RE Megaprojects - (002)

How regret cost shapes the irreversibility of renewable energy megaprojects?

The case of the Ashalim thermal solar power station AVRI EITAN ITAY FISCHHENDLER

ALFONS VAN MARREWIJK

Avri Eitan

What will we talk about today? Background Motivation Case study and methodology Results Conclusions What’s next?

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Avri Eitan

The global diffusion of RE

Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

Decentralized RE VS megaprojects

VS Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

What are megaprojects?

“A megaproject is not only big, in terms of scope andprojects scale and costs,endeavors, it isthe also big requiring in its “Non-routine temporary In Israel: managed by Accountant Billion$funding, projects? special authorization, potential for1+ politics in and revenues, around theand General? regulatory et al., 2011). project”actions” (Pitsis et(Scott al., 2018:6).

Background

Motivation

Case study

Results

Conclusions

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RE megaprojects: characteristics Provide significant amounts of clean and sustainable energy.

Large size and centralized locations. Centralized management (private and public actors). Long time span from initiation to delivery. Enormous budget, structural complexity and high uncertainty. Significant environmental impact (positive and negative). A symbol of economic power, energy independence, and technological progress.

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Motivation

Case study

Results

Conclusions

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Avri Eitan

RE megaprojects: problems RE megaprojects often continue to be developed with limited changes, despite the emergence of superior technologies along the way. Influenced by various lock-ins, the regret cost escalates regulators' commitment to megaprojects, leading to their suboptimal outcomes, and eventually to their irreversibility.

Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

Lock-ins, regret cost and escalation of commitment

Path dependent lock-ins

• “How one path becomes dominant due to selfreinforcing processes and absorbing states, and this causes the economy to lock itself in to an outcome which is not necessarily superior to alternative ones, not easily altered and not predictable in advance" (Arthur, 1989:128).

Regret cost

• The price that needs to be paid in order to regret previous decisions and change megaprojects' course of action (Leib & Buckle, 2012).

Escalation of commitment

• “The tendency to ‘carry on’ with questionable endeavors, regardless of whether doing so is likely to result in success” (Sleesman et al., 2018:178).

Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

The fate of RE megaprojects: The balance between regret costs and regret benefits Exit doors

Lock-ins

Regret Benefits

Regret Costs

Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

RE megaprojects: research question Research gap

Research question

• The literature has neglected the role of lock-ins in the framework of RE, which so far has been regarded as malleable.

• How do lock-ins shape the irreversibility of RE megaprojects, through the framework of regret cost?

• Exploring the irreversibility of RE megaprojects is highly important due to the significant growth of decentralized RE alternatives, which questions the necessity of such RE megaprojects. Significance

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Case study

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Avri Eitan

Case study The planning and construction process (2007-2018) of the giant thermal solar power station built near a small community settlement in southern Israel, Ashalim – Focusing on plot A (150 MW). Using a qualitative case study approach (Yin, 2003) in order to provide a understanding of the constructed social reality during the planning and construction of infrastructures (Yanow & Schwartz-Shea, 2015).

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Avri Eitan

Sources of information No

Source

Data type

Public information

1

Prime Minister's Office

Official government decisions

Yes

2

Ministry of Finance

Internal meetings protocols; official governmental

No

agreements (BOT, financial closure); official tender's documents 3

4

Ministry of Energy and the

Ministerial decisions and regulations; data about

Electricity Authority

the Israeli electricity sector

Third party organizations

Position papers about the thermal solar power

Yes

Partial

station in Ashalim, and the Israeli electricity sector

5

Newspapers

Informative online articles about the thermal solar

Yes

power station in Ashalim 6

Field visits

Visual impression concerning the operation of the

Partial

solar power station

Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

Results • The case study is divided into three sub-sections, each one describing an "exit-door" not taken, i.e., an opportunity to cancel or change the RE megaproject, which has been avoided due to various lock-ins. • These "exit doors" relate to different events that could have eased the change in the course of the RE megaproject.

Background

Motivation

Case study

Results

Conclusions

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Part 1 Meeting RE targets through the Ashalim megaproject April 2007

August 2007

August 2007

Sep 2007

Sep 2007

March 2008

• “The State of Israel, with 300 days of sunshine a year, can lead the global effort to produce alternative energy such as solar energy” (Ehud Olmert(. • The government decided to establish large-scale solar power stations in Ahsalim (Decision 2178). • It appointed an interministerial committee comprising the Ministry of Finance (led by the accountant general), the Ministry of Energy, and the Electricity Authority. • The committee recommended promoting a public–private partnership tender (B.O.T) whose winner would be the bidder that agrees to accept the lowest payment. • The committee decided to recommend the use of thermal solar technology over PV solar technology – to be established in Ashalim.

• Another government decision (No. 3338) affirms the recommendation of the committee.

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Case study

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Conclusions

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Avri Eitan

Part 1 Meeting RE targets through the Ashalim megaproject Photovoltaic (PV)

Concentrated solar power (CSP)

VS Require low initial capital Allowed flexibility in the power station's installed capacity

Could be combined with gas power stations Enabling energy storage

Solar PV and thermal solar technologies were highly competitive at the time Background

Motivation

Case study

Results

Conclusions

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Part 1 Meeting RE targets through the Ashalim megaproject

Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

Part 1 Meeting RE targets through the Ashalim megaproject April 2008

January 2009

March 2009

February 2011

• The tender's pre-qualification (PQ) documents were published - seven bidders passing the initial stage in September 2008. • The government announced a new target of 10% electricity production based on RE by 2020 (Decision 4450). • The official tender's documents were published. • The submission date for the bids was repeatedly delayed, and eventually was set to February 2011.

