The price of green power

Finding the balance between flexibility and stability

January 24, 2021
The dramatic shift from coal to renewables in our electricity supply is down to subsidies and astute policy decisions © Daniel Leal-Olivas/PA Archive/PA Images
The dramatic shift from coal to renewables in our electricity supply is down to subsidies and astute policy decisions © Daniel Leal-Olivas/PA Archive/PA Images

At the turn of this century, wind and solar power provided just 0.2 per cent of UK electricity generated. Within 20 years that share grew to around 25 per cent. Over the same period, coal fell from around a third to just two per cent. This helped the UK to reduce emissions from the power sector by half. Indeed, the growth of renewables and decline of coal have been the main reasons that UK CO2 emissions have fallen consistently since the 1990s. As the UK looks towards the COP26 climate change negotiations, it can rightly point to world-leading power system decarbonisation. 

The growth in onshore wind, solar and offshore wind was the result of sustained policy support and at times quite substantial levels of subsidy. Technological improvements have been extraordinary: upscaling wind turbines, reducing the price of solar modules, and creating capabilities to install huge arrays of giant offshore windmills. The costs of new wind and solar arrays have fallen to levels where subsidy is no longer necessary. 

Yet in some respects, the last 20 years have been the easy part. Progress with installing wind and solar needs to continue if we are to get to net zero. The latest target for offshore wind alone represents a quadrupling of current capacity. Analysis undertaken by the Climate Change Committee suggests that total electricity generated will need to more than double so that we can electrify our cars and home heating. All of this new power needs to come from low carbon sources, with a big role for wind and solar. 

Meanwhile, incorporating a modest share of wind and solar into the electricity system is reasonably straightforward. This is because much of the flexibility needed to absorb wind or solar energy costs effectively already exists. Existing power stations can flex their output to follow demand and adjust to the supply provided by wind and solar when available. But the low carbon power grid of the future will need to operate with large amounts of variable renewables alongside nuclear power that tends to be quite inflexible. New sources of flexibility must be found. This will come from additional interconnection with mainland Europe, new electricity storage and “smart” demand, such as varying the charge rates for electric cars. 

One of the most significant drivers of wind and solar growth around the world was the creation of long-term fixed price contracts known as feed-in tariffs. These are attractive to investors because they give a stable revenue stream to wind or solar developers. Since 2014, the UK has offered “Contracts for Difference” for renewable energy projects. Prices are set through a system of auctions and ensure that operators receive a fixed price even when the wholesale electricity market price is low. This price stability has brought low cost sources of capital into the industry, and cheap capital is a key contributor to cost reduction. 

This is where an important new challenge arises for policymakers. Traditionally, electricity market prices fluctuate: when demand is high, prices rise. This provides a signal to higher cost generators to come online and keep the lights on. Renewable energy changes this. On windy days, the price of power falls to low levels and may even go negative. On the one hand, policymakers might like wind and solar schemes to be exposed to price fluctuations, since this could encourage developers to seek opportunities to generate when demand is high. On the other hand, investors perceive exposure to power price swings as a risk and this increases the cost of capital. If prices become too risky investment in renewables could dry up altogether. 

The great challenge therefore is to make sure that electricity markets reward flexibility whilst at the same time ensuring that investors continue to be attracted to new wind or solar schemes. Academics and policymakers do not yet know quite what the right answer will be. Working out how to design electricity markets for very high shares of renewables will be key to ensuring that we can continue to benefit from low cost and clean renewable energy, and keep the lights on.

This article features in Prospect’s new “Green Recovery” report, published in partnership with SNC Lavalin, Atkins, Ricardo and the Aerospace Technology Institute. Read the full report PDF here.