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OPTIMIZATION OF WIND FARM PROJECTS FOR THE CfD AUCTION SYSTEM

OPTIMIZATION OF WIND FARM PROJECTS FOR THE CfD AUCTION SYSTEM

As the pre-qualification for the auction system will start by 1 May 2015, market players are preparing themselves. From 1 January 2016, RES installations (up to 1 MW and above 1 MW) will compete for renewable support in technology-neutral auctions. For most units from 500 kW the bid parameters will be indexed strike prices in contracts for differences and the volume of electric energy (spread over a 15-year period in even parts every 3 years). Bidders are limited in their bid price to a technology-specific reference (ceiling) price - to be published by end of 2015, although public consultations will start most likely during summer this year. The reward will be pay-as-bid. The winning entity/RES installation at auctions will be required to deliver the offered electricity volume, with volume settlements made for 3-year periods; a penalty of 50 per cent of the (strike) price will be applicable for undelivered electricity; in its current form, this obligation has been relaxed, so that only 85 per cent of the contracted volume has be delivered to avoid a penalty – and bidders may risk to start at p50 production.

 The winner for large-scale auctions above 1 MW is expected to be onshore wind with reasonable CAPEX and OPEX costs and a p50 production substantially north of 3,000h/a. Investors with good wind sites and a technological concept should be able to achieve an adequate return. Furthermore, Contracts for Difference (CfD) are a different asset class to green certificates as they have a substantially lower risk profile. The major risk with a CfD is whether on a daily basis a RES generator sells above or below the day-ahead average at the Power Exchange. This seems to be a risk that can be handled by merchant traders or off-takers – in the past Polish wind farms generally sold about 7% below the day-ahead average. With more peak-load technologies such as gas power plants or PV to enter the market in the coming years the gap is expected to increase. Anyway, no other mid- or long-term risk has to be taken on a 15-year basis - even indexation is covered by the CfD. Institutional investors have already declared their interest in investing in RES generators. Therefore, a far lower return on equity will be accepted by future purchasers of commissioned projects. Additionally, financing banks seem willing to accept higher debt-equity ratios with decreasing margins and may finance on p75 production in case the wind campaign is done properly to diminish long term risk. On the other hand, institutional investors require highly professional documentation – so far often a weak point with projects in Poland.

 Many wind farm projects may need to be optimized and re-permitted to be competitive. Many developers face the dilemma whether to push a slightly optimized wind farm project into the first auction or to undertake a reasonable re-permitting to start at the second or maybe even third auction. Another important question is which type of re-permitting is possible after a successful auction. As turbine prices will most likely drop substantially once auction systems are implemented all over Europe, there will be further potential for decreasing costs.

 To pre-qualify for an auction, an investor has to present:

 

  • the exact location(s) of the RES generator and the installed capacity;

  • a master plan or, alternatively, a planning permit to prove the project is permitted;

  • grid connection conditions (at least 6 months valid) or a grid connection contract (with an end date no later than the end of March 2019, but with a connection date no earlier than before the auction takes place);

  • a valid (not final and enforceable) building permit for the RES generator, and

  • a schedule of works and expenditures.

 For those who succeed in pre-qualification, the Energy Regulator will issue a certificate valid for 12 months allowing them to participate in every auction that takes place within that period. The offer at an auction indicates the exact location(s) and the total installed capacity for the type of RES generator devices. In case of successful auction, this offer will be accepted and a contract for difference will be concluded between the RES generator and OREO, a newly established state-owned settlement agency.

 The RES Act does not specify the exact meaning of “location” - namely whether the term should be detailed (i.e. plot numbers) or more general, such as a city or precinct. The RES Act is also unclear on whether an installation consisting of set of devices must consist of the same number of devices as listed in the building permit, or whether this number can be altered as long as the total power capacity is unchanged (for instance, is it possible to alter the building permit, having previously won the auction, replacing 12 WTG, each of 2.5 MW with ten WTG, each of 3.0 MW?). Nor is it clear whether the volume of power capacity of a particular set of devices should be treated as fixed or maximum – for instance, if having previously won an auction the operator would be permitted to replace 10 WTG, each of 2.5 MW with 10 WTG, each of 2.4 MW. Clarification is needed, especially regarding the transfer of devices to other plots or a cut in the number of devices (e.g. through closure of some locations) having the same total power capacity as initially, which would in turn necessitate an updating of the applications. It is unclear whether such action will be permitted following the lodging of an application or the winning of the auction. The inclusion of both location and power in the RES Act places them in an equal position, while the concern of the drafters of the legislation was the transferred and delivered power the winner of the auction is obliged to produce.

 Further doubts are cast by the lack of a legal definition for the term “valid” (Polish: prawomocność). Nor does the RES Act clearly specify whether the term should be understood as referring to non-appealable decisions of the administrative court or decisions with respect to which the period for appeals has expired. In this case, it would be preferable to apply the Administrative Procedure Code. Given that the proceedings in Poland often move slowly and that the RES Act requires building permits accompanying an application to be valid for at least six months as at the date of the application, it is unlikely a “final” building permit in the meaning of the Administrative Procedure Code - which allows construction to commence even if challenged before the administrative court – could not have been attached to the application for notification to enter the auction. 

 A legal and technical feasibility review of promising onshore wind farm projects is strongly recommended to set the course for optimal strategy at auctions and to leave the door open for further cost savings.

 Cost savings can be discovered in a number of ways, including through:

 

  • Reviewing the permits for resubmission or reviewing the permit application before submission can provide flexibility during the wind turbine selection process to maximize the range of suitable wind turbine manufacturers and models for the Project.

  • Flexibility in permitting allows for the re-negotiating of agreements with turbine manufacturers with a pro-active approach regarding increasing availability rates (and production figures) and improving warranty terms to better satisfy institutional investors.

  • An accurate pre-construction Energy Resource Assessment (EYA) for a wind farm project is of paramount importance for the investment to be successful. A well-designed and well-executed wind measurement campaign, as well as the assessment of the data, are of great value for establishing a realistic financial model of a wind farm.

  • Re-negotiating lease and easement agreements with land owners and lease agreements with municipalities and re-designing cable lines to optimize costs for easements and payments to municipalities for cable corridors.

  • Professionalization of project engineering with the aim of the client being able to tender for separate orders for turbine supply, earth works & foundations and electrical works to avoid EPC premiums as well as contract and claims management to enforce proper documentation required by institutional investors and to prevent construction companies achieving “savings” by using inadequate quantities of construction material or to make excessive claims for extra payments.

  • Tax optimization of real estate tax, company tax on profits, investment tax-breaks etc.

  • Opportunities to increase revenue from a wind farm project by reviewing the O&M strategy and re-designing the O with a separate M before construction to reduce OPEX and increase revenue.

  • Re-designing documentation, including electronic documentation for better Asset Integrity (and therefore higher Asset value), better claims management and better predictive maintenance (which means reduced downtime and increased revenue from the project).

 

(By Christian Schnell, Partner, Radca prawny, Solivan Adwokaci i Radcy Prawni, www.solivan.pl)


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