January 10th, 2014

The shock of the renewable

8 minute read

by Laurence Elliott

 

The UK’s energy system is currently undergoing a period of permanent change. The European Union’s Large Combustion Plant Directive (LCPD) has spelled doom for a number of fossil fuel power plants. In many parts of Europe, an increase in renewables is already changing the structure of electricity markets with profound implications for how we manage and transmit power.

 

Watts gained and lost

Under the LCPD, plants that do not comply with stricter emissions standards for sulphur dioxide, nitrogen oxide, and particulate matter emissions must operate only for a further 20,000 hours, and shut down permanently by 2015. Many in the UK have closed already; those that remain past 2016 face the costs of fitting emissions reduction technology, known as selective catalytic reduction (SCR), to meet Industrial Emissions Directive requirements.  According to a report by Energy UK six coal plants and three oil plants totalling 11.8GW of generating capacity will close by 2015. Meanwhile, many nuclear plants are reaching the end of their expected lives, with five expected to close by 2016 – Wylfa having been given a reprieve until 2015. In all, 16.9GW, almost half of the 35.8GW average energy demand in 2012, will be lost in the next three years.

It’s little wonder that as the winter nights started drawing in, newspapers on both left and right ran articles on the threat of energy shortages. National Grid has forecasted for this winter an electricity margin (that is, the buffer between peak demand and total possible power generation) of 5% during cold weather – the lowest margin since 2007. Ofgem recently reported that the risk of blackouts could increase from the current rate of once every 47 years, to once every twelve years by 2015/16, before rallying.

So, how might we plug the gap? While coal is currently making something of a comeback – US exports are suddenly cheap due to competition from a glut of fracked natural gas – both climate change and air quality dictate that this can only be a short term fix. A recent study has shown that more fossil fuel is already listed on the world’s capital markets than can be burned if we’re to keep below a 2oC increase in global temperatures; so the only real options for the majority of our electricity needs are renewable energy and nuclear power.

Established forms of nuclear energy function very much like fossil fuel power stations, only far more expensive to build (and decommission). They conform to our current system of ownership and distribution: each site is owned by a large corporate and generates large amounts of energy that must be transmitted widely. Nuclear will be part of the UK’s energy mix for some time to come, but it will increasingly sit alongside renewable sources: one of the EU’s “20-20-20” targets is to increase the share of energy consumption produced from renewable resources to 20% by 2020. Renewable generation is less bound to traditional patterns, and we’re already seeing the effects of its rise.

 

Wholesale reductions

Over the weekend of the 15th and 16th of June, wholesale prices on the German/Austrian electricity exchange went negative: power generators were paying the grid to take their electricity.

The EU’s Renewable Energy Directive requires that electricity grids must give priority to energy from renewable sources. Warmer than average temperatures and windy conditions conspired to reduce electricity demand and increase the supply of wind power, displacing the normal baseload generating capacity from nuclear, coal, and combined-cycle natural gas plants. Load-following plants, commonly traditional gas turbine units, are able to ramp down their output. But much of the baseload shuts only for planned maintenance, and is slow and expensive to restart. With supply outstripping demand, the excess electricity had to be cleared by the markets through negative power prices.

Indeed, as German renewable supplies have increased, wholesale electricity prices have been steadily falling.

 

German Market Price

The price of power. German wholesale energy prices are falling – but domestic customers aren’t benefiting. Image: EEX

 

Counter-intuitively this has not led to lower prices for consumers, although it may do in the longer term. In fact, domestic energy prices in Germany are amongst the highest in Europe, largely due to the structure of the country’s renewable energy subsidies. Under the Renewable Energy Act dating from 2000, suppliers of renewable energy are guaranteed a minimum rate for the energy they produce, funded by a levy on household electricity bills. As wholesale prices fall, the share of the minimum that must be met by feed in tariffs grows, raising the price consumers pay.

Plunging wholesale prices and lower demand for conventional energy are hitting German utilities hard. The country’s biggest energy company, E.on, saw its bottom-line profit for the nine months to September 2013 shrink by 19 percent compared to the same period in 2012, while another energy giant, RWE, announced substantial job cuts.

