07 October, 2019

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Record breaking wind power prices

Welcome to the October 2019 newsletter from the Oxford Martin School Programme on Integrating Renewable Energy.
Read about the record low prices for offshore wind energy; the inconsistencies between the government words and actions regarding funding fossil fuel technologies; record breaking renewable generation but inaccurate data; the decline of nuclear fission in favour of renewables, but glimmers of future fusion; and the potential effect of a no-deal Brexit outcome on electricity supplies.
If you have been forwarded this email and like it, please do subscribe directly!    Helen Gavin

Wind prices plummet again!

The UK’s September 2019 ‘Contracts for Difference’ auction has delivered record low prices, lower than government and industry expectations, sending shockwaves through the sector.
Contracts have been awarded to 12 schemes including six offshore windfarms, totalling 5.5GW, alongside a further 0.3GW of onshore windfarm capacity expected to generate ~29 TWh of electricity annually.  This is equal to 9% of the UK’s total output in 2018 and is estimated to be sufficient to power 25% of the country’s 26 million homes.
These projects are located in the southern North Sea, close to existing offshore wind farms.  As such, the low prices possibly reflect the fact that these sites are cheaper to develop due to being closer to shore, having access to existing port infrastructure and in relatively shallow water.
Low carbon energy can now shake off the accusation of being costly and expensive: these wind developments will “pay back” potentially £246 million per year, once operational.

What is the CfD?

The Contracts for Difference (CfD) scheme is the government’s main mechanism for supporting low-carbon electricity generation.  A CfD is a long-term contract between the government and an electricity generator guaranteeing a price for the electricity produced: this is called the “strike price”.  The strike price is guaranteed and indexed for 15 years, to give investors the confidence to develop projects with high upfront costs and long lifetimes.
Renewable generators can apply for a CfD by submitting a ‘sealed bid’ in a specified auction round every two years, of which the third round concluded in September.  Contracts are awarded to developers that bid with the lowest prices.
There are different categories of technologies under the CfD: Pot 1 (established technologies, such as onshore wind and solar) and Pot 2 (less established technologies, such as offshore wind and biomass CHP).  Only Pot 2 technologies have been eligible for the last two rounds.
When the market price for electricity is higher than the contractual Strike Price, the generator receives the market rate and pays the difference to the government; when the market price is lower than the strike price, the government pays the generator to make up the difference.

Notably, prices have fallen with each CfD auction: round 1 strike prices were £114 per MWh (operation start year 2018/19); round 2 prices were £58 per MWh (2022/23); and round 3 = average £41 per MWh (for project starting in 2023/24 and 2024/2025) (all costs are stated at 2012 prices for continuity).

Why has offshore wind been so successful?

What underpins the amazingly successful investment and development of offshore wind which has led to such low prices? Regen identify the critical factors to be a) public actors working with the private sector, b) a clear policy framework, c) seed investment and d) a clear development path.

These essential items need to be applied in a consistent way across all energy, industrial and business sectors to meet our climate change targets.

What are the possible ramifications of these record low prices?

Round 3 has shown prices £8-9/MWh below the government’s “reference price”, the expected price of electricity on the open market.  If the market follows the government’s expectations, Carbon Brief expects these wind developments could contribute nearly £600m towards consumer bills by 2027, instead of receiving a subsidy.  In addition, these prices are so low that the UK windfarms could generate electricity more cheaply than existing gas-fired power stations as early as 2023, much earlier than the expected tipping point of 2030.

Offshore wind may now be considered as a mature, proven technology, and moved to Pot 1. This may remove it from further CfD rounds.

The government may continue its stubborn opposition to developing onshore wind energy, despite high public support, as offshore prices are low.

 Innovation continues to thrive: Doggerbank, 130km off the Yorkshire coast is one of the areas contracted under round 3, and will feature the world’s largest wind turbines.  Each turbine will be 220m high, with 100m long blades, and a third more powerful than current, typical turbines. Each turbine is expected to generate enough electricity for 16,000 homes.

