UK renewable energy cliff brings both risks and opportunities

Yet, contract end dates also present an opportunity, if the right steps are taken, to fully realise the benefits of past investment in renewables in ways that offer cheaper electricity, according to the new report.

In 2002, the Government introduced the Renewables Obligation (RO) support scheme* for renewable electricity projects to encourage investment into building low-carbon power. This offers participants funding per MWh of renewable electricity generated at a fixed rate for at least 20 years, to help new projects get off the ground before they’re able to be self-sufficient.

The scheme closed to new projects in 2017 and financial support for some of the schemes is starting to run out.

The Government is planning to introduce an alternative “repowering” scheme, but only for wind farms which are more than 25 years old. Not all renewables are eligible, and some existing generators could even be pushed out by new renewables investment – so some could close when their RO contracts end.

In their new report, published by the UCL Centre for Net Zero Market Design, the researchers found that by 2027, 5.1 gigawatts of renewable power generation will ‘age out’ and no longer be eligible for this support. This represents about 8% of the UK’s current renewable power generation of 61 gigawatts; last year, renewables supplied about 50% of the UK’s electricity. Following that, 4.7 more gigawatts will drop off the RO contracts by 2031, with another 25 gigawatts due to exit by 2037.

Co-lead author Katrina Salmon (UCL Bartlett School of Environment, Energy & Resources) said: “These generators are vital to the UK’s energy market. If they’re allowed to close permanently, we will lose that capacity, consumers will not see a clear benefit from these generators they have subsidised for decades, and it will only become harder to reach the government’s Clean Power 2030 targets.”

The government’s response could establish a precedent for how renewables are handled once they exit support schemes, the researchers say.

Co-lead author Professor Michael Grubb (UCL Bartlett School of Environment, Energy & Resources) said: “The growing pool of renewable energy which has benefited from past support could offer an emerging opportunity for cheap power, but realising its potential is not simple or automatic. We need to start seriously looking at how to make best use of existing renewable energy generation capacity, as this Renewables Obligation cliff approaches.

“Renewable energy is often cheaper to produce than energy from fossil fuels, but the current system of the wholesale energy market – a flexible pricing system designed to ensure consistent energy provision despite wind and solar being intermittent suppliers – can distort prices and pose challenges for many of our providers of renewable energy. But we can make the system fairer and more effectively geared towards a net zero power system.”

These solutions they are proposing include:

• Cap-and-Floor, which would guarantee minimum revenues for operators, but also limit excessive profits. This regime could create incentives for flexible operation, although determining the proper price points for the cap and floor could be tricky.
• Green Power Pool, which pools different forms of renewable generation together and pays them their average operating costs. This energy could be offered directly to different categories of consumers, providing greater revenue stability to both generators and consumers compared to the current gas-dominated wholesale market. This would help to address a current problem with the energy market wherein the cost of electricity is set by the most expensive type of generator.

However, their report warns that each option comes with trade-offs in terms of cost, flexibility and feasibility.

In addition to their low environmental impact, renewable energy has the potential to provide electricity at much lower costs than fossil fuels. Such is the case with the projects exiting the RO in the coming years, as they have paid off their initial investments, and, with the majority being wind farms, also have low operating costs, the report adds.

But uncertainties in the energy market and rising maintenance costs identified in the report pose challenges to wind farms as older generators age off of support schemes. The financial problem is compounded by the fact that receiving planning permission to rebuild existing sites is difficult and expensive, and new environmental regulations for onshore wind installations also limit how many sites will be eligible to repower under the Government’s proposed new scheme. As a result, it is likely that only a relatively small proportion of renewables will be able to secure such contracts in 2027.

Without support from the RO scheme, these wind generators may become too expensive to operate. Though overall running costs for renewables are comparatively low, they still must pay for general maintenance, and generators have to pay for transmission connection - which is expensive, particularly in Scotland where the majority of wind farms coming off the scheme are located. Many may also face the need to renew planning consents.

*More about the Renewables Obligation (RO) support scheme 

Links

• Research project: Realising the value of renewables post-contract - issues and options for ‘Merchant Tail’ generation
• Katrina Salmon’s academic profile
• Professor Michael Grubb’s academic profile
• UCL Centre for Net Zero Market Design 
• UCL Institute for Sustainable Resources
• The Bartlett Faculty of the Built Environment

Image

• Credit: fokkebok

Media contact

Michael Lucibella

E: m.lucibella@ucl.ac.uk