UtiliPoint Europe

I had one of those calls recently. The sort of call where a vendor wants to know why we aren't covering them as much as their competitors and is all upset about it. I get those calls, as all analysts do I am sure, from time-to-time and from our point of view they are both infuriating and also an opportunity. They are infuriating because most often the vendor calling to complain is one that you have been trying to engage for some time but never returns your calls or email. An opportunity because it finally gives you an opportunity to discuss the issue.

The role of an analyst is one that requires constant interaction with all players in an area such as ETRM software for example. The analyst wants and indeed needs to talk to vendors, suppliers, consultants, integrators, end users and more besides to keep up with everything that is going on. It is an aspect of the job that I find most rewarding.

What seems to happen is this. We write an article and in doing so we talk about a variety of vendors or products. In preparing the article we reach out to various suppliers for information. Some are extremely proactive, others a bit sleepy but talk back to you after a prod or two and the odd one plainly and simply ignores you. You then write the article but of course you can only say and analyze what you know and so if a suppler didn't respond and isn't in regular contact then what can you say? You can say only what you know and often that isn't as much as you would like.

What happens next continues to confound me as an ex-VP of Marketing. The article is read. The vendors who wouldn't and/or didn't respond are upset because they weren't covered effectively. At that point, I would expect a call and re-opening of communication lines. But for some reason that sometimes doesn't happen. Instead the reverse occurs. The supplier is so mad at our lack of coverage that they reaffirm not to talk to us at all.

And so of course we go full circle. The pattern repeats and repeats. The supplier get's more angry at the perceived lack of coverage and so on.....

Eventually though you get one of those calls. I have had 3-4 in the last five years. I hear out the supplier and then calmly and logically as possible explain that the issue lies in their analyst relations. That they should brief us, keep us up to date and work with us. That we should have a central point of contact in order to improve the level of communication. I explain that I can't make stuff up about them - indeed, that would be worse than little coverage.

Usually, the supplier begins to understand that, in fact, the analyst should be on their radar screen too. That communication and cooperation will actually bring the coverage that they desire but that it is, after all, a two-way street.

We are an independent analyst service. We seek to fairly cover everyone and all of the issues irrespective of client relationships and so forth. In order to do that we need access, we desire to be be briefed. Not everyone will be happy all of the time but if you have some news or you want us to be aware of you and your products, call us..... we are here.

Did you know that we offer a Directory of ETRM Vendors and Products that is available for a small subscription and is updated by our analysts on a quarterly basis? It is designed to help those looking to pull together long lists of products in procurement projects or for those who like to keep upto speed with the latest developments.

The Directory is available for subscription here.

The UtiliPoint Commodity markets study is underway and getting a very good response. If you want to offer your views on how commodity markets changes are impacting traders and ETRM/CTRM software then please do take a small amount of time to fill out the survey which may be found here. Meanwhile, Patrick Reames has inspected he early responses and wrote an article on market liquidity based on those responses. It is well worth a look and shows the kind of data this study will eventually generate.

When talk turns to wind power, for most people the first image that springs to mind is one that consists of many huge turbines dotted across the landscape or out at sea. It is very much a large-scale vision. Yet today there is increasing interest in wind turbines that are small enough to mount in backyards and local parks, and on the roofs of houses and office buildings. Could these turbines, that in many cases look like attachments for a giant hand held cake whisk, become a big part of the energy future?

As with any nascent technology it is not an easy question to answer, but what has become clear in recent months is that they are slowly moving towards the mainstream. This has been particularly evident in the UK, with the recent move by German and European power major RWE—through its UK utility RWE Innogy—to take a minority shareholding and make a capital injection into Quiet Revolution Ltd, a small wind turbine company based in London.

Founded in 2005, Quiet Revolution has installed its flagship product, the 6kW QR5, on a number of rooftops in England. There is one located on top of King's College School in Wimbledon and a large pub chain has begun installing them as well. The QR5 is a vertical axis wind turbine, rather than the conventional one that is horizontal, and is particularly suited for local energy production in built-up areas that can be installed either on buildings or as a stand-alone turbine.

When a company the size of RWE gets involved the market certainly takes notice. And the group states that it sees the local supply of electric power to individual buildings from renewable energy becoming increasingly significant, with small wind power units on roofs making a major contribution to this goal. In this case, says Crispin Leick, head of the Ventures Division of RWE Innogy, “the purpose of our involvement is to take this promising technology towards mass production, so that it will become commercially usable.”

