HOW SHOU LD A STOP MECHANI SM FOR THE
EL EC T RI C I T Y C ERT I FI C AT E MARK ET BE D ESI G NED ?
NVEs vin d krafts emin ar 2 0 1 8
M a r i u s H o l m Re n n e s u n d , T H E M A C o n s u l t i n g Gr o u p
T h e b a l a n ce d ete rmi n e s th e p ri ce s af te r a vol u me or d ate stop
Wh en th e sto p r u le kic ks in :
• The pro ductio n capacity is given
• The quo ta o bligatio n fo r the entire pe r i o d i s gi ve n
Tw o c o n s t r a i n t s o n t h e p r i c e f o r m a t i o n :
• Balancing supply and demand fo r the entire
pe r i o d: Pro duc t i o n i n no r mal ye ars fo r t he pe r i o d fro m t he sto p r ule kicks in to 2045 ce r t if icate de mand f ro m t he sto p r ul e ki c ks i n to 2 0 4 5
• Sufficient supply in each year : Annual demand an n u al s u p p l y o f c e r t i f i cate s + c e r t i f i cate
inve nto r y Unc er tainty :
• Annual c e r t if icate pro duc t io n
• Annual c e r t if icate de mand
• Pr ic e dy namic s
Th re e p o s s i b l e s c e n a ri o s a ft e r t h e s t o p ru l e ki cks i n:
Ba l a n ce o r to o m u c h
inve stme nts with a pro bability of scarcity in certain years To o l i t t l e i n v e s t m e n t s – th e
ta r g e t i s n o t m e t
To o m uc h i nve stm e nts, but no ye a rs w i t h p ro b a b i l i t y o f s ca rc i t y 1
3 2
Underlying dynamics Uncertainty and variations
Be f or e s c ar c i t y Af t e r s c ar c i t y
Likely price development
Fou r a l te rn ati ve s a re a n a l yse d *
§ The o ppo r tunity to invest is clo sed when facilities with a no r mal year pro ductio n o f 46.8 TWh are o nline
§ The sto p r ule might take effect any time between 2020 and 2046, but mo st likely well befo re 2030
§ Inve st me nt s must be co mplete d befo re a ce r tain date ( mo st like ly 3 1 /1 2-2030) to be awarde d elcer tificates
§ Whe n a c e r tain vo lume is met , inve sto rs get a pre-spe cifie d t ime to co mplete inve st me nt s
§ Example: When 44 TWh is invested in, investors get 2 years to complete investments in order to be eligible fo r elcer tificates
§ The mar ket is extended with an increased target
VO LU M E S TO P
* For al l al te r nati v e s, w e base the anal y si s on the assum pti on that a pr oj e c t i s r e al i se d i f i t can r e ac h a posi ti v e N PV on power pr i ce al o ne
VO LU M E + DAT E S TO P
EX T EN D M AR K ET 1
3
4
DAT E S TO P
2
The target will most likely be met long before 2030
With an expected continuation of investments in the early 2020s, the 46.4 TW h target is met in 2026
The m a r ket m ay show posit ive pr ic es, but is t here a need for quota a dj ust m ent s?
