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100 pct renewables: it may be closer than we think

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The stunning set of data, cost profiles and market analysis produced in the first few weeks of calendar 2013 have confirmed what many had long suspected – that the global energy markets are changing faster than anyone had thought possible.

The implications for the incumbent energy industry – be they generators, network operators or retailers – couldn’t be more significant. The business models that supported the ageing infrastructure are broken, and if they can’t adapt to the new environment, they may soon be out of business. The idea of a rapid change to a largely renewable energy grid no longer seems aspirational, it could be inevitable.

Consider what we have learned this week:

- The price of wind energy (and in some isolated cases solar PV), is already cheaper than coal and gas in Australia. This gap is likely to widen considerably in the coming decade.

-  By the time new baseload capacity is required in 10 years time, other technologies, including solar thermal with storage, and concentrated solar PV, will also be cheaper than coal and gas. Marine energy and geothermal could be close to parity.

-  But not only do we have “grid parity” at the utility level, we also have socket parity, which means that homeowners and businesses can lower their cost of electricity by installing solar panels on their roof.

-  the growing impact of large scale renewables, the self consumption market driven by rooftop solar and battery storage, and the impact of energy efficiency schemes, is reshaping the profile of the energy market and the dynamics of the industry. Sometimes in the most dramatic way. Coal and gas fired generators are getting priced out of the market.

As investment bank UBS noted last week, we are facing a “solar revolution” in the energy industry, and another is on the way with battery storage. As we suggested last year, the change is so profound that existing business models appear broken. According to Macquarie Bank, the German energy model is  already “kaput”.

As we have seen in Australia, the increase in renewables is pushing down wholesale electricity prices, forcing the closure or mothballing of 3,000MW of fossil fuel capacity. In Germany, the closure rate is so rapid that the electricity authority has had to step in to slow them down.

The more retailers and network operators seek to recoup their investment in the face of lower demand, the more customers will be tempted to look after their own energy needs. Even halting all subsidies for rooftop solar will not stop it, said Macquarie. “The ever-increasing (grid) prices for domestic and commercial customers as well as rapid solar cost declines have brought on the advent of grid parity for German roofs. Thus, solar installations could continue at a torrid pace,” it notes. The same applies for Australia.

So what does this mean?

As Michael Liebrich, the head of Bloomberg New Energy Finance, suggested. “The fact that wind power is now cheaper than coal and gas in a country with some of the world’s best fossil fuel resources shows that clean energy is a game changer which promises to turn the economics of power systems on its head,” he said.

Consider the situation in Australia. The utilities and the energy market operator have told us that no new baseload is needed until 2020. Now we know that when new capacity is required, technologies such as large scale solar PV, solar thermal with storage (dubbed as better than baseload) will likely be cheaper, along with wind.

Coal-fired power stations will not get built, for reputational and economic reasons, and gas – the much touted transition fuel – may also not get a look in. “Costs are just falling so quickly and the cost of fossil fuel are so much higher than public perception,” said Kobad Bhavnagri, head of clean energy research for BNEF  in Australia. “We could leapfrog gas as transition fuel.”

Bhavnagri said that by 2020 the “world could look quite different”. The market operator and system will be more experienced and adept at handling intermittency. “The case for gas is not as strong as people assumed a few years ago.”

The upshot of that analysis is that the plants we will be building in the 2020s will be – because they are the cheapest options – large scale solar with storage and other dispatchable renewables. The economic case for existing fossil fuel generators will be further undermined.

This explains why the fossil fuel industry in Germany, and in Australia, have been trying to halt the expanse of renewables. The primary policy goal of generators and fossil fuel industry for the past decade or more has been one of delay – to push back the build up of renewables long enough to extract maximum value from their existing assets, and even to create space so they can build more assets. The extractive industries have the same, simple plan.

All the major Australian utilities made clear in their submissions to the Climate Change Commission that allowing the renewable energy target to stand – and more wind farms and large scale solar PV to be built – would reduce the profits of their generators, quite dramatically. Yet diluting that target would allow them to build more gas-fired generation.

This is also why the utilities have also argued against the Clean Energy Finance Corporation, because it is designed to help usher in those technologies such as solar thermal and ocean energy that will be competitive in a decade’s time. But they can’t be competitive if none are built, and installation and manufacturing costs are reduced.

