100 pct renewables: it may be closer than we think

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.