From CfDs to Energy Union, an energy revolution is under way

James S Murray

The latest phase of the UK's electricity market reform programme has its flaws, but don't let them detract from the historic transformation that is well under way

You would not expect a Contract for Difference (CfD) auction as part of the Department of Energy and Climate Change's (DECC) Electricity Market Reform (EMR) programme to command much attention. After all, I reckon a good journalist rule of thumb is that if you need three acronyms in the first sentence of an article you are probably on to a loser.

However, if the complexity of the EMR programme means it is unlikely to excite anyone outside the fiefdom of Whitehall energy policy wonks, the transformation it is about to enable will affect each and every one of us. You don't have to understand the finer points of CfD auction procedures to understand we are on the brink of a genuine revolution in how we generate and use energy.

Just look at the numbers. Today's award of CfDs guaranteeing power purchase prices for clean energy developers will, through one wave of projects, deliver 2GW of capacity, enough to power 1.4 million homes and cut greenhouse gas emissions by four million tonnes a year. And that is one wave of projects. Another wave will come in the autumn, and more will follow after that. The UK is firmly on track to source 15 per cent of its energy (that's energy, not power) from renewables by 2020 and could well deliver an entirely decarbonised power system within 15 years.

More important still, the concept of auctioning contracts to the developers who can put in the lowest bid (and penalising them if they deliberately bid too low and are unable to deliver as promised) has undoubtedly served to further accelerate the cost reductions the renewables' industry has already been achieving.

The £50/MWh bids put forward for two solar farms may prove to be unachievable outliers, but the £79.23/MWh for onshore wind and £80/MWh for energy from waste put them on a par with the £80/MWh levelised cost DECC estimated for new gas plants in 2013 and comfortably below the £92.50 contract offered to EDF for its proposed Hinkley Point nuclear power plant.

You could argue that gas costs only stand at £80/MWh because of the carbon price operators have to pay, but firstly, that is the taxation regime the UK currently operates under, secondly, why shouldn't fossil fuel operators pay for the pollution they produce, and thirdly, even without the carbon price some solar projects are apparently now in the same ballpark as gas. Coal may remain cost competitive (if you ignore climate change and air pollution), but the leaders of the three main political parties in the UK just agreed to work together to phase out unabated coal power, so I think it is safe to discount it as a long term option.

What this all means is that renewables industries that have existed at a commercial scale for a little more than a decade are now able to generate power at a cost that is comparable with polluting fossil fuels and a nuclear industry that has been going for half a century. Meanwhile, the renewables sector with arguably the biggest potential for providing industrial scale power, offshore wind, is clearly running ahead of schedule with its efforts to bring costs down to the nuclear competitive level of sub £100/MWh.

It will be fascinating to see how cost reduction curves evolve as the next few waves of auctions are delivered. All the evidence from clean tech manufacturers and developers around the world is that costs can keep falling. Throw in potential breakthroughs in energy storage and smart grids and costs will then fall still further. It is clearer than ever that we can decarbonise the power sector without breaking the bank.

Inevitably, the complexity created by all those three letter acronyms creates winners and losers. There is no doubt the CfD auction system has its imperfections (some would say downright flaws). The solar farm industry has got a particularly raw deal, as developers struggled to compete with the more mature onshore wind industry. Whether the falling cost of solar projects means the sector is more competitive in the next round of auctions, as some believe, or whether the risk inherent in bidding for a contract simply locks smaller developers out of market and drives consolidation in a previously competitive sector, as others warn, remains to be seen. The Solar Trade Association's complaint the sector has been exposed to full competition a year or two too early, leading to yet another boom and bust cycle, has plenty of merit.

There is also still a big debate to be had about the pace of renewables growth the government is willing to countenance and the public is willing to pay for. The cap on the CfD budget means viable projects that are ready to go will be shelved or cancelled altogether, proving a source of immense frustration for those of us who believe the threat presented by climate change requires the most urgent action possible.

It is easy to see why politicians of all stripes are wary of measures that could lead to further upward pressure on already politically toxic energy bills, but equally it can be argued that a more generous budget cap now would help further accelerate clean energy cost reduction, bringing the point at which cost parity with fossil fuels means subsidies are no longer needed even closer.

This is also where the inter-connected nature of every aspect of the energy and climate change debate comes into play. A more ambitious and effective energy efficiency strategy would reduce energy bills and create more headroom for clean energy funding. A bolder community energy strategy would provide an expansion route for those smaller renewables developers who are always going to struggle with the CfD regime. As is so often the case, failure in one area of government climate policy is creating challenges in another.

In addition, it is worth noting these policy problems are bad enough before you consider the volatile political context. Being able to compete with gas on a cost basis will count for nothing if wind and potentially solar farm developers are frozen out of the planning system by a Tory government bent on banning onshore renewables.

But while it will be of little consolidation to those companies that today missed out on CfDs the big picture outlook for the renewables industry and the wider green economy remains remarkably rosy. Wave after wave of clean energy projects are on the way, each one likely to deliver low carbon power at a lower cost than the last.

Meanwhile, other developments this week serve to hammer home the encouraging backdrop against which electricity market reform is playing out. A full blown Energy Union is on the cards across the EU, delivering new low carbon infrastructure, comprehensive energy efficiency programmes, and greater energy security. The reform of the emissions trading scheme promises to tilt cost arguments ever further away from fossil fuels and towards clean alternatives. Overseas, Obama is digging his heels in over tar sands pipelines, Shell is shelving carbon intensive projects, and China has seen coal demand drop for the first time in years.

Moreover, the UK's clean energy developers are building on increasingly low carbon foundations. As official government stats revealed today, UK energy consumption fell a staggering seven per cent last year, continuing a downward trend that started in 2000, while clean energy now accounts for over 35 per cent of our electricity share.

All these trends are well positioned to accelerate, right up to the point where the UK powers its energy efficient buildings using almost exclusively home-grown, low carbon, emission-free power. This point could well come within the next 15 years. All that is required is a bit of policy stability and continued technological ingenuity.

We are on the brink of an historic transformation of our economy and a host of other countries are willing and able to make precisely the same journey. Those confusing three letter acronyms really are more significant than they look.

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