Evaluation of the National Energy Investment Opportunities in Wind Generation in the UK - Essay Example

? Evaluation of the national energy investment opportunities in wind generation BY YOU YOUR SCHOOL INFO HERE HERE Project scope To determine the long-term and short-term viability of investment in wind power technology based on research data and the current energy market in the United Kingdom. 2. The UK Energy Market The current energy market in the United Kingdom is undergoing considerable diversification, transitioning from reliance on fossil fuels and carbon-generating systems to a wide variety of cleaner, renewable energy sources. Many of these improvements in infrastructure and energy generation have been mandated by certain European Union agreements, governmental regulation, and corporate-based interest in the investment opportunities for more efficient energy systems. The current energy market consists of nuclear energy technology, hydroelectric systems, fossil fuels (i.e. coal and petroleum), with a sudden emergence in recent years of wind power development processes. This research project will focus specifically on electrical energy, with major players including nPower, E-On, Scottish Power and EDF (Boilers Prices, 2012). Currently, 91.4 percent of all electricity utilised in the UK come from traditional, non-renewable sources which indicates a need for further growth in renewable technology in this market. The entire UK energy market is currently valued at over ?28 billion (Research and Markets, 2008), which represents significant profit opportunities for the Big 6 energy providers, corporate investment and various venture capitalists looking for return on investment in energy. Passing of the Planning Act in 2008 provided new opportunities for all of these firms and independent investors to contribute more capital to infrastructure development by establishing a singular consent regime advocating more liberal government-mandated policies for what is referred to as Nationally Significant Infrastructure Projects (Sustainable Development Commission, 2012). 3. UK renewable energy strategy The European Union has been integral in dictating policy regarding the renewable energy strategies for member nations. In 2001, the EU Renewables Directive proposed a target for member nations to achieve 22.1 percent development of renewable electricity (Dept of Energy and Climate Change, 2010). This Renewables Directive highlights specific, incremental steps necessary to achieve this target including solar photovoltaic, hydroelectricity and wind power. The UK share of this directive was to be 10 percent renewable electricity by 2010 (DECC, 2012), a target met when including wind and other renewable project developments in the UK. Currently, renewable electricity accounts for 9.6 percent of total UK renewable delivery with a significant surge in wind technology since 2007, a rise in output of 120 percent annually (Guardian.co.uk, 2011). Figure 1 illustrates the significant growth in renewable with an emphasis on wind power from 1997 to 2007. Figure 1: National Statistics Illustrating Growth in Renewable Energy Sources Source: uk-air.defra.gov.uk/reports (2009). Statistics on Renewable Energy Improvements 1997-2007. Growth in renewable technology is being promoted by national government, local community government, corporate investment, and even consumer sentiment about sustainable living that influences both policy makers and development of investment firms dedicated to improving renewable energy source production. For instance, the Carbon Trust, an independent yet governmentally funded company is currently a major advocate for renewable energy sources, reinvesting capital from various commercial activities and reapplying this capital to achieve this mission (Carbon Trust, 2012). Partnerships between governmental actors, corporate investors, and independent companies like Carbon Trust have assisted in making progress to have more transparent renewable markets internationally and domestically. They have influenced the implementation of the Climate Change Bill, a measure providing liberalisation, incentives and regulation to assist in providing the UK with cleaner energy sources (Anderson and Bows, 2008). The renewable market, however, is limited by the incrementalism mandated by UK government and the European Union, allowing for only small-scale periodic developments of low-carbon electricity sources. It is currently proposed that such changes to current power infrastructure should equal maximum capacity of five megawatts (DECC, 2012). This somewhat limits the funding available for renewable energy development as these incremental changes proposed by the UK and the EU are generally what is supported in grant allowances and other incentives funded by government. 4. The UK wind market One sector with the most development and diversification is the renewable electricity market, especially wind power. There are currently 138 offshore and onshore wind farms in the UK, not including Wales, which maintains 40 of these renewable energy farms (BWEA, 2012). To illustrate the rapid growth potential of wind farm development, there are currently 43 additional wind farms under construction in the whole of the UK (BWEA, 2012). Much of this rapid growth in wind technology is being supported by the Offshore Wind Developers Forum co-chaired by the Energy Minister as a means of removing barriers to development (DECC, 2012). This partnership and many other public and corporate investors work together to establish more effective supply chains, remove market entry barriers for investment firms and venture capitalists, and work with local legislative representatives for real estate issues and development projects. There are a significant volume of grants, also, that are being provided to companies and investors looking to enter the value chain for wind technology. For instance, in 2010, the government provided Siemens a ?5 million grant to develop next-generation windmills offshore, with a guarantee to use this next-generation technology to integrate into the broader UK infrastructure for wind technology (DECC, 2010). Such grants are being provided to those companies and investors that comply with all of the regulatory mandates from the EU and national government, designed to incentivize the urgency of development and its viability to improve diversification of the current electrical grid. 4.1 The viability of wind technology Currently, the United Kingdom is the second-largest exporter of wind technology and wind turbines (Appleyard, 2009). The UK maintains 82 percent revenue share in this sector, making it the most profitable nation for turbine exportation (Appleyard, 2009). This is due to growth in the supply chain for manufacturers that have developed