Many European markets are now at critical junctures with high penetration of wind and solar. This includes Germany, Italy, Denmark, Spain and Portugal. Australia, should it maintain its current renewable energy target, will follow soon enough. Germany, while reducing subsidies, is still increasing its renewables targets – 40 per cent by 2020 and 80 per cent by 2030.

Its biggest challenge is to figure out how to redefine the market rules so that it can provide enough economic incentive to prevent too many closures of fossil fuel plants, and to encourage existing gas to stay open rather than coal. It needs these gas plants to assist with the transition.

But it is instructive to see how the big utilities are responding. In Germany, also in an election year, they are faced with a government which is absolutely committed to its targets, and an Opposition that will likely accelerate it. In Australia, the utilities appear to have the alternative government singing from its own song book, and still stuck to the outdated notion that renewables are expensive and intermittent, and therefor of little use.

As frustrating as the position of the utilities and the network operators is, they will argue that they are acting in the interests of shareholders. But given the analysis produced by the likes of UBS, HSBC, and Macquarie in the past few weeks, long term investors such as asset managers may well be wondering how these executives  are positioning their company for the long term future, rather than short term returns.

Again, the situation in Germany is instructive. Its biggest generation company E.ON has fought ferociously against the government’s nuclear phase-out and the pace of the roll out of renewables. Now it concedes its gambit is lost, and so its strategy for the future is simply to transform itself towards a generator focusing on distributed energy and renewables as quickly as it can.

As Rob Passey, from the UNSW, commented on our article on the UBS report, the network operators would be best served by embracing the new technologies rather than fighting against them. “It seems that the only way network operators can remain solvent over the longer term is for them to actively participate in this market themselves,” he said.

The sooner all Australian generators and utilities come to the same conclusion, the better for everyone – shareholders, consumers, and citizens. The question should not be how quickly we can move to 100 pct  renewables, but to ensure we don’t hang on to antiquated policies and business practices designed only to slow it down.

 

 

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  • Stan

    Great news and great timing. We no longer need to argue about the RET scheme – Combet can get rid of it given it is no longer needed – everyone is a winner.

    • http://ronaldbrak.blogspot.com.au/ Ronald Brak

      There is no need to get rid of the RET scheme. The decreasing cost of renewable energy will push down the price of Renewable Energy Certificates. Over time it will go away by itself. But scrapping it would be economically damaging by introducing more uncertainty into the market. Technological change can be erratic, but government policies don’t have to be. And given that our carbon price doesn’t reflect the full cost emitting greenhouse gases it would be foolish to scrap our mechanism for promoting the development of renewable power. We need to cut our emissions as quickly as realistically possible given the threat climate change poses.

    • Richard Koser

      Stan, the last stats I saw showed that traditional power – oil, gas and coal – was getting subsidies an order of magnitude greater than all the renewable energy support schemes were worth. Off the top of my head, I can’t remember if it was 8 or 11 times the value. Funnily, you won’t hear the electricity generators (some of which own coal mines) bring up this subject. So sure, scrap all subsidies and pay households the marginal cost of the power we’re generating. I’d love to get $12/kWh during summer peaks instead of the 12c currently available in Queensland. I’d also be thrilled if the coal companies were banned from dumping toxic dredge spoil in the waters of the GBR marine park, instead of being charged $15/tonne for the privilege. That’s less than I pay to drop green waste at the local tip.

  • http://thisnessofathat.blogspot.com.au/ Gillian

    Do you mean “now” instead of “not” in this sentence?

    Many European markets are not at critical junctures with high penetration of wind and solar.

  • suthnsun

    Existing generators and utilities can only survive by engaging with the *current* reality, they need to supply a clean product efficiently ASAP. If they seize the initiative with aggregated storage opportunities and novel arrangements with rooftop owners they may still(just) be able to survive. Given my experience with Australian business management and the recent history of this industry, I have little confidence they will adapt in a constructive way, shareholders, customers and the environment are the likely losers, though the environment will still be a longer term beneficiary of the changed circumstances.

  • http://thisnessofathat.blogspot.com.au/ Gillian

    Giles, it would be interesting to see an article that summarises the renewables goals of various countries, provinces and cities.

    Germany – 40% by 2020, 80% by 2030
    Scotland – 100% by..

