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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.

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