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Winners, losers and the low-cost energy future 

03 Oct 2018 Dave Elliott
Photo of solar farm
(Courtesy: iStock/Milos Muller)

Some technologies win, others lose, at least in the short term. The UK tidal power industry has been taking stock after the UK government decision not to proceed with the 320 MW Swansea lagoon as it saw it as too costly. “We saw no appetite from government to think differently, which suggests there’s a systemic obstacle to innovation,” said Tidal Lagoon Power Ltd. Richard Graham, MP for Gloucester, UK, and chair of the All-Party Parliamentary Group on Marine Energy & Tidal Lagoons, reckons the government needed to be clearer about how it would compare the costs of different energy sources: “How do you compare a price for marine energy relative to sources around for almost 60 years (nuclear) or much shorter periods (wind), but which have reached their current price after c.£18 billion of subsidy? If everything is priced from the latest offshore wind bids of CfD [contract for difference] of £55 per kWh, the chances of much marine energy being added to the mix are very modest.”

For good or ill, a new dynamic is taking over from the climate response motivation

Dave Elliott

Atlantis, which didn’t get a CfD for its next set of turbines for the 398 MW MeyGen tidal stream project in the Pentland Firth in the last round, is also facing problems. It is also seen as too expensive at present. This reflects the UK’s CfD competitive contract auction arrangements – they make it hard for novel technologies to break in, as Richard Graham indicates. But it’s not just in the UK; the novel Open Hydro tidal stream project in France has also been cut back. So it may be a generic problem of new technologies in the tidal area, and for wave energy technologies too. Some remain convinced that these will follow wind and photovoltaics (PV) to lower prices, but that is taking a while.

Falling costs

However, there are also problems in other areas, for those technologies that are already seen as economically competitive, like wind and PV solar. There is no question that they are becoming cheap globally. The Levelized Cost of Energy (LCOE) for utility-scale solar has dropped 86% in the last eight years. For wind, the figure is 67%. In 2017, the international average cost for wind power was $51/MWh, and for PV solar $54/MWh. For comparison, while renewable projects were between $35 and $54/MWh, fossil fuels were between $49 and $174/MWh in the G20 countries in 2017, according to a survey by the Kaiserwetter consultancy.

Costs are still falling, with some solar projects in favourable – sunny — locations getting down to near $20/MWh or less. For example, solar auctions in Mexico yielded an unheard-of average price of $20.57/MWh, including a $17.7 bid by Enel. These cases may be exceptional and the competitive “race to the bottom” may perhaps undermine further development: as developers scramble to under-bid one another, some fear the price war may eventually erode the quality that is deliverable, always assuming that the low-bid projects can actually deliver at all. Some say these winning low-cost projects are speculating against future cost falls, a risky strategy. However, for good or ill, that is how market competition works, and it certainly has led to some cost reductions across the board.

The “race to the bottom” issue does present potential problems, but they are common in many areas of market competition: all other things being equal, if prices fall, there is less incentive for new investment, given the reduced profit margins. It’s sometimes called “price cannibalism”. Essentially, it’s a problem of success: once you’ve won and destroyed your rivals, it’s hard to do better. However, as I noted in my last post in relation to storage, if overall market demand is expanding, as is the case for most renewables, then there are still commercial gains to be made, so growth can continue. For once, the growth driver in capitalism can be beneficial, up to a point.

There are presumably limits, and at some stage we would have built enough renewable capacity to suffice, meeting most energy needs, and then only need replacements and upgrades to reduce costs. That is some way off. Even on the most optimistic scenarios, it would take up to 2050 to get to 100% renewables. In the meantime, however, costs will fall. One recent study even suggested that renewable power will essentially be free by 2030.

It might be wise to be wary of over-optimistic views, and it seems likely that the overall cost of making the transition to renewables will be relatively high — although not as high as the cost of not doing so. But it’s true that costs for some technologies can fall dramatically and fast. At one time, for example, DVD players cost many hundreds of pounds, but they gradually fell to tens of pounds before being replaced by downloading at, in effect, zero cost; the profit is now made mostly by selling the content and software, not the hardware.  The pattern in the energy area may be different, but with PV costs falling fast, it may be that software for smart grid use and peer-to-peer trading will become the dominant cost.

Best option?

That is all to come. But looking more broadly, in terms of energy system development, it might be argued that, for good or ill, a new dynamic is taking over from the climate response motivation. Renewables are getting so cheap they are being adopted for purely commercial reasons: they are the most economic option in some places. While that may be true in some contexts, at least part of the reason has been earlier support under climate policy-inspired subsidies. Now, arguably, the situation has moved on and new projects are going ahead in some locations on the basis of their own merits with, in the UK, there being talk of subsidy-free solar and wind projects.

With the Feed-in Tariff scheme closed and new support under the CfD limited until 2025, that may be the only way ahead for a while, and some are quite optimistic about what can be achieved, even if that might still need some form of zero subsidy CfD, Power Purchase Agreements or debt financing arrangements.

Of course, in the short term, there could be limits as to how much this approach can prosper, given that rival energy options might still be subsidized, most obviously nuclear but also in some countries coal still, while in the UK shale gas fracking is getting strong government support — as well as facing strong local opposition.  

Though some, reasonably enough, have lamented the lack of a level playing field, it is perhaps inevitable that emergent technologies have an uphill fight against incumbents. But some unfair aspects — what are sometimes called “market failures” — can be reduced to open the way for the new technologies. There certainly seems to be demand for it, with 50% of UK households evidently wanting to install solar PV. In that context, it does seem odd to shut down the FiT scheme, which provided a framework for managing PV, including an export tariff. If we are to move towards the widespread use of new smart energy systems at all levels, using cheap PV and the like, there will be a need for some sort of replacement for the FiT. As well as for some system to help the less developed renewables, like wave and tidal power, to progress.  Assuming, that is, that wind and PV don’t wipe all else off the map.

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