 

Power to the people

Although consumers are currently meeting the costs of the investment in renewables, in the longer term we stand to reap the benefits. Critical voices have labelled domestic energy price rises as a symptom of continued market failure. Four of the “big 6” energy companies have recently announced electricity price rises for 2014 of between 8.2 and 10.4%, far outstripping increases in generating costs, with only EDF Energy keeping to a “near-inflation” 3.9%.

However, the National Audit Office recently reported that consumers face at least 17 more years of above-inflation increases in their energy bills to fund essential and long-delayed investment in energy infrastructure. The Government’s controversial agreement with EDF Energy to fund the building of Hinkley Point C, the UK’s first new nuclear plant in 20 years, by agreeing a strike price of £92.50 per MWh – double the current market rate – is a clear signal of an expensive future.

But many forms of renewable energy move us away from centralised power plants owned by energy utility firms, and towards decentralisation and increased citizen ownership. In Germany, 47% of installed renewable capacity is in the hands of citizens and community energy companies, while utility companies hold only 12%.

 

Eolienne_et_centrale_thermique_Nuon_Sloterdijk

Energy old and new: coal and wind operating side by side in Amsterdam. Photo by Aloxe, via Wikimedia Commons.

 

A Greenpeace report has suggested a number of environmental, economic, and security of supply benefits to decentralised energy. Community renewable energy projects have direct financial benefits for local community groups and investors, enabling communities to access cheap, green energy. Even the UK Government is a supporter.

 

Grid and bear it

Renewable energy also has profound implications for the transmission grid, leading to some commentators expressing concern about a loss of reliability. Integration of significant amounts of renewables with conventional baseload plants is certainly problematic. A 2010 study by the German Renewable Energies Agency found that, due to their inflexible ability to adjust to changing demand, “nuclear power plant are incompatible with renewable energies” – bad news for countries looking to combine the two.

However, this is not a new problem: a study by the German Institute for Applied Ecology showed that France, heavily reliant on inflexible nuclear power plants, already exports significant power when demand is low, and imports it when demand is high.

It is also soluble. Consultancy Eclareon Gmbh surveyed the grid function of EU member states and found that “large quantities [of renewable generation] can be effectively managed on the grid”, providing that sufficient investment is made in smarter grids and storage technologies. Germany is already demonstrating that significant renewable penetration is possible with no apparent decrease in reliability.

 

German lessons

Germany’s rapid transition to renewables sets a far from perfect example, but there is much the UK can learn from it. Germany was compelled to make changes fast to fill the gap left by the closure of nearly half its nuclear power plants in 2011, driven by post-Fukushima safety concerns. Cheap coal and low carbon prices have left Germany reliant on significantly increased coal-fired generation; a more gradual, managed transition may have been wiser both economically and environmentally.

The UK has the opportunity to achieve just this, although the government continues to send out mixed messages. It is clearly enthusiastic about shale gas and wary of following the advice of the Committee on Climate Change on higher green energy targets. Recently announced increases in subsidies for offshore wind came alongside decreases for onshore wind and large-scale solar PV. According to RenewableUK, these cuts may impact most on the viability of small community electricity projects – which the government is at the same time trying to promote through the Rural Community Energy Fund.

Yet while the future for renewable energy in the UK may be less clear than investors would like, it is hard to see how in thirty years we could still rely so heavily on fossil fuels, or that renewables will not have made substantial inroads. Where fossil fuel use persists, it will need to consist mainly of peaking units such as simple gas turbines, which rapidly flex to match demand. Our electricity grid will need to have been transformed to allow energy generated at a domestic and community scale to be integrated to meet national needs, and to allow energy to be stored so that what we make on a windy day can be saved for when it’s needed. It will take substantial investment now, which is tough to contemplate when money is scarce. But it is an investment whose value for the future will be on a par with the rail and water networks we inherited from our Victorian ancestors, which will pay dividends for years to come.

 

Laurence Elliott

 

Laurence Elliott Trainee Consultant

 

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