The potential is also underlined in two recent reports. The first is the August 2008 report from the UK's Carbon Trust and the Meteorological Office, which states that in theory small wind systems could contribute around 11 percent of the UK's electricity. On paper it is a figure that can only be described as “very significant,” though it needs to be noted that this is “could” and not “will.”
The second is from the British Wind Energy Association (BWEA) in its "First BWEA Small Systems Report" published the following month. It stated that it identified very strong annual growth for small wind turbines in terms of units installed and projected that the three previous years of interrupted growth would continue through 2008 and into 2009, with the UK retaining the mantle of world leader in small systems technology. It added that the growth is driven not just by technological improvements, but also by a realization that there are huge energy savings to be made by deploying small turbines.

There are certainly opportunities, but what both reports also highlight is the fact that challenges, barriers to development and some “unknowns” exist.
The BWEA report highlights the continuing consternation at the UK Government's lack of clear guidance to local planning authorities, which it says would assist those wishing to generate their own renewable energy. It states that in 2006 as part of the Micro-generation Strategy there was a commitment to address planning as a barrier to deployment, but industry, local authorities and consumers are still waiting for detailed planning guidance and permitted development rights to be issued. It also recently stated that it was important the Government came out with much stronger backing for the burgeoning sector.

The UK's Carbon Trust and Metrological Office report also touches on planning, but also underscores downsides in relation to the turbines being too small and inefficient to be cost competitive, as well as the issue of the optimum location.
On this last point, the study indicates that for the UK as a whole, the majority of electricity and carbon savings are available from small turbines in rural areas—four times as much as urban areas irrespective of costs, and considerably more given economic drivers. It says that turbines in some rural locations, where wind speeds are generally higher, could provide cheaper electricity than the grid, but it appears that in many urban situations, roof-mounted turbines suffer from wind turbulence and may not pay back their embedded carbon emissions.
Quiet Revolution acknowledges that in an urban or built-up environment some wind turbulence is inevitable—unless the turbine is sited well above any surrounding buildings—it says that this is the primary reason for opting for a vertical axis wind turbine as such a design doesn't require wind from a consistent direction to continue producing power.

Reducing costs, improving efficiencies, streamlining government support, grants and subsidies, and having strong regulatory and planning guidelines are obviously paramount. And with these in mind, the Carbon Trust has recommended a number of improving existing policy measures including using a criterion in any new grant schemes to measure likely carbon savings; and, having higher limits for stand-alone turbines under permitted development rights to help maximize the overall carbon savings of small-scale wind energy, given the sensitivity of electricity generation to height.

Going forward it is also important to throw in a few “unknowns.” For example, how might fossil fuel prices impact development? And will the UK renewable energy goals for 2020, which month-on-month look further away, lead to more small wind, particularly if they prove easier to build than other forms of renewable generation? It should be stressed that this is not an exhaustive list.
The overall goal needs to be stimulating the growth of more productive, lower cost turbines, and there have been some positive signs. RWE's recent investment is obviously one, particularly as it has as the scope for mass production that should bring down costs, and looking outside the UK, in the United States only recently, New York Mayor Michael Bloomberg announced that he is interested in installing wind turbines on top of the city's buildings.

As with any new technology, these goals are critical. If output efficiency is not improved, and costs remain high, small wind will be little more pie in the sky.

Energy commodity trading funds are getting physical it seems. Discussions with a couple of fund managers and a major provider of commodity OTC electronic trading and deal discovery platforms have all indicated to me in the past few weeks that this is the case. The banks of course have been heavily involved in physical energy markets for some time actually owning assets like generation and oil & gas reserves in the ground and the Enron experience apparently taught everyone at the time that connection to a physical trading desk was paramount. Despite that, many fund managers have actually been focused on financial commodity markets until recently.

