Renewables growth in Europe: good news for wholesale electricity prices?
- 12 Nov 2012, 16:30
- Freya Roberts
The fast growth of renewable energy generation in Europe has
pushed down wholesale electricity prices in recent years, but could
this trend mean governments end up subsidising fossil fuel plants
that might otherwise be forced to close? We look at how the growth
in renewables may affect electricity costs in Europe and the
UK.
According to a report by market analyst
Moody's, the profitability of fossil fuel generated electricity
has gone down as renewables have grown. This means some power
stations are operating at a loss, and may close. Since some form of
backup is needed for days when renewables produce less electricity,
Moody's suggests governments may need to incentivise power plants
to stay open. And that could put an upward pressure on
prices.
Renewable electricity generation
According to
the somewhat gloomily titled Moody's report, 'European
Utilities: Wind and Solar Power Will Continue to Erode Thermal
Generators' Credit Quality', the expansion of solar and wind power,
combined with reduced demand for electricity thanks to the economic
downturn, has led to an oversupply of electricity in Europe,
pushing down its market price.
This may sound like good news - perhaps it is. But it also means a
number of fossil fuel power generators in Europe are now running at
a loss. With less demand for the electricity they produce but the
same fixed costs, some are struggling to stay afloat, the report
says.
According to Moody's analyst Scott Phillips, large increases in
renewable capacity has reduced both power prices and the
competitiveness of fossil fuel generators in Europe. He says:
"What were once considered stable
companies have seen their business models severely disrupted and we
expect steadily rising levels of renewable energy output to further
affect European utilities' creditworthiness."
So a balance must be found - it's likely that however much
renewables grow, some fossil fuel power generation will always be
needed to provide back up. Fossil-fired generation can be easily
switched on and off, making it a flexible way to meet demand and
balance out periods of low renewable electricity generation.
Meeting electricity demand
So how can intermittancy be dealt with? Moody's suggests three
potential approaches: extend interconnections between European
countries, invest in energy storage, or pay fossil fuel plants to
stay ready to backup renewables.
Interconnectivity - cables linking electricity from one country
to another - could even out electricity market prices and increase
the security of supply. But there are regulatory challenges around
building interconnectors, says Moody's.
Electricity storage is likely to be another part of the solution,
but at the moment storing electricity makes it more expensive than
producing electricity from gas, according to Moody's.
The other option Moody's suggests is a financial incentive to keep
fossil fuel power plants open, to be switched on as needed. A fixed
price for potential power generation, also known as a capacity
payment, is being considered in many European countries.
But all three of these approaches will result in costs to the
consumer, potentially evening out some of downward pressure on
wholesale prices renewables appear to be causing.
Could the cost of generating electricity fall in the UK
too?
While the report largely looks at changes in Europe, it suggests
wholesale electricity prices could change in the UK too. But
whether the changes would be as significant is unclear. It depends
on how quickly renewables grow, what type of renewables are used,
and how the government goes about providing backup.
Moody's suggests that between now and 2020, wind capacity in the
UK will grow by 30 gigawatts (GW). But this is an overstatement
according to the figures they cite - it comes from the Department
of Energy and Climate Change (DECC) projections
(here) for the growth of all renewables. Looking just at
onshore and offshore wind, these combined are more likely to add
about
25 GW of capacity by 2020.
Moody's suggests that in Germany and Italy, solar power has
played an important role in driving down wholesale prices. Solar
electricity supply peaks around the same time as demand (midday),
and this means other forms of generation aren't needed when power
is in demand.
But electricity generated from wind power, which the UK relies
more heavily on, doesn't map demand as closely. So fossil fuel
electricity generation may not be substituted so readily, which may
limit the downward pressure on prices.
These are just a few of the factors which make it difficult to
work out if the wholesale cost of electricity will fall in the UK.
Perhaps in an effort to stave off worries about fossil fuels
becoming uncompetitive early, the government has already
announced plans to introduce capacity payments to keep fossil
fuel power plants open. According to the report, the government is
also planning more interconnections, on top of the three already
linking the UK to France, the Netherlands and Ireland.
Moody's suggests the European experience "could well be replicated
in the UK' but that depends on many things. Still, it's an
interesting alternative take on the effect of renewables on
electricity prices, even if mapping through the effect onto energy
bills isn't straightforward.