This blog is an Innovation Insights video podcast transcript. In this episode of Innovation Insights, Emerald’s Partner Charles Vaslet discusses Energy Transition Challenges and Trends. Click here to watch or listen.
Charles Vaslet: My guest in this episode of Innovation Insights is Stefan Goebel. Stefan leads Statkraft’s activities in continental Europe to become a leading renewable developer by 2025. Welcome, Stefan.
Stefan-Jörg Göbel: Thanks, thanks for the invite, Charles.
Charles: Thanks very much for the presentation. How increasingly competitive and challenging will it be for you to develop profitable wind and solar in Europe in the coming 5 to 10 years and what do you need to stay ahead?
Stefan: Well, we can at least say that the early days of project development in Europe are over, so it’s become a very, very professional industry, with very strong competition, which also means, however, that the market is consolidating, becoming less fragmented and needs to become less fragmented, and we want to be part of this consolidation process, obviously. Now, what does it take to be competitive? I think still a lot of the value creation is really on the ground, locally. You need to convince local communities that a project makes sense. You need to get the land. You need to get the permits. You need to get the grid connection, all very local business. So, that is really what we need to achieve over the next years in near future to make sure these local processes are handled efficiently, professionally and to, while still build synergies across Europe, while having a business that in its core is very, very local.
Charles: And how important is it for you, as a developer and operator, to create or even deploy your own innovation in addition to that that would be supplied by the OEMs of the wind and solar equipment? Perhaps you can give us some examples of software technology that you would think would play a part in reducing costs or time, or improving yield and availability?
Stefan: Yes, well, I think it will be very, very difficult to do technical innovation and R&D that really differentiates us. We’re simply too small in the global wind and solar markets to make a difference, as a customer. I mean, that will be driven by OEMs. I think our core will be about integrating all that technology and all this innovation, not only in the core hardware, but also on the software side into an overall business model, and that has to do with, say, portfolio management, financing on a sales side through to market. How do we manage the real-time access to power markets? How do we bring balancing costs down? So, it’s about the totality, and I would probably be too bold to say that we really have found the golden fleece when it comes to the core project development and how to really make a difference. I think we can just do things a little bit better than others, seeing a pan-European global picture, being on top of everything it takes to have a competitive project, but I don’t think there is the one innovation that would really bring us ahead.
Charles: I mean, you mentioned in your presentation this kind of increasing competitive green on green competition almost with generators with zero marginal cost. How do you think the market will have to evolve to continue to encourage project development and maintain affordable prices for project finance?
Stefan: In general, I think we need to understand that they are a variety of models out there on financing and incentivizing renewables. Of course, the tradition model is one that is set by policy, direct subsidises, hidden tariffs, auctions, CFDs, and then there is the pure merchant model where market prices set the signal so that we invest, and people have normally seen this as a linear development away from subsidies and CFDs and government incentives, towards market-based renewables and yes, we see an increasing segment there, especially it’s in Spain, maybe also in Poland, and other places, but I’m not sure if that is the end game. Again, if you have a marginal cost of zero at some point say in 2050, it’s rather likely that the average market price will also be close to zero at least whenever the sun shines or the wind blows.
Stefan: So we will have to think about a regulatory environment, which in the long run at least, also incentivises investments and maintains infrastructure, even if these market mechanisms, per se, no longer work.
Charles: So, you pointed to the fact that maybe renewable assets get a price or receive a price, which might be less than the average wholesale price because of this variability and this, and so far… How important, I think you mentioned in the presentation of routes to alternative markets, how important is it for you to capture some of that end market or create new markets…
Stefan: Yup. I think we are traditionally very skeptical to capturing specific market segments in the way of isolating them from the rest. We believe very much in power market as commodity market, as a competitive commodity market, because that is guaranteeing optimised resource use, and yes, those markets are partly local, national but certainly not pan-European, only to some extent, but kind of capturing or privatising almost these markets, I don’t see that as a major issue. I think we will definitely see island solutions and behind-the-meter solutions as a niche and as starting phenomenon, but I don’t think that will be the mainstream. The mainstream is simply rolling out tens of thousands of megawatts on a grid scale, on a utility scale, infrastructure investment, that will deliver change.
Charles And these will mostly be kind of virtual PPAs to large off-takers or mostly sold to other supply retail businesses?
Stefan: What we see, as we see our role for example on the trading business, it’s that we will offer long-term, 10, 15 year PPAs fixed price for example in Spain, and it will allow the developer to invest and get project finance in place. Now, what we will do with that position is a second question. We might just keep it on our books because we like it, because we think it’s valuable in its own right, but we might also sell it to end customers, large industrials and consumer companies, etcetera, so we will manage that position, and I think that is a very, very standard way of handling commodity risk in power, but you can also compare it to any other commodity market where you would also try to have a risk taker in between bridging different risk profiles and timing considerations, etcetera. So, that is how we see our role in this market. Of course, there are some developers who have the ambition to access the corporate PPA market directly. What we think is that this is extremely difficult because the corporate doesn’t want the wind profile. They want 24/7 power.
Charles: Yeah, yeah.
Stefan: And the developer normally isn’t an expert in negotiating PPAs and well, they have a project once in five years, maybe, at least the smaller developers, and that doesn’t make them, turn them into a strategic partner for the procurement of power, so we think there is a role for energy traders, if you like, as risk mitigators and risk takers and risk managers.
Charles: Thanks very much, Stefan. It’s been a pleasure to speak to you and again, thanks for your contribution to the effort, and…
Stefan: My pleasure, Charles.
Charles: Yeah, it was great to talk you.
Charles: Look forward to seeing your success the next five years.
Stefan: Thank you very much, Charles.