The past year has been the most challenging the renewables industry have faced. At the REA we have grown with the industry. Set up in 2001, we have seen the evolution of ‘alternative energy’ through to the mainstream. From a cottage industry spoken about in fantastical terms to standing on the precipice of delivering energy cheaper than fossil fuels. The economic direction is clear, last year saw the tipping point of renewables attracting more investment than traditional fuels worldwide.
The renewables industry should be a point of national pride, an area of real success, showcasing British ingenuity and innovation. We made ground-breaking strides forward in wind turbines during the eighties yet gave it away, for the past decade we have had the intellectual jump on the rest of the world in terms of marine energy and are in real danger of doing the same thing.
Solar is another area we have innovated. The drastic cost reductions seen in solar are only in small part due to cheaper panels, with EU tariff protection capping the cost of cheaper global prices. The British solar industry has driven down costs in the same way the British cycling team has revolutionised their sport, through the “aggregation of marginal gains”, a thousand minute improvements that are the difference between winning and losing. At a time when nuclear is going up in cost, coupled with doubts over deliverability, solar costs are still dropping and can be deployed quickly, cleanly and sustainably.
The cost of new renewables may now in fact be cheaper than those for new fossil fuel generation. I say in fact because there is no way of knowing. No new gas station has been commissioned in last 4 years, and the last plant to open in 2012 started construction in 2008.
The nearest viable new gas generation we have is Trafford, who quote they need £72MWhr to complete. The current wholesale price is around £35MWhr, leaving a £37 gap that needs to be plugged if the UK is going to get our new capacity from fossils. For reference, the last round of renewable contracts, solar and wind both came in at around £79. However, that was in February 2015 so the costs will have certainly have reduced further.
But in a twist of events, 2016 will see new gas subsidised, the Hinkley deal guaranteed at £92.50MWhr and even more bizarrely, diesel is receiving subsidy. Yet arguably the cheapest of all new generation options, wind and solar, will be blocked from having access to any market. So, government policy now subsidises diesel, but blocks the cleaner more cost effective choice.
How did we get here? It is undoubtedly exacerbated by low gas prices, making new capacity unattractive for energy companies, in addition to subsidies costing more due to the drop in the wholesale price. But whilst the low wholesale price is out of the government’s hands, the assault on renewables is not.
The industry has to move on from the last year and look to the new government agenda. The overall direction of renewables is clear and is an unstoppable global movement. Whilst we may have to spend a couple of envious years looking towards our partners in other countries longingly, wishing for their apparent ease, we need to get back to doing what we have already shown we are capable of, namely of innovation and finding UK solutions to UK problems.
Whilst the era of subsidies is coming to a early and abrupt end, renewables and new technologies can still find a use in some of the biggest policy problems we face in one of the oldest and most complex energy markets in the world.
Some of these problems are merely of an aging infrastructure. Last September, the then Chief Executive of the National Grid, Steve Holliday, summed up the shift in thinking that is going to have to happen.
“The idea of baseload power is already outdated. I think you should look at this the other way around. From a consumer’s point of view, baseload is what I am producing myself. The solar on my rooftop, my heat pump – that’s the baseload. Those are the electrons that are free at the margin. The point is: this is an industry that was based on meeting demand. An extraordinary amount of capital was tied up for an unusual set of circumstances: to ensure supply at any moment. This is now turned on its head. The future will be much more driven by availability of supply: by demand side response and management which will enable the market to balance price of supply and of demand. It’s how we balance these things that will determine the future shape of our business.”
This is a business case for renewables that doesn’t rely on targets or subsides, but of economic and consumer terms. There is a very real problem with the old way of thinking that is no longer suited to modern realities, and renewables offer part of that practical solution in a more decentralised grid.
The second is the financial environment we inherit. The old model of ‘big pieces of kit’ is increasingly unrealistic. In a nationalised system it would still perhaps be practicable to fund power generation in the billions for a single project, but as demonstrated with Hinkley Point C, it is proving hugely difficult to raise capital and underwrite the risk and is certainly added to the overall cost. Gas plant is also proving difficult, with policy uncertainty playing its part and the low wholesale price too. But large energy companies are also sitting on reduced reserves with little incentive to risk hundreds of millions in a new asset.
Smaller, easier to fund projects are looking much more attractive and can have much lower financing costs.
Thirdly, the inherent problem of renewables variability is soon to be turned into a positive when coupled with energy storage. With energy storage, the instant dispatchability is in stark contrast to the unresponsive and inflexible nature of baseload. For many, energy storage is a green pipedream still decades away. This is now demonstrably wrong, with companies around the world already operating energy storage plants. Even better, they’re operating energy storage projects without subsidy. California is undoubtedly leading the way but the UK is looking to catch up quickly. Kilroot in Northern Ireland is a 10MW plant recently opened, with plans to extend to 100MW. National Grid announced their tender for 200MW of enhanced frequency response capacity its resulted in 68 project submissions totalling 1.3 GW. Energy storage is already viable, and we are going to see a lot more of it.
The energy sector is going to have a revolution in the coming years. Smart businesses and markets have already woken up to that fact, now is the time for the UK government, and some in the energy market clinging to the old broken models, to do the same.
By James Court, Head of Policy & External Affairs, REA
This article first appeared in the Guide to Clean Energy
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