Larger, more efficient turbines and improved design and operation will increase the “load or capacity factor” for offshore wind to over 50% by 2035 (currently 39-47%) according to research for BEIS, meaning more energy will be generated, cleanly and cheaply.   The capacity factor is the average power generated, divided by how much it could produce, over a set period of time; the higher the value, the more power has been generated.  For wind power, factors that lower the capacity factor include windspeeds that are too low or too high; turbines not working; system losses e.g. energy lost in cables; and the ability of the turbines and their layout to capture the available energy.

Could offshore wind farms be built without any public assistance?

The Financial Times argue not, unless the cost of intermittency is significantly reduced. While the round 3 developers will be paid at rates less than estimates of future market prices, they still have a guaranteed price and buyer, and do not cover the cost of intermittency (curtailment costs and the need for backup electricity sources) and network and grid connections.
Forcing renewable generators to cover these costs may increase the required subsidy but would encourage renewable power operators to reduce the cost and impact of intermittency issues. Further it would be a more transparent approach, enabling a more accurate comparison of different power technologies.Integrate believes that achieving a fair and transparent process is ideal, but the same goal needs to be applied to all power generating sources, for equity.  For example, nuclear power operators should fund long term waste disposal and fossil fuel companies would need to cover the cost of spills, contamination and decommissioning, as well as climate change induced impacts.  Due to vested interests, powerful lobbyists, and slow nature of policy changes, it is unlikely that there will ever be a fully transparent, even, playing field on which to compare power generators.Arguably, a better approach would be for the government to allow Pot 1 technologies to compete in future CfD auctions i.e. solar and onshore wind to give them the same opportunity to produce zero emission energy for our net zero future.

Government spends £2.5 Billion on fossil fuel projects

The UK government has stated an ambition to achieve Net Zero emissions by 2050… but refuses to end fossil fuel subsidies, both at home and elsewhere.

The UK Export Finance (UKEF), a ministerial department, spent £2.5 billion subsidising UK fossil fuel projects mostly in low and middle-income countries; amounting to 96% of the total UKEF budget over 2013/14 to 2017/18.   In contrast it spent £49 million on clean energy and renewable energy projects over the same period; a reduction of 71%.

This “dirty” investment from UKEF increased eleven-fold between 2017/18 and 2018/19, jumping from £205 million to £1.9 billion.

In addition to this subsidy, the UK Government annually provide a £10 billion subsidy to fossil fuels through tax breaks and budgetary transfers, more than any other EU state.

Subsidising fossil fuel projects, removes the risk to investors and sends signals to the market to continue supporting fossil fuel production. It also locks the recipients into high-carbon dependency for decades.  The investments undermine the UK’s legally-binding climate neutrality agreements, and international climate and development targets, and have wide-ranging negative environmental impacts.

In June 2019, the Environmental Audit Committee published its report on the UKEF, calling on the government  to end its support for overseas fossil fuel energy projects, and only back British business export projects that support the UK’s climate goals.  In addition to identifying the total funding for fossil fuel projects, the committee also found that some of recipients were not based in the UK.  The former UN Secretary General, Ban Ki-moon also urged a “recalibration” of UKEF’s policy to meet international climate trends and obligations.

International trade secretary Liz Truss rejected the call to cease fossil fuel investment by 2021, saying that the “UK’s oil and gas sector is a significant source of skilled jobs across different regions of the UK and continues to play an essential role in the UK’s energy security even as we transition to lower carbon and renewable energy sources.”

This response has been called hypocritical, and completely undermining parliament’s declaration of a climate emergency.

If we don’t measure it, we can’t manage it!

BEIS has published renewable energy trends and information which, at first sight, look great.

