EUROPEAN RENEWABLE ELECTRICITY CERTIFICATES Long term outlook 16 August 2011 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / of Bloomberg New Energy Finance. For more information on terms of use, please contact sales@newenergyfinance.com. Copyright and Disclaimer notice on page 27 applies throughout.
CONTENTS SECTION 1. EXECUTIVE SUMMARY 1 Update and outlook... 1 SECTION 2. ITALY 3 2.1. Recent developments... 3 2.2. REC demand... 3 2.3. Supply of RECs... 3 2.4. Price forecast... 3 SECTION 3. POLAND 5 3.1. Recent developments... 5 3.2. REC demand... 5 3.3. Supply of RECs... 6 3.4. Forecast... 7 SECTION 4. ROMANIA 9 4.1. Recent developments... 9 4.2. REC demand... 10 4.3. Supply of RECs... 10 4.4. Forecast... 11 SECTION 5. SWEDEN 15 5.1. Recent developments... 15 5.2. REC demand... 15 5.3. Supply of RECs... 16 5.4. Forecast... 16 SECTION 6. UNITED KINGDOM 19 6.1. Recent developments... 19 6.2. RECs demand... 20 6.3. Supply of RECs... 21 6.4. Forecast... 21 ABOUT US 24 sales@newenergyfinance.com. Copyright and Disclaimer notice on page 27 applies throughout.
TABLE OF FIGURES Figure 1: REC price forecast, Italy... 4 Figure 2: Recent REC performance (OZEX_A index)... 5 Figure 3: Recent REC performance (OTC)... 5 Figure 4: REC demand, Poland... 6 Figure 5: Pipeline of new eligible renewables capacity (MW), Poland... 6 Figure 6: Eligible renewable capacity (GW), Poland... 7 Figure 7: RECs generated, Poland... 8 Figure 8: Fundamental price forecast, Poland... 8 Figure 9: Recent REC performance, Romania... 9 Figure 10: REC demand, Romania... 10 Figure 11: Pipeline of new eligible renewables capacity (MW), Romania... 11 Figure 13: RECs generated, Romania... 12 Figure 15: Fundamental price forecast, Romania... 14 Figure 16: Recent REC performance (SEK/Elcertificate), Sweden... 15 Figure 17: REC demand (number of El-certificates), Sweden... 16 Figure 18: Pipeline of new eligible renewables capacity (MW), Sweden... 16 Figure 19: Eligible renewable capacity (GW), Sweden... 17 Figure 20: RECs generated, Sweden... 17 Figure 22: Recent REC performance (ROCs), UK... 20 Figure 23: ROC demand, UK... 20 Figure 25: Renewable capacity (GW), UK... 22 Figure 26: Eligible renewable generation (ROCs), UK... 22 Figure 27: Eligible renewable generation (MWh), UK... 23 Figure 28: Fundamental price forecast, UK... 23 TABLE OF TABLES Table 1: Summary of European REC schemes... 1 Table 2: Requirements for co-firing biomass (%)... 7 Table 3: Banding in the Romanian scheme according to law 220 (including proposed revisions)... 11 Table 4: Capacity reductions (MW)... 17 sales@newenergyfinance.com. Copyright and Disclaimer notice on page 27 applies throughout.
