th November - gale force winds
24th December - record wind penetration on the grid
3rd January - Storm Eleanor
17th January - Storm Fionn

It appears that as very high amounts of wind generation is allowed into the grid, the frequency can drop to a dangerously low level.

One of our key tasks is to maintain balance between electricity supply and electricity demand. Electrical frequency is the measure of balance between supply and demand. When supply and demand are balanced, the electrical frequency is at 50 Hz. We must maintain this balance on the system all day, every day. The normal operational frequency range is 49.8 Hz to 50.2 Hz [Eirgrid].

You can see from the above diagram that the frequency has dropped below 49.8Hz on a few occasions over this period.  As a result, the power station tripped and went offline. This then results in the frequency falling even further. At this stage, cutting demand is one of the few options open to the grid operator. This may explain some of the blackouts on these days.