Only a single bid was submitted by Negev Energy, a company jointly owned by the Israeli Shikun VeBinui (50%) and the German Siemens AG (50%). Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

Part 1 Meeting RE targets through the Ashalim megaproject

Background Background

significant legal or financial obligations toward the single bidder.

* The committee could have addressed the reasons for the private sector’s lack of interest.

Motivation Motivation

Case study Case study

committee would fail to follow official government decisions concerning RE targets, backed by significant political support.

Results Results

Conclusions Conclusions

Organizational lock-in → Regret Costs

Regret Benefits

A decision to continue evaluate * At this with stage, the the project By and cancelling the the single State of Israel had no the bid. megaproject

What’s next? What next?

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Part 1 Meeting RE targets through the Ashalim megaproject

Background

Motivation

Case study

Results

Conclusions

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Part 2 Protecting the state’s reputation through the Ashalim megaproject The single bid reflected a price of 1.02 NIS (€0.26) to be paid by the state for every kWh – much higher than expectations of 0.8 NIS (€0.2).

Neglecting the megaproject at this stage might highlight the committee's failure to promote it (psychological lock-in).

A decision to conduct an independent cost analysis.

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Case study

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Avri Eitan

Part 2 Protecting the state’s reputation through the Ashalim megaproject June

• The committee advised Negev Energy to resubmit its bid at a new price of 0.86 NIS (€0.215) per Kwh.

2012

Nov

• Siemens decides to disengage from thermal solar power stations due to their realization that solar PV was going to be the more dominant technology in the ensuing years.

2012

Negev Energy requested amendments to its ownership structure, enabling the Spanish company Abengoa to replace Siemens. Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

Part 2 Protecting the state’s reputation through the Ashalim megaproject

Regret Benefits Background Background

billion million.

NIS

(€525

both local and foreign players.

* The Siemens decision to stop its engagement with thermal solar technology was regarded as a strong indication that this technology should be abandoned.

Motivation Motivation

Case study Case study

Results Results

Conclusions Conclusions

Social lock-in → Regret Costs

PV power change allowed the project to continue: The approval *ofAlternative the ownership Harming the state’s station (at the same Negev Energy was announced the winner. reputation: as Influencing size) could save 2.1

What’s next? What next?

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Part 2 Protecting the state’s reputation through the Ashalim megaproject

Background

Motivation

Case study

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Conclusions

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Avri Eitan

Part 3 Legal obligations toward the Ashalim megaproject • The State of Israel signed a BOT agreement with Negev Energy. Sep 2013

• The interministerial committee approved the project's financial closure. July 2015

June 2016

• Abangua encountered financial distress and found itself on the verge of bankruptcy.

Negev Energy requested additional amendments enabling the Spanish company TSK Group (10%) and the Israeli Noy Fund (40%) to join Shikun VeBinui (50%) instead of Abangua. Background

Motivation

Case study

Results

Conclusions

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Part 3 Legal obligations toward the Ashalim megaproject

Background

Electricity Authority's BOT begins agreement and2018. Full commercial operation in July estimations, the savings the financial closure could reach a total of with Negev Energy, the 4.25 billion NIS (€1.06 state had no legal way billion). of cancelling the megaproject. * Minimizing the concerns about the developer's capabilities.

Project lock-in → Regret Costs

Regret Benefits

A* decision continue with the megaproject: Accordingtoto the After the signing of the

Motivation

Case study

Results

Conclusions

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Part 3 Legal obligations toward the Ashalim megaproject

Background

Motivation

Case study

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Avri Eitan

Conclusions: RE megaprojects Various lock-ins have influenced the Ashalim RE megaproject, preventing the adoption of the economically superior PV technology. These lock-ins have increased the regulators' regret cost, thus escalating their commitment to the RE megaprojects -resulting in its irreversibility. The discovered inflexibility of RE megaprojects contradicts the growing need of energy markets for new opportunities and degrees of freedom. However - megaprojects can also be evaluated using other aspects , which are often intangible and thus harder to quantify. Background

Motivation

Case study

Results

Conclusions

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Avri Eitan

Conclusions: lock-ins in megaprojects The various lock-ins reinforced each other as the megaproject progressed, thus increasing regulators' regret cost over time. The power of the lock-in mechanism is emphasized in light of the events that could have reduce the cost of regret along the way – the three “exit doors”. The balance between lock-ins, which raise the cost of regret, and the ‘exit doors’, which may reduce the cost of regret, practically dictates the fate of megaprojects.

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Motivation

Case study

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Avri Eitan

Next: lock-ins in decentralized RE? Recent studies have also presented the increasing involvement of large private corporations in the field of RE.

According to some indications, these large corporations shape different lockins around RE, as they did with fossil fuel-based energy systems, in an attempt to regain power in the energy sector.

However, there remains much that we do not know about the nature of lockins in the context of RE and how such lock-ins are being tangibly shaped.

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Case study

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Avri Eitan

Lock-ins in decentralized RE: My postdoc at Copernicus Institute of Sustainable Development

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Avri Eitan

QUESTIONS?

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Avri Eitan

THANK YOU!

AVRIEITAN@GMAIL.COM 35