Too much love will kill you

A Queen-inspired rock musical about a Swedish renewables scheme

Too much love will kill you

If you can't make up your mind

Torn between the lover and the love you leave behind

You're headed for disaster 'cos you never read the signs

Too much love will kill you every time

A renewables scheme in trouble

The Swedish/Norwegian elcertificate system for supporting renewable electricity production is under pressure. The system has successfully produced large investments in new renewable power production at a relatively low cost to the taxpayers. The clever system worked by issuing one electricity certificate per produced renewable megawatt hour of power. The demand side was created by requiring electricity consumers to buy a certain percentage of certificates that are cancelled every year. The present target is to produce 28,4 TWh (terawatt hours, i.e. millions of megawatt hours) of yearly renewable production until the end of 2020.

Up until early 2016 the scheme exhibited great staying power by not favouring any special technology and creating a market with fairly predictable supply and demand.

In the early years, with Nordic power prices at 50 EUR per megawatt hour (MWh) and the elcert at 30 EUR, the system gave the renewables producer a combined income of 80 EUR/MWh. This promoted an explosion of investment, making the early prospectors and investors feel these were the days of our lives. Mostly wind, but also new small hydro and biomass fueled combined heat and power plants were build.

- However, the system turned out to have a dangerous flaw.

In December 2010 Nordic power prices peaked at above 60 EUR/MWh. Then they began a long slide down that didn’t bottom out until early 2016 at just above a terrifyingly low 16 EUR/MWh. With strong development of wind power technology all over the world, the cost of building new production infrastructure fell dramatically, and this made up for the fall in revenue from power. Just as the theory said, there was a negative correlation between power and elcerts; the sum of revenue from power and elcerts should match the cost of investment in new renewables production (plus risk premium).

However, the system turned out to have a dangerous flaw.

The design lacked a stop rule for approving new production above the targeted 28.4 TWh. The scheme’s inventors left it up to the market to stop building prior to or ideally exactly at 28.4 to avoid overproduction of elcerts. Production above the target would produce more elcerts than yearly cancellations. This would accumulate a surplus and, without demand, drive the elcert price to zero.

The architects of the elcert system may have confused the decreasing returns of producing more fossil fuels with the increasing returns of producing more renewables. Extracting more oil and gas will become more and more expensive as the cheaper wells dry out and you need to go to deep sea or fracking. Yet, for every doubling of solar power production, the cost decreases 22%. As a result, a wind turbine built in 2017 is five times cheaper than one built when the elcert-system began in 2003. The decreasing production costs had the downside of killing the negative correlation that was supposed to compensate for decreasing power prices. In 2016 the elcert prices started living their own life, stating I want to break free and disconnected from the power prices.

- What will happen if we overshoot the target?

Despite lower and lower returns, another group of investors turned up: pension funds. With a long-term view and low single digits requirements on return, new money came in and the boom continued. Then a third group of giants, government owned energy companies such as Vattenfall and Statkraft, woke up - late to the party as always. Despite being late, they had the political pressure to go green and essentially build at any economical reality.

Some analysts issued warnings: too much, too fast. What about the missing stop rule? What will happen if we overshoot the target?

Surprisingly, we have only seen a few large scale bankruptcies, but at these price levels, it won't be long before another one bites the dust. And it seems like those players still intent on building are telling the governments in Sweden and Norway that you don’t fool me. We know you will bail us out. We can play the game.

Another blow to the elcert prices came from the Swedish Energy Commission, a cooperative between several political parties to create a long term stable energy plan. They focused on renewables, but also once and for all aimed to kill the almost 40 year old debate about the future of Swedish nuclear power plants. The participants competed in their renewables ambition, and strangely both the ruling parties and the opposition each came out feeling we are the champions. The agreement resulted in an increased target of another 18 TWh renewables to be built before 2030. But it also lowered taxes for the nukes, increasing their potential lifespan beyond the assumed 2021 phase out. The uncertainty of how the system would handle these changes forced elcert prices down from a semi-stable 120 to 90 SEK, showing that too much love will kill you.

- another 18 TWh renewables to be built before 2030

Full panic began in the end of January this year after the yearly elcertificate conference in Norway. Market participants left the conference full of negative news: the 28.4 TWh target had already been surpassed, some very large wind parks were going to be built "no matter what", indications that there would be no fixes to handle the new 18 TWh, etc. One analyst predicted a long-term price range of 40-70 SEK. A steep decline started the day after the conference, bottoming out at basement levels of 43 SEK. Even the newspapers picked up the movements, and ordinary Swedish citizens have begun to learn about elcertificates.

The Swedish Energy Inspection Authority, responsible for maintaining the system together with the Norwegian NVE, defend themselves, saying "it was meant to be temporary, just reaching the target." "The risk was with the investors - it is a market based system, you have to handle the risks.” The architects never intended a system who wants to live forever. But this is not an entirely fair evaluation, as the deal included an expectation of higher electricity prices after 2021, when the Swedish nukes were expected to be phased out. This phase out is now subject to some doubt due to lower taxes for nukes. And you cannot assert it is a normal market when the Swedish Energy Commission chose to suddenly introduce another 18 TWh of renewables.

- it is a market based system, you have to handle the risks

Everyone is now waiting for the Swedish and Norwegian governments to clearly state if and how the potentially new 18 TWh will be incorporated into the existing system and how to avoid oversupply and zero prices.

So far there has only been a cold silence from the Swedish Minister of Energy. The message to wind turbine owners, especially the early ones who invested at five times today's cost, seems to be, it’s a hard life. Investors and lenders desperately want to hear concrete actions from the regulators and no more radio gaga.

The Nordic energy market is facing interesting times; will there be another 18 TWh of renewables build, further challenging the fuel based power production with a zero marginal cost? Will the pioneers building wind power survive with elcerts at 40-70 SEK? Until we hear from the Swedish and Norwegian governments, the focus will be to keep yourself alive.

The large energy companies can take the losses. Despite writing off billions on bad coal and gas assets, they are still protected by their balance sheets. For them, the show must go on. But the smaller and early pioneers, the real renewables heroes, are left with a different tune...

I'm just a poor boy,

I need no sympathy

Because I'm easy come, easy go

Little high, little low

Anyway the wind blows,

doesn't really matter to me,

to me

Text: Founding Partner, Fredrik Bodecker