What is causing this sudden interest in trading physical energy commodities and in OTC markets I wondered? Well, it seems there are several reasons as follows;

1. Market Intelligence – Many managers have discovered to their chagrin that signals emerging from paper energy markets often reflect actual market drivers but too late for them to do much about it. Paper energy markets often represent physical traders off-loading risk and not the underlying fundamentals that are driving the physical markets. By getting more involved in the physical markets themselves managers get earlier insights into market trends and can respond faster;

2. The connection to a physical trading desk is, as was discovered post-Enron, very important to get that read on market conditions and signals. Many hedge fund managers who used to trade at large energy trading firms or banks were used to having that kind of access and knowledge. They soon find that in starting a small hedge fund their access to that information is essentially cut off and they cannot deliver the performance they once did. His is particularly so in power markets. Having a connection to a physical trading desk supplies that information and helps the manager be more effective and hopefully – profitable;

3. Hedge funds are naturally attracted to more illiquid OTC markets anyway where there is the potential for better profits. The downside of this of course is ensuring proper valuation and fair value account issues that may crop up.

According to our sources, many US-based hedge fund managers are increasingly looking to European energy markets to gain their physical exposure. The reason for this is in the nature of trading styles on the two continents as Europe tends to be more focused on OTC-based trading whereas North America is more exchange oriented electronic trading focused.

For the first time in recent history the UK is now consuming more energy than it is able to produce. Over the next 20 years natural gas reserves will become depleted and the UK will become increasingly dependent upon imported energy. This increased dependency on imported energy and the December 2007 announcement of a Strategic Environmental Assessment (SEA) to examine additional UK offshore wind energy generation capacity may be responsible for many of the recent investments in existing and new wind energy initiatives in the UK. In addition the Climate Change Bill to be debated in the House of Commons this week will commit the UK to cutting greenhouse gases by 80 per cent by 2050. An amendment put down by the UK Government will also require all companies to publicly reveal their greenhouse gas emissions by 2012. In recent years attractive subsidies and high electricity prices have turned Britain’s onshore wind farms into extraordinary profit centres, with a single turbine capable of generating significant profit per year. According to new industry figures, a typical 2 megawatt (2MW) turbine can now generate power worth £200,000 on the wholesale markets.

The lucrative outlook has led to a surge in planning applications for new wind farms. According to the British Wind Energy Association, there is currently 2,727 MW of operational onshore and offshore wind farms with an additional 2,022 MW under construction. Onshore wind farms outnumber offshore wind farms by a factor of 26 to 1 and by a factor of 6 to 1 in terms of operational energy capacity. However, it is the number of consented projects and the number of projects in planning phases that truly express the enormous increase in wind energy capacity the UK faces in the coming years. It is estimated that there are currently 122 consented projects, accounting for some 6,251 MW and an additional 8,680 MW of planned projects.

The emergence of a significant number of wind farms also presents some opportunities, and a recent study by Stanford University confirmed that interconnected multiple wind farms can be used to provide baseload electric power. Interconnecting wind farms with a transmission grid reduces the power swings caused by wind variability and makes a significant portion of it just as consistent a power source as a coal power plant. On a large enough scale, wind power energy can be used as reliable electric power source.

But the increased numbers of wind farms are not without their challenges. Principal among these are the issue of operating inefficiencies and claims of extensive and expensive builds as a result of excessive subsidies. In fact the availability of generous subsidies has been one of the principal reasons for the significant increase in planning applications and the development of some sites where the wind resource is very weak and the environmental impact severe. At a time when costs and emission charges associated with traditional power stations are under scrutiny, the issue of whether wind energy is too inefficient to replace fossil fuel power stations needs to be examined. Even with modern turbines, wind farms are unable to operate at full capacity because of the unreliable nature of the wind. The question then is whether winds farms give good value for money and if the incurred costs are reasonable when one considers the returns or the added costs consumers are asked to carry. The reality is of course, that wind farms are a new technology and like all new technologies face challenges and significant start up costs. In addition there is the added business overhead of taking on the fossil fuel industry and the traditional power plants while all the while trying to create something that can make a real difference to the climate change challenge. In the case of the UK, its investment in wind farms is timely with production from UK oil and natural gas fields having peaked in the late 1990s and declining steadily over the past several years, a situation likely to be experienced by other countries in increasing numbers over the next decades.

