New report warns high renewables output and plummeting prices could mean future subsidy-free projects struggle to attract investment - but are the concerns valid?
Rising capacity and output from solar and wind farms in the UK is unalloyed good news for renewables developers, right? It helps cut carbon emissions, clean up our air, and, as costs continue to fall, reduce bills for consumers. But could there be a sting in the tail? That is the question posed by a new study from analyst firm Cornwall Insight, which warns a surge in renewables capacity could potentially push wholesale power prices down to such an extent that it stymies future investment in the renewables sector.
Higher renewables capacity could increasingly have a "cannibalisation effect" on wholesale electricity prices, the analyst firm warned, potentially pushing power prices into negative territory. It added that ultra low or negative wholesale prices could present a major challenge for future subsidy-free solar and wind projects, which would be increasingly reliant on wholesale markets for income.
In effect, it means that by the 2030s producing power from wind and solar in the UK could be so cheap as to significantly cut developers' revenue streams, making it far harder to attract investment in new subsidy-free renewables projects, it argues.
Gareth Miller, Cornwall Insight's CEO, said the potential problems thrown up by falling renewables prices and increasing capacity had yet to be properly addressed by policymakers and energy firms. As such, he questioned how renewables could be financially viable without subsidy in future, and how new projects could attract finance.
"As the government moves to review its Electricity Market Reform framework, the potential of this effect has largely gone under the radar and merits serious consideration as it could reshape the economics of the sector," Miller warned.
A "cannibalisation effect", the report explains, is defined as the depressive impact on wholesale electricity prices at times of high output from intermittent, weather-driven forms of generation, such as solar, onshore wind and offshore wind farms.
As more renewables capacity comes online in the UK, leading to increasing clean power output, the absence of fuel costs for solar and wind power makes them more competitive in wholesale markets, thereby squeezing out capacity from less efficient and higher cost conventional power plants.
In some cases, renewables can continue to receive revenue even when wholesale power prices are low or negative, as subsidies are paid when the stations are generating energy. But with the withdrawal of subsidies for new onshore projects, alongside limited government spending on Contracts for Difference up to the early 2020s, the income from wholesale power is set to become increasingly crucial for wind and solar projects at the same time as the growing cannibalisation effect presents a new risk for developers.
"The greater the fraction of output on the system to meet demand from intermittent generation at any given time, the greater this effect becomes," the report adds.
Amid falling development costs, the rising potential for subsidy-free renewables in the near future has become a hot topic in the UK energy sector of late. Recent research by Aurora Energy estimated that continued cost reductions could help unlock up to €64bn of investment in subsidy-free clean energy projects, potentially delivering up to 18GW of capacity across Europe. It came as Vattenfall secured a landmark contract from the Dutch government to build a 700MW offshore wind project without subsidy, while the UK's first subsidy free solar farm was opened last year by Anesco. Construction is also set to start soon on the UK's first subsidy free onshore wind farm, it was confirmed this week.
Yet Cornwall Insight's report - entitled Wholesale Power Price Cannibalisation - shows that for a representative 10MW onshore wind project, the combination of lower wholesale prices and higher output could cut revenues from the wholesale market by as much as 34 per cent by 2033 compared to 2018.
Solar power could also be significantly impacted by cannibalisation, according to the report, which states that a representative 5MW standalone solar project may experience a drop in wholesale market revenues between now and 2031 of as much as 22 per cent.
As it currently stands, there are no new subsidies available for renewables projects beyond 2025, despite the fact as much as 18GW of new capacity is needed to replace older power plants set for decommissioning in the coming years.
The government is hoping increaing investment in subsidy free projects will help close any looming energy gap and drive down emissions. But Cornwall Insight warns that without any form of subsidy and with wholesale power prices likely to become more volatile, new wind and solar projects may become unviable, thereby putting investment in future renewables projects at risk in the UK and undermining efforts to meet decarbonisation targets.
The consultancy said the report posed several questions which needed to be considered by policy makers: "Will intermittent renewables be financially viable without subsidy? How will projects be financed in the absence of subsidies or substitute revenues? And what does the projected level of volatility mean for the point at which different sources of flexibility, particularly battery storage, become economically viable?"
The Department for Business, Energy and Industrial Strategy (BEIS) did not respond directly to the "cannibalisation" concerns raised in the report, but highlighted the continued significant increases in renewables investment seen in recent years.
"Over the last five years investment in renewables has more than doubled while the UK's low carbon sector grew four times faster than the wider economy," a BEIS statement read. "Our renewables sector is a British success story and will continue to thrive, with clean growth at the heart our modern Industrial Strategy. Consumers benefit too, as renewable energy continues to be more affordable."
Fears about the impact of the cannibalisation effect on the investment pipeline are not universally held.
Léonie Greene, director of advocacy and new markets at the Solar Trade Association (STA), said the cannibalisation phenomenon was "well understood" in the industry. She acknowledged it "could make it harder in future for ambient renewables to recover their capital costs through the wholesale market, even where they are saving consumers substantial sums of money". But she added that renewables developers were already working on approaches that would minimise the impact of lower wholesale prices on project viability.
"Much of solar is installed 'behind-the-meter', and some solar farms have direct PPA contracts with commercial customers, which provides protection," she said, adding that if solar projects were allowed to compete on equal terms for CfD contracts it would result in projects that were "effectivity 'subsidy-free'", while ensuring developers have a stable payment mechanism.
"However, there is a bigger question about whether solutions to cannibalisation are best left to open markets, rather than endless layers of government intervention which have been far from even handed to date," she argued. "A much more free market approach is taken by major system operators on the continent, including in Germany, dealing with very large volumes of renewables, where generators exposed to a more real-time market are naturally incentivised to deliver power when it is needed, and where much greater use is made of demand-side response services."
She added that improved solar farm configuration, smart grid, and energy storage systems could also all help address cannibalisation concerns. "We would expect to see more innovative solutions for making use of cheap and surplus power, including smart energy management technologies and time of use tariffs," she said. "And beyond that we'd expect to see markets developing for heat storage and even for hydrogen generation making use of abundant cheap, clean power, which over time would lead to market corrections."
Clearly, as the Cornwall Insight report suggests, the success of renewables in recent years raises a host of questions about precisely how new subsidy free projects will operate, especially as the industry scales up. Renewable energy risks becoming a victim of its own success, but at the same time emerging technologies suggest the sector could yet find a way to address the fear of cannibals.
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