SECTION 1. EXECUTIVE SUMMARY Renewable energy investments by their very nature are subject to political risk. This is especially true of the European REC markets, which since the last longterm update in March have been plagued by high levels of policy uncertainty. Italy has revised its REC scheme to that of a feed-in tariff by the end of 2015. The UK has announced that it also intends to change to a feed-in tariff, although green certificates will continue to trade until 2027. Romania and Poland are all considering amendments to their schemes and Sweden is preparing to link its scheme with Norway next year. This report provides an overview of the recent market developments and a long-term, fundamentals perspective on these programmes with projections for REC demand, supply and price. In addition, Bloomberg New Energy Finance has released a new version of the European REC model which has been used for analysis in this report. This model features a number of improvements: Data is updated based on the latest knowledge from sector specialists Improved price search algorithm and re-coded to improve run time Enhancements for modelling biomass, banding of credits by technology and headroom provision for the UK. The model can be licensed for client use. Please speak with a member of the sales team for further information (contact details are provided at the back of this report). REC schemes in Europe The Renewable Energy Directive dictates that the EU must source 20% of its primary energy requirements from renewable technologies by 2020. However, member states are free to choose how they will meet their obligations. While many countries have chosen to incentivise renewables through feed-in tariffs, six countries have chosen to implement renewable electricity certificate (REC) schemes with tradable certificates. The Bloomberg New Energy Finance European REC service provides coverage of the REC schemes in Italy, Poland, Romania, Sweden and the UK. Update and outlook The REC schemes covered in this report have varied in their success to date. Oversupply in the Italian market, for example, led the government to intervene by purchasing certificates to support prices. This proved unsustainable for government finances in light of budgetary pressures. The result was a policy u-turn in March leading to a gradual phase-out of its green certificates scheme and its replacement with a feed-in tariff. The Romanian and UK schemes, on the other hand, have been in deficit. This has resulted in changes in banding levels to support greater renewables build-out. A summary of the recent changes and price outlooks is set out below (Table 1). Table 1: Summary of European REC schemes Italy Recent developments A surplus since 2005 resulted in a growing fiscal burden for the government which underwrites the scheme. This has led the government to gradually reduce the obligation on generators by the end of 2015. New projects will receive a feed-in tariff from 2013. Price outlook Stable. REC prices will be driven by power prices as the transmission system operator, GSE, purchases certificates at a 22% discount to the average annual power price. sales@newenergyfinance.com. Copyright and Disclaimer notice on page 27 applies throughout. Page 1 of 25
Poland Sweden Romania UK Recent developments Prices have been fairly stable as they have tracked the substitution fee of PLN 275/MWh. The government is considering amending the scheme to include banding of technologies. Targets have been achieved to date with a small accumulated surplus. But scheme likely to be in significant deficit from 2013 due to removal of legacy capacity from the system. The dynamics of the scheme will change once it is linked with Norway in 2012. Despite strong growth of onshore wind projects, Romania's REC scheme has failed to meet its targets. The introduction of banding has not improved confidence in the scheme as it has not been enforced. This may soon change if the European Commission approves amendments to the legislation. However, participants may still be hesitant to be included without a mechanism to tighten the scheme if it moves into surplus. The UK government has proposed replacing its green certificates scheme with a feed-in tariff in 2017. The UK will also be reviewing banding levels this summer. Source: Bloomberg New Energy Finance Price outlook Bearish. The large build-out of Poland's onshore wind and biomass capacity should suppress prices over 2012-16. However, low prices and the phase-out of much of Poland's biomass co-firing capacity should support prices in later years. Stable. Prices are expected to be stable over the coming years as the target is reduced to reflect the withdrawal of legacy capacity. A tightening of the quota should support price increases through 2020. Bearish. Due to an ambitious pipeline of projects expected to come online in the next few years, prices are due to soften. They then steadily increase for the remainder of the scheme as the target tightens. Stable. The headroom provision should provide stability to ROC prices over the coming years. However, there could be some volatility in ROC prices during the transition period to a feed-in tariff. Prices from 2017-27 should be supported by an increasing buy-out price and the application of headroom. Prices are likely to be fixed beyond 2027. sales@newenergyfinance.com. Copyright and Disclaimer notice on page 27 applies throughout. Page 2 of 25
ABOUT US Subscription details STEVEN MARTIN Energy Markets Business Development smartin88@bloomberg.net +44 20 3216 4797 Copyright. This publication is the copyright of Bloomberg New Energy Finance. No portion of this document may be photocopied, reproduced, scanned into an electronic system or transmitted, forwarded or distributed in any way without prior consent of Bloomberg New Energy Finance. Disclaimer The information contained in this publication is derived from carefully selected public sources we believe are reasonable. We do not guarantee its accuracy or completeness and nothing in this document shall be construed to be a representation of such a guarantee. Any opinions expressed reflect the current judgment of the author of the relevant article or features, and does not necessarily reflect the opinion of Bloomberg New Energy Finance. The opinions presented are subject to change without notice. Bloomberg New Energy Finance accepts no responsibility for any liability arising from use of this document or its contents. Bloomberg New Energy Finance does not consider itself to undertake Regulated Activities as defined in Section 22 of the Financial Services and Markets Act 2000 and is not registered with the Financial Services Authority of the UK. sales@newenergyfinance.com. Copyright and Disclaimer notice on page 27 applies throughout. Page 24 of 25