Vattenfall AB, one of the largest electricity generators in Europe, recently made an offer for the entire share capital of Eclipse Energy UK PLC. It follows Vattenfall AB’s acquisition of AMEC Wind Energy Limited, a major UK developer of commercial wind farms in early October 2008. This move enables Vattenfall to expand its presence in the UK market and to take an active role in the UK’s third licensing round for offshore wind development. Round 3 follows a December 2007 announcement by the Secretary of State for Business Enterprise and Regulatory Reform on the commencement of a Strategic Environmental Assessment to examine 25GW of additional UK offshore wind energy generation capacity by 2020. This follows the 8GW planned for Rounds 1 and 2. Offshore wind energy is expected to provide a large share of the UK’s renewable electricity and the EU renewable target to source 20% of Europe’s energy from renewable by 2020.

The completion of a 194MW wind farm off the coast of Lincolnshire sees the UK become the world leader in generating electricity from offshore wind. Offshore wind accounts for about 20% of the UK’s electricity from wind. In recent years there has been a steady increase in the number of companies who have made significant investments in UK wind farms. Much of this investment has been possible because of generous UK government subsidies. To meet EU targets for renewable energy, the Government has subsidised the wind turbine industry by half a billion pounds. Under the Renewables Obligation Certificate Scheme (ROCs) companies that meet green energy targets receive Government cash. The subsidies are only paid per unit of electricity supplied to the National Grid and not for the building of wind farms. But the subsidy is one of the most generous paid for any commodity and the wind power industry in the UK and in other countries has benefited significantly as a result. The subsidy is considerably greater than that received by coal generation plants and has in some part contributed to an increase in electricity prices to all consumers, whether or not they subscribe to a green tariff. In fact it could also be argued that without the subsidies, many of the wind farms would not even be built. Given the level of subsidies available for wind generated electricity and the challenges wind limitations presents for wind farm operators, some it could be argued from the poor positioning of wind farms, the question of whether wind farms provide value for money is an obvious one. From the perspective of the investors and operators, the favourable market conditions created as a result of the ROCs make it an attractive investment. At a time of financial uncertainty in traditional markets, energy companies and wind farm companies in particular now appear a rather attractive investment opportunity.

From the perspective of the end user the subsidies ultimately come from consumers in the form of rising energy prices, and this on top of recent increases in gas and electricity prices. There is a cost for installing wind power and ultimately reducing the dependency on imported energy, but the cost must take account of all the issues including the cost of wind power generation, the continued cost of maintaining traditional power plants to support wind instability and ultimately, the increased costs passed onto consumers. Gordon Brown, the UK prime minister, recently unveiled a £1bn energy package plan. The energy efficiency measures aim to help low-income families cope with soaring utility bills by making long-term savings. The energy package is being funded by the "big six" energy companies operating in the UK. It would be interesting to examine how many more energy package plans will be needed to offset increasing utility bills and to understand what proportion of the utility bill increases are a result of energy subsidy schemes. Ultimately the main reason for installing wind power is that it will save carbon dioxide (CO2) emission and consequently reduce the rate of Global warming. And that in the long term makes them the right investment option.

Talking to a number of folks around the business, one trend that appears to be gaining ground is algorithmic trading in energy and commodities. Essentially, this is computer automated trading based on some algorithm that identifies trading opportunities. Algorithmic trading is commonly used on other Asset Classes but has been slow to take off in energy and commodities due to the complexity of trading but is now starting to take off according to our sources.