Total renewable electricity capacity at the end of June 2019 was 45.9GW; a 7.9% increase on the previous year. The portion of electricity generated by renewable sources between March and June 2019 was 35.5%, at 27 TWh.  BEIS also published data showing that UK solar deployment at the end of August 2019 is 13.3 GW.

But can we be sure that these numbers are accurate? Not really.

At the 2019 Oxford Energy Conference, Claire Spedding from the National Grid stated that four years ago, there were real-time common discrepancies between known (metered) production, and the electricity in the grid system of up to 4GW.  A key reason for this was the lack of export meters on small scale PV systems. Since then the National Grid has reduced this mismatch by using predictive modelling from the Sheffield Solar group, and others.

 This gap still exists however due to the continuing lack of export meters, and now the lack of a requirement to register installations following the closure of the Feed in Tariff at the end of March 2019.  As a result, the Solar Trade Association (STA) has called on the government to  stop publishing inaccurate information, given that the methodology for data collection relies on subsidy schemes that have closed, or exclude significant schemes such as large-scale commercial and industrial rooftop PV installations.

Timely, detailed and accurate data is important!  Let’s count the ways… (1) to ensure safe, efficient and cost-effective grid operation and electricity supply; (2) to provide an accurate picture to drive investment and new business models; (3) to create a robust evidence base for research, innovation and policy-making… and more!

How can the energy sector fully decarbonise unless there is certainty how the grid is being powered?
It is currently hindered by poor quality, inaccurate, or missing data, while valuable data is often restricted or hard to find. These were the findings of the Energy Data Taskforce, which was commissioned by Government, Ofgem, and Innovate UK.   Its report in June 2019 advocates for a “Modern, Digitalised Energy System”, and set out a number of recommendations, based on two key principles – filling in the data gaps through requiring new and better-quality data, and maximising value by ensuring open data.  Critically, it calls for a coordinated generation asset registration system, to enable truly accurate monitoring of renewable energy sources and battery storage deployment and a Digital System Map to increase visibility of infrastructure and assets, enable optimisation of investment and inform the creation of new markets.

We await the government’s response…

“Nuclear power… meets no technical or operational need that renewable competitors cannot meet better, cheaper, and faster”

Nuclear fission plants have had some bad press recently.  EDF have stated that Hinkley Point C faces even more delays with costs escalating to ~£22 billion.  Japan’s new environment minister has called for the country’s nuclear reactors to be scrapped to prevent a repeat of the Fukushima nuclear disaster.  And France has started to repower nuclear sites with PV: 62.5MW of solar near EDF’s Fessenheim nuclear station.

These incidents are proof that the world is witnessing an “organic nuclear phaseout” according to the 2019 World Nuclear Industry Status Report (WNISR), “the authoritative report on the status of nuclear power plants worldwide”.The WNISR2019 report states that over the past two years, the largest historic nuclear builder Westinghouse and its French counterpart AREVA have gone bankrupt. Trends suggest that the nuclear industry may have reached historic maxima, with nuclear power generation peaking in 2006, and fewer reactors operating today than in 1989.
The report echoes the IPCC, stating that the political, economic, social and technical feasibility of solar energy, wind energy and electricity storage technologies has improved dramatically over the past few years, while that of nuclear energy and carbon dioxide capture and storage (CCS) in the electricity sector have not shown similar improvements.  It reports that:

In 2018, ten nuclear countries generated more power with renewable than with nuclear energy; China produced more power from wind alone than from nuclear; in the fiscal year ending March 2019, both wind and solar out-generated nuclear in India; and in the EU, renewables accounted for 95% of all new electricity generating capacity added in the past year.

A record 165 GW of renewables were added to the world’s power grids in 2018, compared to 9 GW of nuclear.

Global wind power output grew by 29% in 2018, solar by 13%, nuclear by 2.4%. Compared to a decade ago, non-hydro renewables generate over 1,900 TWh more power, exceeding coal and natural gas, while nuclear produces less.

Over the past decade, cost estimates for utility-scale solar dropped by 88%, wind by 69%, but nuclear increased by 23%.

