Peak Winter Demand Arrives

Things get a little bit shaky !

 Last night at 5.30pm, the electricity grid hit peak demand for All Ireland at 6,638MW - not far off Record peak demand of 6,878MW reached on December 21st last year.

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But total system generation was only 6,106MW leaving a shortfall of 532MW.  

Wind energy was low most of the day, only 380MW or about 7% was available for the whole island at 5.30pm.

The two UK interconnectors saved the day with combined imports of 450MW. There was still a shortfall of about 80MW, made up presumably from demand side units. These would comprise mostly of diesel generators and combined heat and power units. These units are "non-centrally monitored" according to Eirgrid and are not included in these graphs.  

Of course, that damned Brexit lot across the sea with their dastardly nuclear power charged us handsomely for the imported power, at € 2,000 a MW. 

To give some credit to the Irish grid operators, they were correct to build the East West interconnector as it is making up for the once efficient gas plant that have been prematurely wrecked from backing up the wind. One just hopes that the UK will have sufficient power to give us on those cold winter nights over the next few months. 

Gas Prices Rise and Fall but Energy Bills never get Cheaper

People's memories are short in Ireland so now is a good time to remind them that gas prices rise and fall but energy bills never get cheaper. This is a quote from an Irish Independent article from 2015 :

 

 "Irish consumers pay the fourth-highest energy bills in Europe, according to EU statistics. Little of the large recent falls in wholesale gas and oil prices have been passed on to consumers".

The energy industry and politicians are now blaming high gas prices for the massive rise in electricity prices. In a properly functioning market, falls in wholesale prices would lead to lower bills. It has to work both ways. This clearly did not happen. 

Record Prices hit the Irish Electricity Market

 On Thursday the 9th September, prices in the All Ireland Electricity Market hit record highs of €4,680 per MWh, well over 20 times the normal price :

The scale here is from €0 to €5,000 MWh

What a normal day looks like, prices rise to about €150 MWh

These prices may have had something to do with the UK switching on coal plant that same week, the cost of which can be very high. Margins are set to get even tighter in the UK as this week one of the interconnectors to France went on fire causing wholesale prices to rise even higher there. Low outputs of wind energy have plagued both Ireland and the UK for many months now. In essence, high prices in the electricity market go hand in hand with low amounts of reliable generation.

There have been three Amber Alerts and seven Notifications of Tight Generation Margins issued this month in the Single Electricity Market (SEM). An Amber Alert means there was expected to be enough energy to meet demand, but possibly not enough in reserve should something go wrong. They can also be issued if there are significant frequency / voltage deviations which can happen when there aren't enough large power stations on the grid. The notification of Tight Generation Margins seems to be a prelude to an Amber Alert. 

System Alerts can go from Alert (Amber) to Emergency (Red) to Blackout (Blue) and finally to a Restoration state. Up to the end of August of this year there have been six system alerts on the grid. In the previous decade, they averaged just one per year.

Wind Industry Admits Wind Energy Costs Money

But claim only as little as €1 per person

A recent Irish Wind Energy Association report has stated that the total net cost of wind energy to the consumer has been one euro per person per year since 2000. It is an interesting report for a number of reasons, not least, that this is the first time the wind industry in Ireland have admitted that wind energy costs money. 

The total cost calculated was €0.1bn, but this includes savings from not having to pay EU fines of € 0.7bn. Since it now looks like we will miss our targets regardless of how much more Ireland invests in wind (and unlikely in any event that the EU will impose fines on Member States), the actual cost then of wind energy according to the report was €0.8bn , eight times the cost claimed.  

Their calculations were based on wholesale price and capacity payments savings of €2.5bn  on one side and costs of €3.3bn on the other side arising from the PSO Levy, DS3, grid investment and constraint costs. This is the first time that the wind industry have acknowledged that these last three costs are directly related to increased levels of wind. This blog has argued that they should be included as wind related costs for many years now. 

I have shown before that the link between higher levels of wind and lower wholesale prices is tenuous. Wholesale prices are actually rising as investment in wind is at it's peak. The wind industry report used models to calculate their wholesale price savings rather than real data. I can no longer find any real time pricing data on the new SEMO website.  But if it is really the case that wind has led to €2.3bn in wholesale price savings plus €200m in capacity payments savings, then that means that power stations have taken a hit of €2.5bn over the 20 year period, with some additional revenue of €0.5bn from additional constraint payments. So about €2bn in lost revenue, the equivalent of about one whole year of wholesale payments lost to fossil fuel generators.  There is some evidence that has come out in recent days that shows that power stations are now losing money. Last year, ESB were forced to write down the value of two of their power stations. 

Finally, the report admits what I've been writing about for years, that only 10-11% of wind energy can be relied on as equivalent conventional capacity (capacity credit) :

The rate at which wind capacity reduces the capacity requirement is defined by the wind capacity credit, which is around 11% of installed wind capacity.