production systems dedicated to assisting in meeting EU and national government guidelines for diversification of electricity. Recent weaknesses in the British Pound have made it an incentive for foreign nations to import UK-produced turbines and other wind technologies, providing mutual gain for both the UK and corporate producers. By 2020, it is estimated that over 5,800 workers will be employed in wind export activities, thus improving the national economy (Appleyard, 2009). Incentives referred to as Feed-in-Tariffs (DECC, 2010), renewable energy payments, and advanced renewable tariffs are being launched in the UK as a means to stimulate more growth in production and exportation of wind technology. These involve guarantee of long-term development and implementation projects (as a revenue guarantee to companies) as well as cost compensation associated with all elements of the value chain from planning through final launch. This provides overall price certainty in certain phases of wind technology development to give corporations and investors more return on investment and taxation breaks (Lipp, 2007). As identified by research, the government puts considerable effort into reducing barriers and incentivizing more capital investment in export activities and ensuring a greener electric infrastructure for the entire UK. 4.2 The current supply chain of wind technology The supply chain for wind technology is highly complex and involves multiple stages ranging from planning to final maintenance of launched turbine systems. The following represents the rather standardised supply chain concept as identified by the Dept. of Energy and Climate Change (2010): Development and consenting – Includes environmental assessment and contract negotiation Tangibles – Development and delivery of turbine systems, preassembly of support systems, and transferring transportation. Balance of Plant – Foundation, building, and electrical systems Installation and commissioning Operation and maintenance – Service and grid connection activities Because there are so many players in the supply chain, it would be difficult to isolate the most viable actors in supply. However, Siemens and other major corporations provide many activities related to supply chain including technical support, labour, tangibles delivery, and even balance of plant. Depending on the depth of financing and investment, supply chain actors have many consolidated function within the supply chain and thus are diverse supply partners throughout the chain. Decommissioning activities also occur throughout the supply chain, requiring redevelopment of the environment where wind turbines were once utilized. Major actors in decommissioning are local project planners, corporate investors, and government providing labour for environmental studies (DECC, 2012). As is illustrated by the supply chain complexities, it can be a costly and labour-intensive process from development to completion that requires multiple expertise and tangibles deliveries. 4.3 Entrants in the wind market Because of grants, tariff changes, local and national funding, and long-term contract agreements, the barriers to market entry are quickly breaking down, which impacts investors and corporations domestic and international. Michael Porter (2012) identified the Five Forces that impact success when attempting to gain market share in a chosen market. One of these is the potential bargaining power of suppliers. In earlier years of wind power development, the supply chain was dominated by corporations that maintained high market capitalization and cash flow, which limited the bargaining power of local planners and government. However, with many more entrants being lured into the market in all aspects of supply, there is much more opportunity for bargaining price and negotiating delivery timelines as supplier switching costs have raised considerably. This gives government and investors much more leverage in determining their total project costs, reducing supplier ability to dictate terms and conditions within the supply chain. Using a relevant example, the airline company Air Asia once had standardised fleets, manufactured and serviced by Boeing (Feng Chia University, 2010). After diversifying fleet options, Boeing could no longer dictate pricing and other terms, giving Air Asia a cost advantage. 5. Estimated return on investment for wind technology Wind power is not an inexpensive alternative, even with grants, incentives and other cost reduction activities. However, after launch, the average cost to the business or government is approximately 3.2 pence per kilowatt hour (BWEA, 2012). Hence, there are opportunities for considerable profit growth through the mark-up pricing structure that is passed back to businesses and consumers for consumption. It is the development and implementation that poses the most short-run costs for wind technology and manufacture. The cost of development and implementation is estimated at approximately ?425 per kilowatt hour of capacity gained by the project (EIA, 1998). For a wind farm, wholly developed and launched by a corporate investor, with a capacity of 5 megawatts, the costs would be estimated at ?5,125,000 that consists of ten turbines. Source: US Dept of Energy (2006). International costs of investment are typically coinciding with domestic UK costs. As illustrated by Figure 2, above, prices can also exceed the estimated 2.1 million Pounds investment based on higher capacity with the project and its scope of output. However, due to the very low costs of producing wind-generated electricity, return on investment can be determined in two ways. First, by taking the national average costs of electricity to current households and businesses in the UK less the cost of service provision. At an average household/business cost of 13 pence per kilowatt hour, renewable energy sources are determined at: .13 x 1,000 = ?130 per megawatt hour 130 x 5MwH = ?650 per megawatt hour ?650 x 150,000 customers / 10 turbines = ?9,750,000 Though the calculation is subject to adjustment, it does represent significant return on investment post-launch of the well-developed wind project. Though costs of promotion, selling and administrative costs, labour and other operational costs are not considered in this calculation, there is ample ROI for wind technology due to low cost outputs. Wind technology investment would seem to pay for itself, especially with incentives and cost reduction guarantees, to make this a viable long-term strategy. Return on investment can also be achieved by partnerships in development, whereby the firm or investor is not required to absorb all costs of development. 