‘For much of the past decade, renewable-energy costs fell rapidly’, but now ‘the cost of creating new clean power has risen across much of the system’. So says Tone Lagengen, in a new report from the Tony Blair Institute for Global Change. It calls for a new approach to supporting clean energy technology with a focus on allegedly cheaper options.
She says that, under the current approach, for renewables like offshore wind, ‘inflation, higher interest rates, constrained supply chains & global competition for key components have pushed up capital costs. This is evident in the upward trajectory of strike prices at offshore-wind auctions in recent years. In 2019’s Allocation Round 3, offshore wind cleared at the lowest prices recorded: about £55 per megawatt hour (MWh) based on 2024 prices’.
By contrast, she says ‘Allocation Round 5 in 2023 failed to attract a single offshore-wind bid, as no project could be delivered below the administrative strike price. Allocation Round 6 in 2024 subsequently cleared at £82/MWh (2024 prices), reflecting sharply higher capital costs, financing conditions & system risks.’ And now, in Allocation Round 7, ‘offshore-wind projects secured contracts at strike prices of about £90/MWh in 2024 prices, reduced due to the 5-year extension of the contracts awarded to those projects. This was despite strong competition’.
She concludes ‘the direction of travel is clear: offshore-wind costs have risen materially from their 2019 low, reversing the assumption that scale alone would continue to drive prices down. In addition to the pure capital cost of renewables, the cost of integrating them in the energy system has also proven to be higher than expected, & at higher levels of penetration. As a result, electricity prices are now shaped less by the marginal cost of generation and more by the total system cost. In this environment, adding clean capacity at the margin can raise costs rather than lower them, especially when deployment is rushed, poorly located and/or poorly integrated’. Instead, she says, we must go slower and look to a lower cost alternative approach: ‘an approach that rewards speed and scale will reliably drive prices up’.
It’s a debatable thesis, and not everyone agreed with it. For example, James Alexander, CEO of the UK Sustainable Investment and Finance Association, said: ‘The Government must resist short-sighted calls to prop up our declining fossil fuel industry and instead focus on making the UK a leading destination for green investment’, and Jess Ralston, energy analyst at the Energy and Climate Intelligence Unit, said : ‘While the thrust of this report is around cheaper power, it’s not clear how many of its recommendations will lower bills’.
Going back in time, there was much enthusiasm for renewables when prices kept on falling. They still are for PV solar. But does that mean we should keep chopping and changing our investment patterns based on minor short-term variations in prices? Lagengen evidently thinks that energy costs are all important, and certainly that’s a common theme in much comment on energy choices at present. But it is a criteria that us not always applied consistently. For example, nuclear technology has remained very expensive and yet, many decades on, we are still investing heavily in it- and using public subsidies to keep it going.
There is a case for subsidies when a technology is new. Renewables got heavily subsidised in the early days when they were starting out, for example with the Non-Fossil Fuel Obligation, Feed in Tariffs and then Renewable Energy Obligations, as the Global Warming Policy Foundation (GWPF) has pointed out. But it worked. As the technology improved, the markets expanded, and less support was needed. That’s been the case for the new CfD support system most- most strike prices have continually fallen. Even if you add in the cost of balancing and curtailment losses, most renewables still look good, with solar and on shore wind winning out against all options including nuclear, although, in GWPF’s recent estimation, not fossil gas, which it sees a cheaper than all, even with carbon costs added in! Lagengen’s TBI paper seems to see things the same way. She says we must ‘create an investable North Sea basin’ and also promote nuclear innovation. All this, allegedly, to get costs down.
It’s a little hard to follow the logic, but she says, ‘instead of Clean Power 2030, the organising objective of electricity policy should be Cheaper Power by 2030. This would put the system on a credible path to lower electricity costs over time while maintaining a clear decarbonisation trajectory’.
Is that really possible, given that she seems to be looking to fossil gas and nuclear innovation- along with some renewables? Well she obviously thinks it will work and insists that ‘Cheaper Power 2030 is not a retreat from climate ambition. Rather, it is the only version of climate ambition that survives contact with economics, politics and geopolitics. Because Clean Power 2030 has become the overarching mission for energy policy, it dictates strategy and systematically rewards the wrong behaviour. One of the most common misconceptions is that, even if the 2030 target is flawed, it is harmless and therefore there are no downsides to keeping it in place. That is not the case. This kind of objective shapes incentives - and incentives shape outcomes’. Sorry I think that is very debatable- given that we need to tackle climate change urgently.
Of course, if you don’t think that’s true, then we can take our time and stay with fossil gas for as long as it last (evidently about 7 years for the fast depleting North Sea reserves), and try our luck with shale gas fracking- and even with new nuclear! As Reform seems to want to do. Even coal! But will any of that really turn out to be cheaper than sticking to renewables? After all, one of the reasons for the rise in cost of some renewables has been the rise in cost of gas and its knock-on effect on the economy in general and materials in particular: you might see that as the dead hand of fossil fuel slowing down its replacement. Although that’s also an issue for other new energy technologies, like SMRs- it adds to their costs.
The alternative view, as argued by Chris Stark, the net zero ‘Mission Controller’, is that we need to accelerate renewables, even if it costs a bit more for some of them for a while – we are ‘sprinting ahead’ in a fast changing situation. Well, it probable is true that, as he says, longer-term, wholesale price differences will even out. But that doesn’t mean that we should not improve on how we are developing renewables. For example, I’m not sure that extending the CfD contract life time from 15 to 20 years was necessarily a good idea. In 2016 the Hinkley Point nuclear plant was given a CfD contract guaranteeing EDF an index-linked strike price for 35 years after it started up: that now looks like being after 2030! I don’t think very long contracts like this support innovation - and we do need that for renewables, not least to get the prices down.
Comments
Post a Comment