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Renewables hit by economic success

A Christmas success story – of sorts

By Dave Elliott

Renewables are getting cheaper, with the costs for some falling dramatically. However, as overall energy prices fall, due in part to the success of renewables, it is not just old fossil and nuclear plants that suffer, becoming stranded assets. Older less efficient renewable projects can also face problems, as has happened, it seems, with some older wind turbines. They need replacing with new better designs – reblading and repowering. But, as energy prices continue to fall, upgrades like this may not yield enough extra income to be worthwhile. This will be a continuing issue as renewables expand and get cheaper: the market value of wind and PV power drops with increasing market penetration and success.

This ‘problem of success’ is a general problem in competitive market contexts. As costs fall and markets build, the competitive advantage of new technologies reduces. In the case of renewables, the more renewable energy there is in the market, and the lower its price, the lower is its market value – it sees off expensive fossil fuel, cuts overall prices, but also thus cuts its potential income. See this rather gloomy analysis of the German situation, and this Dutch story.

Basically, it’s all about a race to the bottom in marginal costing. Good for consumers (retail prices should fall), good for the planet (emissions will fall), but not good for companies trying to make a living out of green energy supply (their profit margins fall). The trouble then is that this may mean the growth of renewables might slow, as profit-seeking investment capital dries up. It’s a standard problem of success – once you reach the top (dominating the market) there is nowhere to go but down, especially since, within the sustainable future credo, the longer term aim is to limit growth once needs have been met.

There can thus be problems with trying to deal with the fact that the market value of wind and other renewable power drops with increasing market penetration by technological upgrades, since the incentive to invest in upgrades may be less, unless they can raise profits significantly. However, a study published in Energy Economics assesses ‘system-friendly’ wind turbine upgrade options with high capacity factors as a means to mitigate the value drop. Design options looked at are increased tower height and a larger rotor-to-generator ratio, which mean the same power can be obtained from lower wind speeds. At 30% market penetration, such turbines increase the market value by15%, according to the model used in the study. Additional benefits come from reduced costs for grids and balancing.

Enabling continued use and expansion in this way also ensures that the direct economic benefits of reducing fossil fuel use continue to be gained. The extra environmental benefits of using more renewables are also obtained – including avoiding the social, health and environmental costs and risks of using fossil and nuclear fuels. While some of those benefits are captured by markets, not all of them are, at least not initially. That’s one reason why some say that in the absence of markets with fully internalised carbon-costing, subsidies will still be needed to gain the environmental benefits of keeping these projects going. Though the savings from avoiding the costs and risks of using fossil and nuclear fuels should in time balance that out. However, half-way house systems, for example with carbon cap-based emission trading systems running alongside conventional open energy markets, can come unstuck: as renewables expand the incentive to invest in them reduces, unless the cap is reduced.

For the moment, the market for renewables is nowhere near saturation, so there is plenty of room for expansion if these interim problems can be overcome. To some extent then, given the right carbon market framework, the issue is a straight-forward economic one: how to keep reducing the cost of generation. Modern wind turbines have moved down their learning curves, getting bigger, more efficient and less costly, with some being able to run effectively at lower wind speeds. Innovation continues, and new device concepts are emerging for specific niches and applications, including larger machines for offshore siting. 20% cost reductions are envisaged for the next generation, some of that due to reduced blade and/or tower manufacturing costs or reduced installation costs, as with floating offshore wind turbines.

Even so, unexpected breakthroughs and new technologies apart, major and continuing device-level cost/kWh reductions within specific existing device design categories may be less likely. By contrast, significant positive system-level developments may be possible. For example, better siting and linking of arrays, with improved grid integration, balancing and operational management. Innovation is also possible in the financing systems, rewarding integrated system approaches as opposed to focusing just on individual device generation costs. That, of course, would be even more important if a multi-source approach is used: wind, solar PV and other renewables in an integrated distributed system, linked to balancing systems. PV module costs are still falling rapidly, and it has some way to go down its quite steep learning curve, while some other renewables, like wave and tidal, are only just starting to move down theirs. So the race is on, to cut costs so as to stay competitive as others cut costs. Or perhaps, more coherently, to develop system-level cost reduction approaches, combining all the sources effectively.

At some point, however, this cost race will become pointless – it will bottom out, with only marginal cost gains. The gains to be sought then will be in operational and environmental improvement, e.g. lower eco-impacts in manufacture and/or use, although improvements in device performance and efficiency will always also be welcome, since that will reduce device resource use. Old less efficient systems will be replaced, but at some point, when markets saturate, the emphasis is likely to be on maintenance in a stable state rather than continued growth, and then a new form of low- or no-growth economics will be needed –  with improvements being adopted to provide better services rather than just to expand services.

For the moment, however, with pressures to reduce or avoid subsidies, the bottom line is still cost reduction and that is continuing, even though it can be tough on older projects, or even new projects. For example, in Denmark, the early phase of wind power deployment famously involved many small energy co-ops who made use of Feed In-Tariffs – a celebrated example of grass roots ‘bottom up’ success. However, the swing to the political right in Denmark has meant cuts to the FiTs just at the time when the co-ops needed to reblade to maintain viability as electricity prices fell.  Some have not been able to and have been bought out by private companies. This trend is also one reason why few new wind co-ops have emerged in Denmark in recent years.

Nevertheless, in some cases, despite FiT cuts and falling returns due to successful price reduction, there may be some clever ways forward.  For example, in the case of solar, by selling locally generated PV power direct to local users, via ‘private wire’ links, rather than trying to compete via the grid. There may be limits to this, with balancing being needed to meet lulls. Grid imports of green power are one ‘top up’ option and that might be the most efficient but, like PV, local distributed storage is also getting cheaper and that could play a balancing role in a new more decentralised system. This ‘direct local supply’ approach, along with the expansion of ‘prosumer’ self generation, does suggest that new decentral market structures may be emerging with, possibly, new economic values.

So economic success means that changes occur, with new opportunities hopefully opening up to allow for further developments in technology and in operational practice, based on new forms of local generation and use.

*For a helpful review of wind project repowering issues in Germany see http://analysis.windenergyupdate.com/operations-maintenance/german-wind-auctions-hike-power-market-risk-repowering-projects

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