6. Risks of investment Many small and some large scale wind power development projects are being planned by local authorities that maintain legislative jurisdiction over the project (Sustainable Development Commission, 2005). Many local governance systems are not mandated by national governance, thus having autonomy in real estate, zoning and other functions, thus are the authority for allowing development of various wind farms in their communities. These regulatory bodies must, according to their community charters, consult with the public before confirming many aspects of new environmentally-related development initiatives. There is a risk of community rejection, with no advocacy through national governance systems, that could conflict or delay rapid implementation of these wind farm projects. National governance and EU governance generally maintain little discretion over community-based advocacy and consultation in these matters. The national government has also recently been accused of rationing grants and other incentives, withholding funds from business and independent investors looking for investment in wind technology. The British Wind Energy Association (BWEA) offers that 12 out of every 18 applications are not approved by regulatory bodies and planning commissions (Hencke, et al., 2007). The rational for these supposed restrictions is not generally understood, however the potential for grants to be withheld can jeopardise capital procurement and incentives over the long-term for a complete development-to-launch investment project. Though full grant privileges are extended to approved parties or corporations, it is a risk that should be considered prior to establishing an investment plan in wind power. Furthermore, Mintzberg, et al. (1998) identifies that learning is an emergent process, meaning that history is highly relevant to understanding how to improve and grow as it relates to business and investment. There is a great deal of bureaucracy involved in wind development, from environmental planning committees to oversight agencies to ensure environmental or systems compliance which can complicate operations of wind power farms or development. These agencies were established over the last decade to ensure a more smooth and compliant transition to renewable wind power, however their emergent learning overlaps from one agent to another impedes progress and makes the project reliant on externalities that are not necessarily in-line with investor or corporate objectives. At the same time, as aforementioned, the community role in wind farms maintain conflicting social attitudes about aesthetics of wind turbines and community-based self-protectionism that can also complicate success in timely and cost-recognized launches of the investment. 7. Recommendations Based on the potential high return on investment for investing in wind technology and the identified risks to the projects, the following recommendations can be deduced and proposed. 7.1 Recommendation one It is suggested to the corporate and the independent investor to withhold immediate participation and investment in wind power technology until the bureaucratic mechanisms driving planning and initial launch have been considered. Before partnering or investing capital, the individual or business should consult with their partners to ensure that all zoning, community-based objections, and other relevant assessment agents have signed off on the project and guaranteed its viability. Thus, these investors should wait until the project is well-designed, maintaining a strong strategic plan, and ready to break ground before investing in capital expenditures. 7.2 Recommendation two The corporation or independent investor should understand the full fundamentals of farm capacity and output before investing in production-based activities with partners. The majority of return on investment will come from the pricing structure of delivering electricity to UK customers and there must be preliminary acknowledgement of expected capacity and output to determine an effective ROI projection. The output of electricity is the primary element guaranteeing return on the investment much more than any synergies experienced through manufacture or corporate processes within the value chain. 7.3 Recommendation three In order to gain appropriate approvals from local communities for these investments, the business or private investor should consider taking proactive, preliminary promotional action. In marketing theory, individuals can be swayed toward an investor’s agenda if use of legitimate and socially-responsible advertising is conducted (Henerson et al., 1987; Rigelsberger, et al. 2005). The investors should recruit various celebrity endorsers that maintain a positive attitude about renewable energy that should be included in the promotional materials to gain community support. Ohanian (1990) indicates the viability of celebrity endorsers for the purpose of gaining support who are considered trustworthy, attractive, and credible with expertise. Using respected celebrity representatives will ensure that communities take on the same position as the investor or corporation, whilst also illustrating the investor or business focus on corporate social responsibility. It is not only the tangibles of project investment that must be considered, but the complex variables of attitude and cognition in multiple populations to ensure that wind power is recognised and accepted, by a broad community, to ensure an easier transition from planning to ultimate launch. Establishing estimated preliminary pricing schedules for public promotion will also ensure more success since the costs of wind power are less than current traditional power systems. By publicising opportunities for discounting, more support can be gained for the project and its commission-generated approvals for the price-sensitive businessperson or household energy consumer. 8. Conclusion As was indicated by the research, the UK energy market is making significant strides in changing social and political attitudes about the viability of wind energy as a long-term solution to reducing the carbon footprint and providing more efficient electrical power. These changes are reflected by more corporate investment, reduced barriers along the supply chain and for new market entrants, and with the volume of governmental and corporate actors in the process that have established well-constructed regulatory and implementation strategies. It is a viable model for capital investment based on years of efficiency studies and successful launches across the UK and internationally. Short of the risks associated with potential grant withholding, there appears to be enough solid incentives to make this a worthwhile investment strategy and should be pursued by any public or private agent looking for long-term return on investment. 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