    • Ben Elliston

      Gillian, AYCC did this infographic which is a nice summary of the situation: http://t.co/yZ1qylia. Just be careful about possible confusion between end-use renewable energy targets and renewable electricity targets.

  • David

    The government sponsored 100% Renewables study is due in a couple of months time. Judging by past performances in the local industry, I expect them to determine it is all too hard and will cost a trillion dollars.
    However, for those of us who have followed this development for a long time, a move to predominantly renewables now seems inevitable.

  • Tim Buckley

    Giles
    Another great article. Could I add a point about the E.ON and RWE utilities’ gambit? Shareholders have lost out big time from management’s attempts to stonewall this inevitable transition. Compare the five year return to shareholders from this strategy of fighting the inevitable to the returns generated for shareholders by the farsighted leadership of NextEra Energy. As background, Nextera is a leading US power utility that has invested so much capital in renewable energy generation over the last five years that its board decided to change its name from Florida Power & Light last year. NextEra is one of the five largest wind and solar farm owners in the world.
    Long term returns to shareholders is the name of the game. RWE share price now €26. Five years ago? €70 (-64%). E.ON share price now €12.50. Five years ago? €44 (-72%). NextEra now US$72. Five years ago? US$64 (+12%). Shareholders are rewarded for backing management that take an existing successful business model, look out 10 years, accept that things need to change and then get on with it with all their available resources.
    Thanks
    Tim Buckley Arkx Investment Management

  • John

    …and a way for the retailers to start would be to refuse to pay the pittance the east coast governments have mandated for solar fed back into the grid and instead pay what that energy is truly worth in terms of peak energy cost avoided. But that may just be dreaming as a lot of the retailers are also generators!

  • Dimitar Mirchev

    Just a thought.

    As I see it I expect at the end we will have (bio)-gas power plants that will receive fix amount of money just to exist. Pretty much similar to the feed-in-tarrifs.

    This way a new generation of (bio)-gas power plats will emerge – small (50-100 MW or less) but highly automated and exclusively designed to have minimal maintenance and expenditures when they are not working so they can get bigger profits from the money they receive. Pretty much as the way the FITs are reducing the installation cost of renewables: the smaller the installation cost is – the bigger the profit is.

    They will be needed when there is not enough renewables working and will sell their electricity at market prices.

  • Lyn Harrison, InsightWind

    Great article. I’ve steered analysis, reporting and commentary on the Australian wind power market for a leading international publication since the construction of the country’s first wind farm in 1987 in WA. It’s made my weekend that I’ve lived to see the day when such an article could come out of carbon-rampant Australia — and before I’ve turned grey (with a very little help from a bottle, I’ll admit). Do note that it’s at least eight years ago since Denmark’s utility sector first looked at the feasibility of 100% renewables (without interconnection to neighbouring networks) and concluded that not only was it technically feasible but economically sensible, too. Good to see that Australia is far sighted enough to be coming to the same conclusion.

  • Richard Koser

    But Tristan, this is going to kill our economy! Don’t you realise how tough things will be for the billionaires who shoulder the burden of keeping the wheels turning? And think of the captains of all those coal freighters who skillfully pilot their ships through the waters of the Great Barrier Reef. Not to mention the doctors who’ll be deprived of income when rates of coal-related diseases drop.

    Thank God we didn’t get onto this 25 years ago when Australia led the world in solar technology.

  • Peter

    I think we are going to see greater ‘pushback’ from the fossil fuel industries, particular the coal industry as they see how rapidly renewable energy will become competitive. They will realise they are sitting on stranded assets and will want someone to pay, namely the taxpayer.

  • Ken Fabian

    Storage is the major stumbling block – I don’t see the energy companies and grid operators stepping up to rebuild their infrastructure into intermittent and distributed energy friendly which makes storage even more important. They are going to end up being as much or more energy storage and redistribution utilities as energy producers as wind and solar penetration grows.

    I don’t know how or when the mindset within our energy industry will change but I don’t see a lot of evidence of it so far which means that change will have to happen in spite of their heels dug in resistance. Coal remains their preferred energy source with gas as their fallback option and the state of politics means that they will be getting assurances from Labor and Coalition that they will not be forced to change much or fast; their position as essential and the power that that preferential treatment brings means that instead of being at the forefront of a low emissions energy economy they will continue to be powerful opponents of it.