§ Me eti n g th e ta rget b efo re 2 0 3 0 i s n o t n e c e ssa ri l y a problem with a volume stop
§ As l o n g a s t h e re i s a p ro b a b i l i t y o f s ca rc i t y at a point in time prices will stay positive (but not necessarily high)
§ Pr i c e d eve l o p m e nt s d e p e n d e nt o n
§ Inve stme nt p ro f ile vs. q u o ta c u r ve
§ We a t h e r p a t t e r n s
§ A key q u e st i o n i s i f t h e m a r ket s h o u l d b e c l o s e d i n 2041 an d th e q u o ta c u r ve ad ju ste d
§ If so, th e re i s n o e sta b l i sh e d ru l e fo r th e ad ju stme nt
Volume stop
1
0 1 2 3 4 5 6 7 8
2018 2020 2022 2024 2026 2028 2030
Investment vol ume T Wh
Wi n d N o rw a y Hy d ro N o rw a y Bio Norway PV Nor way Wi n d S w e de n Hy d ro Sw ed e n Bio Sweden PV Sweden
Al l p r oj ect s i n v es t ed i n a r e prof i t a bl e on t he power pri ce alone and are invested in as soon as they reach a positive NPV
There could be scarcity in single years even when the target is met
Maintaining a positive price
We a t h e r s i m u l a t i o n s s h o w proba bilit y of sca rc it y
The pr ic e is posit ive for t he re m a i n d e r o f t h e m a r ke t
Volume stop
1
Scarcit y most likely in 2 0 2 1 and
af te r 2 0 4 0
W i th a n a d j u ste d q u ota cu r ve , we get a l owe r p rob a b i l i ty of f u tu re sca rci ty
Adj usted quota c ur ve if ta rget is met in 2026 – market ends in 2040
The pr ic e stay posit ive wit h t he adj usted quota cur ve
Volume stop
1
We s t i l l g e t a p r o b a b i l i t y o f f u t u r e sca rc it y – but it ha s dec rea sed
Highe r de mand fr om 2 0 2 5 to 2 0 4 0
No de mand af te r 2 0 4 0
Tr a n s p a r e n c y m i g h t b e a problem – prequalif ying necessar y?
• The regulato rs pre-qual i f y pro j e c t s unt i l 4 6 . 4 TWh is met based o n o bj ective cr iter ia
• Sh o u l d i nve sto rs b e o b l i gate d to b u i l d i f t h ey are prequalified?
• Can the investor decide not to build and let some b od y e lse get t h e volu me ?
• Sh o u l d t h e re b e a n p e n a l t y i f t h e i nve sto rs wi t h d raw t h e i r p roje ct afte r i t h a s b e e n prequa lified?
• If s o, ho w hi gh s ho ul d the pe na l ty be ? Volume st op
1
DR I V E RS FO R OV E R I N V EST M E N TS TARG ET MET IN 2026, SIG NIFIC ANT OV ERINV ESTMENT
T h e ta rget mi ght or mi ght n ot b e met wi th a d ate stop
Mo st l i ke l y we w i l l se e a l a rge ove ri nve stme nt*
Dat e st op
§ Fa l l i n g L R M C o f w i n d
§ H i gh e r p owe r p ri ce s
§ Ab i l i ty to attra ct p l aye rs wi th «l ow»
exp e cte d retu rn s
§ Low cost of capital
2
0 1 2 3 4 5 6 7 8
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Investment
vol ume T Wh
Wi n d N o r w a y M W h Hy d r o N or w a y M Wh Bi o N o r w a y M Wh PV N o r w a y M W h Wi n d S w e de n M W h Hy d r o S we d en M Wh Bi o S w e d en M Wh PV S w e d en M W h
Any date stop af te r 2 0 2 6 is like ly to l e a d to ov e r i n v e s tme n ts i n ca pa ci ty
A d ate stop wi l l most l i ke l y l e a d to exce ss i nve stme nts a n d a p ri ce col l a pse
No scenarios with negative surplus
sc en a r ios af ter 2 0 2 0 Collapsing prices af ter 2 0 2 0
Date stop
2
Large expected surplus and low
proba bilit y of f ut ure sca rc it y
H ow wi l l a comb i n e d d ate a n d vol u me stop work?