Under the I-SEM capacity market rules, wind receives a capacity credit of about 10% and OCGTs a capacity credit of about 92%. This means that 1 GW of wind is replaced by 109 MW (= 1 GW * (10% / 92%) of OCGTs.

The Wind Aware Ireland report goes into detail on the various wind related costs (they calculated a cost of € 1.2bn per year). I do not want to rehash all of those points, for those interested you can read the report here. But for further proof that costs across the board are increasing every year as more wind is added, one need look no further than the recent Ancillary Systems Services Report released by Eirgrid. When compared with the same report from three years ago, the costs to maintain back up reserves has more than doubled :

The full IWEA report can be read here.

Decrease in PSO Levy

Most people may have noticed by now a decrease in the PSO levy in recent electricity bills. However, what you might not have noticed is that the unit charge increased from 15.74 cent in May 2018 to 16.72 cent by September, pretty much negating the savings from the PSO. 

As the graph below shows, this is the largest and steepest increase in the unit charge during the past seven years. So as per usual in Ireland the drop in the PSO Levy has not been passed on to most consumers.

Three Reasons Why Wind Energy Policy Needs to be Reviewed

By Owen Martin 

1) Wind has had a Negative Impact on Electricity Prices - many energy companies have stated recently that they will be increasing the price of electricity due to a rise in wholesale prices. Yet, we were repeatedly promised by the powers that be that more wind energy would lead to a reduction in wholesale prices and help reduce dependence on the fluctuating international fossil fuel markets. The fact is that the fall in wholesale prices was barely passed on to the consumer (see graph below). When fossil fuel prices were low, as they were in the past few years (oil hit $40 a barrel in 2016), consumers barely saw a reduction in their bills. Did you notice any reduction ? I sure as hell didn't. We all saw a noticeable difference at the petrol pumps. Why hasn't there been an investigation into this by the Energy Regulator ?

What impact have the 1500 or more wind turbines scattered around the country had on electricity prices ? As far as I can see, they've contributed to higher prices, with hikes in visible taxes like the PSO levy and unseen levies such as the extra grid costs required to transport all this "free energy" around the country.

2) Climate Change - Met Eireann warned last month that more extreme weather is on the way and that another heatwave summer is now twice as likely because of climate change. Other people like Professor Sweeney of Maynooth have said that these events might be even four or five times more likely. Regardless of what you think about climate change, there's an obvious question that needs to be asked - weren't the 1,500 plus wind turbines that we've built supposed to lessen the impact of climate change in Ireland by reducing the burning of fossil fuels and  carbon dioxide emissions?

If you've ever read through a planning application for a wind farms, you will see that climate change is regularly used as justification for the project.  Have you seen less storms recently or less prolonged dry/wet periods ?

Surely we should be seeing some kind of decline in these extreme climate events after spending around €5 to €6 billion on wind energy projects and another few billion on the supporting infrastructure.

Greenies can't have it both ways - if climate change is getting worse then wind energy is obviously not the solution based on past performance.

3) Prolonged Calm Periods - This summer has been catastrophic for wind energy with prolonged periods of little or no wind. If we are to believe the climate experts, more heatwaves are on the way in the future bringing with them anticyclonic regions of persistent high pressure. If wind has made little difference to electricity prices or climate change now, it will have even less in the future as they operate at lower and lower output.

Wind energy has not been very profitable in Ireland with many companies struggling to make money and exiting the market. This can only get worse in the future. Who is going to bail them out ? Of course, we all know the answer.

Record Low Winds, Rising Electricity Bills

The past month saw record low levels of wind energy adding to the woes of an already financially struggling wind industry. The month of June was comparable to the winters of 2009 and 2010 which also saw very low winds, the difference being that back then the temperatures were very low. These long periods of near non existent wind not only undermine the Government's wind plans, but also seriously undermine the viability of wind storage.  This was Gaelectric's plan, to expand into storage, until they went into liquidation. Their remaining wind farm assets have not attracted a buyer over six months later.

Electricity Bills to Rise

With the recent news that electricity prices are set to rise because of rising wholesale prices, consumers may begin to ask questions as to why wind has not reduced the wholesale price as was promised by all the experts when the Government were preparing their wind energy plans. It is a sobering fact that Ireland's electricity market is still subject to the vagaries of worldwide fossil fuel prices despite having 3,000MW of wind farms, enough capacity to meet 85% of total electricity demand on a summers day or over half of demand on a winters day. 

Ten years after the banking crash, Ireland still has no independent organisation that can review Government policy independently, instead we have plenty of "think-tanks" that rubber stamp policy, including the same ones that supported the wild west lending policies during the boom. The ordinary consumers are the ones paying the cost.

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