Renewable energy is disrupting electricity markets worldwide. The pace of this change has surprised almost everyone, and indeed would have been difficult to imagine just a few years ago.
From Europe to Asia, from the Americas to Africa, wholesale electricity prices are being pushed down by the rise of renewable generation, which has no fuel costs, a disruptive zero marginal cost of production and whose developers can now consistently outbid fossil fuel-based generation.
IEEFA has released a new report that documents the gathering momentum of this trend, and how the impact of renewables on electricity prices is a key driver of this change.
Crucially, renewables need only capture a relatively small market share for disruption to occur, and to accelerate.
While it may take decades yet for renewables to become the dominant form of generation globally, their presence today is permanent, economically rational and their advance inevitable. The combined loss in market capitalization of the underperforming utilities covered in the report from 2007-2016 totaled US$185 billion.
- Across Europe, dramatically lower wholesale electricity prices have created significant disruption and provide perfect case studies on how late-transforming utilities have left shareholders with enormous, ongoing stranded asset writedowns by not comprehending and seizing the renewable-energy mantle quickly enough. Over the 2010-2016 period European utilities have made US$150 billion in asset write-downs.
- In the United States, renewable-energy leader NextEra has undertaken a decade long investment program to redeploy operating cashflows progressively into renewables as a means to build a sustainable, outperforming business model while keep providing power at low prices. In contrast, NRG has destroyed shareholder value as it reverted to a fossil fuel based strategy.
- In China, the merger of China Shenhua and China Guodian stands to create the world’s largest power company by installed capacity (225 GW). This also provides Shenhua with a significant diversification away from its historical position as the world’s largest coal miner to a vertically integrated, financially robust utility with 20% of its assets employed in renewable infrastructure, a strategy belatedly aligned with the central government plan.
- In South Africa, where electricity prices have quadrupled since 2007 and a way over-budget, over-time coal-fired power build-out threatens to drive prices even higher, renewables appear ever more appealing.
- In India, which passed a milestone in 2017 when solar tariffs have come in lower than the cost of power generated from coal-fired capacity, the country’s main national utility, NTPC Ltd has shifted its strategic focus dramatically, with an audacious plan to facilitate 25GW of renewable infrastructure projects by 2022.
- In Australia, electricity prices have become a major political issue driven by consistently chaotic energy policy and a resulting delay in renewable-energy rollout, but AGL Energy has performed relatively well by taking advantage of the resulting record high wholesale prices while using the delay to position for the inevitable technology driven transition to come.
The share market performance disparities among utilities in this regard is considerable. Some like NextEra Energy and ENEL are world leaders in preparing for electricity systems dominated by renewables, while others are laggards like Eskom and NRG, unwilling to modernize their business models.
This picture is further complicated by the presence of utilities that are only belatedly committing to transition and, as a consequence, have inflicted significant damage to shareholder value in the meantime.
IEEFA’s report presents 11 case studies of leading global electricity utilities that collectively illustrate the wide variation in readiness for a future of cheap renewable energy.
Electricity utilities that perform best going forward will likely be those that strategically transition to renewable energy-based business models in a way that avoids the financial damage typically incurred by late movers.
Those that avoid or work against the roll-out of renewables will be met by a future that most likely does not include them.
Tim Buckley is Director Energy Finance Studies Australasia for IEEFA