Volume + dat e st op
3
2018 2030
PH A S E 1 VO LU M E S TO P
(EX. 44 TWh)
PH A S E 2 DAT E S TO P
(2 YEARS)
2027 2025
The volume target will most
like ly be me t be fore 2030 § We mi g ht e xpe ri e nce a n inve stme nt rush to be online by t he de a dl i ne
§ Ri sk of ove ri nve stme nt
TA R G E T O F 4 4 T Wh IS MET IN 2025
T h e ta rget mi ght or mi ght n ot b e met wi th a vol u me + d ate stop
Mo st l i ke l y we w i l l se e a l a rge ove ri nve stme nt*
Volume + dat e st op
* In the or y i nv e stm e nts coul d sl ow dow n so m uc h that w e don’t m e et the tar get, but w e se e no si gns of suc h dev e l opm e nt
§ With a like ly spe e d of inve stme nts we wi l l h ave i nve ste d i n 44 T W h by 2025
§ The key question is how long the time p e ri od f rom th e vol u me ta rget to th e d ate target will b e
§ If it is too lon g we wou ld like ly se e an i nve stme nt ru sh wi th tota l i nve stme nts go i n g a b o ve t h e ta rge t
2
0 1 2 3 4 5 6 7 8
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Investment
vol ume T Wh
Wi n d N o r w a y M W h Hy d r o N or w a y M Wh Bi o N o r w a y M Wh PV N o r w a y M W h Wi n d S w e de n M W h Hy d r o S we d en M Wh Bi o S w e d en M Wh PV S w e d en M W h
? ? ?
W i th a 2 ye a r d ate ta rget, we i mme d i ate l y se e a p ri ce col l a pse
There is a great dif ferenc e in t he pr ic e developm ent wit h 1 yea r a nd 2 yea r date ta rget
Volume stop
1
As long a s t here is a proba bilit y of sca rc it y, pr ic es will st ay p o s i t i v e
1 ye ar 2 ye ars
Fou r Al te rn ati ve s a re An a l yse d a n d Vol u me Stop Comb i n e d wi th Tra n sp a re n cy Me a su re s i s th e Prefe rre d Opti on
§ Ta r g e t i s m e t
§ No ove rinve stm e nt
§ Mo st l i ke l y po s i ti ve pri c e s
§ Re l a t i v e l y s t a b l e p r i c e d e v e l o p m e n t ex p e c t e d
VO LU M E S TO P
Date stop
VO LU M E + DAT E S TO P
EX T EN D M AR K ET 1
3
4
DAT E S TO P 2
§ Di ffi c ul t fo r i nve sto rs to k no w w he n ta rg e t i s l i ke l y t o b e m e t ( w i l l I o r will I no t receive certificates )
§ Po t e n t i a l l y v e r y h i g h p r i c e s i n s i n g l e ye a rs i n c a s e o f s c a rc i t y
§ Tr a n s p a r e n c y m e a s u r e :
§ Database w i th pr e qual i f i e d pr oj e cts
§ Ea s i e r fo r i nv e s t o rs t o k n o w i f t h e y are e ligible fo r e lc e rtificate s
§ La rge pro ba bi l i t y o f o ve ri nve st m e nt
§ Unstable prices mo st likely go ing to ve r y l o w l e ve l s a t a n e a r l y p o i nt i n ti m e
§ We c o u l d a l s o g e t t o o l o w
inve stm e nts w ith ve ry high pric e s
§ Price stabilis ing meas ures might be ne e de d
§ End up with a f e e d-in tar if f
§ Gives more transparency than a pure date sto p
§ Ta r g e t m i g h t o r m i g h t n o t b e m e t
§ Unstable prices go ing to very low o r ve r y h i g h l e ve l s
§ Co m pl i cate d m e c ha ni s m
§ Price stabilis ing meas ures might be ne e de d
§ End up with a f e e d-in tar if f
§ A s moother end to the system?
§ Swe de n has an am bitio us lo ng te rm RES ta rget
§ Wi nd re a c he s g ri d pa ri t y – no ne e d fo r e l c e r t s
§ Ze ro p r i c e s h u r t i n g t h o s e i nv e s t i n g
«e a rl y»
§ Co m pati bl e w i th a gre e m e nt w i th No rway?
§ Price stabilis ing meas ures might be ne e de d
§ End up with a f e e d-in tarif f
PRO CO N AD D I T I O NAL M EASU R ES NE E D E D CO N C LU S I O N S
