Sunny outlook for concentrated juice

Can concentrated solar power (CSP) become economically competitive with more established power generation? The European Investment Bank (EIB) thinks so. Here it explains why it is financing projects that employ this fledgling technology.

Concentrated solar power (CSP) has in recent years been revitalized in Europe, notably in Spain, and the rest of the world. Four CSP projects are under construction in Spain in which the EIB has participated in the financing of: Andasol 1 and 2, based on the solar trough technology, and Solucar’s PS10 and PS20, two projects that use tower-mounted central receiver technologies.

PS10 is in its first year of operation and is undergoing fine-tuning. It will be the first commercial application of central receiver technology in the world. PS20 will be inaugurated next year, as will Andasol 1. Andasol 2 should begin operation in 2009.


Concentrated solar power is set to play a big role in reducing the European Union’s greenhouse gas emissions
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This renewed interest in CSP occurs as the energy sector again faces a phase of change, this time related to changes in the oil market and to policies on climate change. The possible dire consequences for the world, both economically and socially, have put climate change on top of the political agenda of many countries. Nevertheless, the view that it is necessary to take strong action and to dramatically reduce greenhouse gas (GHG) emissions is very recent.

The EU view is that world GHG emissions should be decreased by up to 50 per cent compared with 1990 by 2050 because this will limit climate change to 2à‚°C. This dramatic cut implies a revolutionary change in energy activities, because production and consumption of energy account for two thirds of total world emissions.

Such a revolution would require a substantially accelerated penetration of low-carbon energy technologies into the world energy system. This rapid expansion has to be placed in the context of an acceleration of technological progress in the energy sector in general, particularly in the last three years.


Solucar’s PS10 is in its first year of operation, and once optimized will be the first commercial application of tower-mounted central receiver technologies
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A basic principle of prudence would require that viable renewable energy alternatives, which will potentially become competitive in the medium term, begin to be prepared and the rate of deployment be accelerated. In this context, the EIB took the decision to support the CSP sector both through the financing of its first commercial applications and through financing of related corporate R&D.

The market penetration of new energy technologies has been slow in the past. Studies show that the growth on a global scale of today’s primary energy sources from an embryonic form to a significant market position took about a century1. This implies that we need to accelerate the technological development and penetration of new low-emission technologies through policy intervention if we want to achieve GHG emission objectives. And as indicated in the “Stern Review”, innovation is, by its nature, unpredictable.

So the uncertainty and risk inherent in developing low-emission technologies is ideally suited to a portfolio approach. Will CSP be part of the portfolio of technologies that deserve to be supported?

CSP appears clearly as one of the candidates to be part of the portfolio. Solar technologies, including CSP and photovoltaics (PV), have the technical potential to generate several times over the electricity production of the world without creating problems to do with land suitability or availability. However, the key question is whether CSP can become competitive with other forms of energy in a reasonable time.

CSP cost reduction potential

CPS technologies are in the early market penetration phase. They hold the promise of becoming competitive with fossil fuel technologies in about 15 to 20 years if two factors are realized concurrently: an important deployment of capacity and a focused R&D effort aimed at lowering the costs of many of the technologies’ key components.

New CSP projects produce electricity at a cost of about €200/MWh, while the cost of baseload electricity generation in new combined-cycle gas turbines in the EU is of the order of €60/MWh2. If we include the cost of CO2, this increases to close to €70/MWh (for a price of €30/tonne of CO2).

However, the comparison with conventional baseload electricity is not fully pertinent. On the positive side, solar electricity may have a higher value than baseload electricity if it is produced in peak, medium-load periods, which is likely the case in places with high solar irradiation.

Additionally, solar electricity costs are not exposed to the volatility and uncertainty of the future price of fossil fuel and CO2 price developments. On the negative side, solar electricity is variable and has a lower value than electricity from conventional plants that can provide firm capacity.

An alternative approach is to compare solar electricity with the cost of mature renewable technologies, notably wind. Wind energy costs vary substantially depending, notably, on the wind resource. In the EU, at a marginal onshore wind farm, the cost can reach an estimated €80/MWh. On a global level, there is still substantial wind potential to be exploited, and costs of €50/MWh can be easily achieved in windy areas. However, as indicated, solar may have an additional advantage in relation to wind energy it is produced in peak periods.

Various experts have analyzed the cost reduction potential of the main CSP technologies. The ECOSTAR3 study stated that feasible cost reductions resulting from focused R&D are 25-35 per cent for most CSP technologies. To this would be added the effects of volume production or scaling of the capacity of plants to beyond 50 MW.

For parabolic trough technology the same study quotes another study by Sargent & Lundy4, which estimated a cost reduction of 14 per cent by larger power blocks (400 MW) and 17 per cent by volume production effects when installing 600 MW per year. Assuming similar figures for other technologies, the ECOSTAR study concluded that an overall cost reduction of 55à‚—65 per cent could be expected in the next 15 years.

Cost reductions of this magnitude would bring levelized energy costs to about €65/MWh in southern Spain and about €50/MWh in North Africa. The studies suggest that an investment equivalent to that of about 50 plants of 50 MW each over the next 15-20 years could make these overall cost reductions real. In 2004 prices, considering that the investment cost in the first plant would be about €300 million and in the last plant would be about €120m, the total cost of this investment would be about €10.5 billion. At the end of the period, there would be 2.5 GW of solar capacity installed.