There is no doubting the European Union (EU) knows what it wants to do in terms of cutting emissions and renewables growth. Its 2020 vision, to cut greenhouse gas emissions by 20 percent on 1990 levels and for 20 percent of the region's energy mix to come from renewable sources, is one of its core and oft debated goals. The problem is about how it gets there. Knowing what it wants, and then actually achieving it, are two very different things.
This is clear in the many questions currently being raised by member states and it was brought to the fore at a recent two-day summit of EU leaders in Brussels. Whilst leaders agreed to stick to the 2020 plans, there were clear divisions over how to share the emissions cuts, particularly given the impact of the current financial crisis.
Italy's Prime Minister, Silvio Berlusconi, threatened to veto the plan unless changes were made to lessen the burden on Italian industry. And the leaders of eight eastern European countries (Poland, Hungary, Romania, Bulgaria, Slovakia, Latvia, Lithuania and Estonia) in a joint statement said the EU must balance “this wish” against the need for sustainable economic growth at a time of economic uncertainty. They added that they had made great cuts in carbon emissions since emerging from communism in the late 1980s and that “should be recognized” now.
Others too have been vocal in looking for “wiggle room” from the conclusions of a March 2007 summit that offered the 20 percent pledges and proclaimed the EU's “leading role” on climate change. Over this past year, Angela Merkel, the German chancellor, has talked about German industries that should be safeguarded from the full costs of the package, the UK has been downbeat about its renewable energy targets, Ireland says its farmers must be protected and Greece has talked about renegotiating the details regarding carbon capture and storage (CCS) technologies over concerns that the country's geological instability means it will not be able to benefit from this technology.
In truth, most countries have found reasons why the current promises may be impossible to meet. It begs the question: are these targets now achievable?
What is evident is that much of the concern comes down to money, which is now being exacerbated by the current global financial crisis. There is a feeling that the EU has much less financial leverage now than it did only a year or two ago, with a number of member states talking of watering down the measures. Put simply, many feel the EU and its member states will struggle to put enough incentives and money in place to meet its emissions and renewable targets.
This is also brought home when talk turns to the how the system could impact EU industry in a global context. There is particular concern about the issue of “carbon leakage” arising from the possibility of EU companies having to pay for emissions permits, whilst their competitors elsewhere do not face this burden. Many governments certainly appear less keen to get major energy users and carbon intensive industries such as power generators, steel makers and cement producers to pay billions into its emissions scheme. The French and Germans have talked about giving permits for free, but not everyone agrees, with some arguing that this would undermine the credibility of the entire package.
Nevertheless, it is easy to appreciate the potential disadvantages of these additional costs. There are widespread fears that the EU will simply export industries and jobs outside of its borders, without any noticeable reduction in emissions. A “lose-lose” situation for the EU.
There has also been much talk focused on two energy resources. The first is biofuels, which was initially lauded for its potential to provide a cheaper, cleaner and more secure means of energy supply, but over the past year or so research has seriously questioned the actual credentials of biofuels and highlighted the greater competition they can bring for land, water and food. This culminated in a recent EU Parliament vote which, though confirming a binding 10 percent target for renewables in transport fuels by 2020, shifted the focus away from agro-fuels. In fact, with 2020 goals in mind, some have asked whether many current biofuels technologies and products are now more of a problem, than a solution.
And then there is coal, often derided because of its so-called “dirty” reputation, but now in the early throes of what some have labeled a “renaissance”. This is particularly apparent in countries with an abundance of coal, such as Poland and the Czech Republic, which increasingly fear that abandoning coal will cost them financially, and mean that they have an over reliance on gas imports from Russia. There is no doubt that the stability and predictability of coal supplies make it currently the most viable energy security option for many member states.
It does, however, provide a serious headache for the EU 2020 pledges. Whilst these countries want a climate deal that does not lead them down the path of energy insecurity, at the same time, coal obviously raises some profound environmental questions. With these issues in mind, it means there needs to be a major premium placed on developing and deploying technologies that allow coal to fit into a more carbon constrained world. Foremost among these are clean coal technologies and carbon capture and storage. Yet at present the large-scale commercial deployment of these seems to be beyond 2020.
This only provides a brief snippet of some of the possible issues at play, but what it does underline is that there are serious competing interests. And given the current financial turmoil, many of these appear to have been magnified. Recent comments from the EU's environment commissioner, Stavros Dimas, in an interview with the BBC, appear to recognize some of the concerns. Though he stressed that the target of a 20 percent cut in emissions by 2020 still stands, he said that governments should be able to achieve more than half of their target carbon cuts by paying developing countries to invest in clean energy projects on their behalf. The commission had originally put this figure at not more than a third.
As with any EU deal, the devil will certainly be in the detail. In the coming months there will certainly be plenty of horse trading going on, both out in the open, and behind closed doors. There are two key questions. Firstly, just how much of the package will be renegotiated? Will it be some, or will it be all? The EU will certainly hope much of the essence and spirit of the original package remains intact.
And secondly, can member states work to find a final agreement on the package before the end of the year? If not, it may mean that the EU will have to await a new European parliament elected next summer, a new European commission appointed next autumn. In reality, it could see the EU's lead on this issue in tatters.
It is not easy making predictions 12 years or so hence, but in many respects it does seem that as 2020 draws closer, the actual goals are moving further away.