WNISR2019 urges everyone to meet climate targets by using least-cost and in-least-time principles, and this means using non-nuclear options as they save more carbon per dollar and per year.
In many nuclear countries, new renewables can now compete economically with existing nuclear power plants. The closure of uneconomic reactors will not directly save emissions but can indirectly save more emissions than closing a coal-fired plant, if the nuclear plant’s larger saved operating costs are reinvested in efficiency or cheap modern renewables that in turn displace more fossil-fuelled generation.
While current nuclear programs are particularly slow, current renewables programs are particularly fast. New nuclear plants take 5–17 years longer to build than utility-scale solar or onshore wind power, so existing fossil-fuelled plants emit far more CO2 while awaiting substitution by the nuclear option.

Can we combine nuclei instead of splitting them?

When awarding £220 million of funding towards developing a nuclear fusion power station in Yorkshire by 2040, Business and Energy Secretary Andrea Leadsom said, “This is a bold and ambitious investment in the energy technology of the future. Nuclear fusion has the potential to be an unlimited clean, safe and carbon-free energy source and we want the first commercially viable machine to be in the UK.”
Oxford-based start-up First Light Fusion believes fusion energy will replace the role of natural gas by the 2030s: watch this video to find out their approach.

No Deal Brexit and Electricity

Although energy supplies will not run out following Brexit, there are likely to be “significant” price hikes according to the UK Government’s no-deal Brexit planning document.

The UK’s electricity markets are currently integrated into those of the EU, with common rules governing their operation.  Significant cross-border flows of electricity take place between continental Europe and Great Britain; between Great Britain and the island of Ireland; and between Northern Ireland and Ireland.  These flows, and the domestic markets, are currently governed through EU legislation relevant to the functioning of the EU’s Internal Energy Market.

The Northern Ireland electricity market is separate from Great Britain and different considerations apply.  Northern Ireland shares a wholesale electricity market with Ireland, the all-island Single Electricity Market (SEM), an example of North-South cooperation that has benefited consumers and the economies of Northern Ireland and Ireland.

The Single Electricity Market involves significant cross-border flows of power between Ireland and Northern Ireland and operates within the framework of common EU rules on electricity markets.

The likely outcomes if there is no deal, according to BEIS:

European energy law, including the EU Renewable Energy Directive, will no longer apply to the UK and the UK’s electricity markets will be decoupled from the Internal Energy Market.

The Single Electricity Market may be unable to continue, and the Northern Ireland market would become separated from that of Ireland and have no legal basis.

There will be implications for trade between the UK and the Single Electricity Market through interconnectors.

Separate Ireland and Northern Ireland markets will be less efficient, with potential effects for producers and consumers on both sides of the border.

Cross-border flows across electricity interconnectors will no longer be governed by EU legislation and new trading arrangements will be needed for trade and cross-border cooperation in operating the electricity system.

What’s the effect on meeting climate change goals?

Research from the University of Sheffield highlight that, because the UK has been a key player in securing EU climate regulations, and stronger environmental regulations, Brexit may affect the ability of both the UK and the EU in meeting the goals of the Paris Agreement, let alone Net Zero.

Without the presence of the UK, and with relations between the UK and EU strained, there is an opportunity for climate science denying governments to take more influence, such as Poland, the Czech Republic, and Hungary. Further, with the UK wishing to strike deals with the US, it may follow its lead in withdrawing from the Paris Agreement.

And on Carbon Pricing?

The UK would drop out of the EU Emissions Trading System (EU ETS), and BEIS would replace it with a fixed rate “Carbon Emissions Tax”.  This would be set initially at £16 per tonne meaning that, coupled with the Carbon Price Support levied on the power generation sector, the effective price is £34 per tonne.   The new arrangements would make use of EU ETS mechanisms to smooth the transition. However, the new tax will not cover aviation, a growing source of emissions.

Thanks for reading!