In addition, CSP could then be rapidly and massively deployable. A CSP plant today takes 1.5 to 2 years to build. But with accumulated experience, this time should shorten significantly. The World Bank has assessed the market development of CSP5. It concluded that commercial competitiveness could be achieved with 42 to 22 GW of installed capacity, thus much higher than the Ecostar study. However, the study is based on a much lower cost of electricity than Ecostar.

The comparison with the cost of other renewable technologies is difficult because for most of them, their costs are expected to decline substantially in coming years. Two technologies appear to be the main competitors to CSP: wind energy and PV. The investment costs in wind energy are expected to decrease moderately in the medium to long term by around 20 per cent. PV costs are expected to continue to decrease rapidly in coming years, by around seven per cent per year in Euro terms.

Financing projects

The EIB has taken measures to reinforce its contribution to the energy and climate change policies of the EU. Energy became a new lending priority in 2006 in the bank’s Corporate Plan, including five sub-priorities within energy6.

An annual sub-target of a minimum of €800 million for renewable energy financing has been established, and this figure is expected to increase in the future. A key objective in the renewable sector is to contribute to the development of new markets for renewables, notably the less developed markets in the EU and in developing countries. Another is to contribute to the development of new renewable energy technologies. The latter is particularly relevant to CSP. In addition, the EIB and the European Commission have jointly developed the Risk Sharing Finance Facility (RSFF), mainly geared towards allowing the assumption of higher direct risk in R&D and innovation projects.

In this context, the EIB decided to actively finance the deployment of CSP projects in Spain, given that the latter has created an environment of stable tariffs that allows commercial applications of CSP technology to be financed by the banking sector on a so called project-finance basis. Project finance is a technique that allows projects to be financed on the sole basis of the cash flow that they generate.

In this case, the bank will carry out a detailed evaluation of the project’s construction, operating and revenue risks, and their mitigation and/or allocation to investors, suppliers, off-takers and lenders through contractual arrangements, partial bank guarantees, insurance and other means. The main characteristic of the financing is that it is done either without recourse or with only limited recourse to the sponsors.


Installation of mirrors at the Andasol 1 project, which utilizes solar trough technology:
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Project finance allows highly leveraged structures that permit the sponsor’s equity to receive a fair return that would not be possible otherwise. Most renewable power projects in Europe are financed on this basis. The initial experiences with CSP project financing in Spain suggest that this is the appropriate way to go. As experience accumulates in the sector, the technological uncertainties related to performance will diminish. This fact, combined with the financial sector’s increasing experience in the creation of CSP-specific project financing blue prints, should permit ever faster implementation of projects.

The EIB has adapted its own project-financing standards to seek a maximum complimentarily with the sector, seeking to offer value added to both financiers and sponsors. By assuming the largest shares of direct project risk, the EIB strengthens the deals. It also provides refinancing facilities for the participating banks. In addition, the EIB is financing corporate R&D in renewable energy. The €109 million loan to Abengoa in 2007 and the €230 million loan to Gamesa in 2004 are examples of the type of loans that can be put forth to help accompany the research efforts of corporations active in the renewable energy sector.

Conclusions

The CSP sector has the potential to become competitive with other alternative renewable energies and with fossil energies in a reasonable time. To achieve competitiveness in a short time and in the most effective way, the government support mechanism plays the key role. Incentive mechanisms have to favour cost reductions and limit uncertainties over future regulatory developments. The latter is very relevant to new technologies like CSP, which is in a very early phase of penetration into the market. Uncertainties prevent development of long-term plans to achieve scale effects and to invest in innovation.

At the early phase of development of a new technology, such as is the case for CSP, the sector is characterized by the presence of small and medium-size enterprises that manufacture equipment. These enterprises are normally the ones that promote innovation in the sector. They are generally undercapitalized and under-funded. Additionally, even if a financial support mechanism has been put in place to support the expansion of CSP, there are often regulatory and permitting issues that may create obstacles to the development of the market.

Therefore access to risk capital and appropriate financing is critical in the early phases in the development of a new industry and in new regulatory frameworks. Project financing mechanisms, made possible by stable and adequate tariff regimes, allow projects to be adequately financed despite these limitations. EIB intervention in the CSP sector aims to facilitate the market expansion of CSP and to provide financing to innovative enterprises in the sector. The EIB can provide financing packages adapted to the needs of the projects, given its experience and capacity to evaluate the technical and economic risks of these projects. The EIB also has specific instruments to support corporate R&D projects.

The EIB has played a benchmarking role in some renewable transactions and promotes the development of new renewable energy markets, where regulatory frameworks in general or for a particular technology are still relatively untested. The latter is particularly relevant in new renewable energy markets in the EU and developing countries. In the latter case, the EIB often works in cooperation with other international financial institutions. It can be foreseen that after a few years of development in the south of the EU, projects may begin to materialize in North Africa, where energy outputs can be 20 per cent higher. The potential for other less developed countries in the sun belt to benefit in a similar manner is also very high. Are we at the beginning of a new large energy industry?

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1From P. Lund, “Market penetration rates of new energy technologies”, Energy Policy 34 (2006)

2In the gas baseline price scenario of the IEA, 2006

3ECOSTAR à‚— European Concentrated Solar Thermal Road-Mapping, 2004

4Assessment of Parabolic Trough and Power Tower Solar Technology Cost and Performance Forecasts”, Sargent & Lundy, 2004

5Assessment of the World Bank/GEF strategy for the market development of concentrates solar power, 2006

6EIB Corporate Plan, 2006. The five sub-priorities in energy are: renewable energy; energy efficiency; research, development and innovation in energy; security and diversification of internal supply (including TENs-E); and external energy security and economic development (neighbour and partner countries).

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