Clean and proud: green energy no longer needs government subsidies
Clean energy is becoming the new norm: alternative energy has become a competitive player in the market and no longer needs state support
The global energy market is in the process of a structural transition from the use of fossil fuels to clean energy. Amid ongoing discussions on the need to reduce carbon emissions, an active transition to renewable energy has recently been accompanied by several noteworthy events. For example, in the southwestern United States, solar power plants, including energy storage, began to compete in price with natural gas power plants. And Great Britain last May for the first time since the beginning of the Industrial Revolution dispensed with energy from coal-fired power plants.
Clean energy, such as wind and solar, is becoming increasingly competitive in value without the support of government subsidies, which changes the rules of the game for the entire energy business. The gradual improvement of technology has led to increased efficiency in the sector, and the large volume of production has sharply reduced costs. Major players are increasingly dominating the industry, and the development of expertise in the development and financing of projects further stimulates the introduction of environmentally friendly generating capacities due to cost deflation.
In recent years, solar and wind generation accounted for approximately two-thirds of the total number of new power plants in the world, and the myth that China puts into operation one coal-fired power station per week has long been refuted. Clean energy will remain a growing segment, and its economic competitiveness will determine the market for suppliers and utilities, as well as government policy. At the same time, several trends can be noted that deserve closer attention.
Green tariff days numbered
Traditionally, green tariffs have been a favorite tool of governments around the world to stimulate the development of clean energy. He guaranteed predictable revenues and profits, but did not have a flexible mechanism to enhance cost deflation.
In recent years, the business has shifted to more market-based mechanisms for auctions and electricity supply agreements (PPAs). Now authorities in different countries, including municipal ones, are inviting various companies to bid for direct supply of electricity to consumers, which provides a transparent and competitive system in which the supplier with the lowest price wins. PPA agreements guarantee fixed tariffs, while auctions and bilateral contracts ensure that prices are more closely aligned with cost levels than government tariffs.
As a result, solar and wind electricity became profitable much earlier than predicted several years ago. Unlike most thermal power plants, solar and wind power plants are designed and built in a matter of months, not years. In the sunny and windy parts of the United States, production costs fell below $ 50 per MWh, surpassing coal and natural gas. In Germany, the energy market moved from green tariffs to auctions in July 2016, and by 2018 the average bid price from large solar energy projects reached € 43.3 per MWh (according to Bloomberg New Energy Finance) compared to the average at a rate of € 91.7 per MWh at the first pilot auction in 2016. In the markets of several developing countries, auctions have become a key policy tool for the timely receipt of competitively priced electricity. Private businesses, including data centers, car manufacturers, breweries, and many others, use PPA specifically to generate clean energy directly from manufacturers.
While auctions have become a global phenomenon, PPA agreements with private energy producers, by definition, only work in liberalized markets - for example, in the USA. In Europe, various national legal systems and market structures slow down the spread of this mechanism, despite the development of clean electricity in general. Important factors are experience with new mechanisms and the ability to assess risks. In Taiwan, one of the largest auctions for the supply of wind electricity was severely delayed due to disagreements on the terms of PPA agreements. And in India, generating companies signed agreements with record low tariffs to ensure large volumes of supplies and growth, which over time led to financial problems and even bankruptcy of some projects. However, Solarpower Europe reports that last year, PPA more than doubled to 13 GW.
The days of green tariffs are numbered. PPA auctions and agreements remain the main driving force in ensuring the competitiveness of clean energy through incentives to reduce costs, and also help transform the entire energy business. In the coming years, it is this trend that will shape the markets, especially in Europe. Liberalized countries where buyers can directly receive electricity from producers are likely to see a faster introduction of clean energy in the future.
Technology: squeeze more watt hours
The green tariff has become the tool that led to the emergence of clean energy, and the mass production of components in China has led to the growth of the industry. However, for today's industry success, both factors have proven critical.
As production volumes expand, the gradual improvement of technology, productivity, and efficiency further reduces costs in the sector. Wind turbines and solar modules increase electricity production every year, which does not necessarily reduce costs per watt, but obviously reduces them per watt-hour. The dominant trends in the development of wind turbines are the increase in rotor size, mast height, power and digitalization of systems. For offshore installations, elements of cost deflation are the development of energy transmission networks and improved maintenance. Increasing the efficiency of solar modules is based on the use of new technologies, such as double-sided panels or perovskite panels.
In addition to the structural and technological factors of cost deflation, there are cyclic factors. For example, in 2018 in China there was an overproduction of solar panels. After the authorities implemented a new policy, including reduction of subsidies and generation quotas, the volumes of commissioning of new capacities and the prices of modules fell sharply.
In terms of the cost of generating one watt, solar and wind energy are by far the cheapest. With the installation in mind, costs fell to $ 1 per watt and lower (Bloomberg New Energy Finance data), and their designers spend about half as much compared to thermal alternatives, such as natural gas power plants. A high proportion of construction labor is particularly attractive to developing countries. However, this initial cost advantage is reduced when operating hours are taken into account, i.e. the installed capacity utilization factor. Wind turbines and solar modules typically generate electricity for fewer hours per year than thermal power plants. This explains why both technologies have only recently become competitive in terms of energy networks with more mass distribution and why the production of watt-hours, determined by the operating time and productivity, is of the utmost importance. Nevertheless, low upfront costs, a high share of labor costs and short project lead times are key advantages of solar and wind power in emerging markets.
As clean energy becomes competitive in an increasing number of regions and countries, cost deflation is no longer necessary for business survival, but will continue. Periods of strong price pressure due to regulatory changes become less likely as subsidies in the sector cease. The production growth curve remains steep, and productivity gains due to technological advances will only increase the economic advantage of clean energy compared to fossil fuel-fired power plants. Battery capacities are a natural complement to solar and wind power plants, which increases the value of electricity produced by smoothing short-term fluctuations. Electric cars provide large-scale production of batteries and reduce energy storage costs, which will contribute to increasing the competitiveness of the clean energy segment in the future.
Regulation creates small interference, not fatal obstacles
Clean energy and, in particular, solar energy technology have been the objects of trade policy for many years, not least because of China's dominant position in production. In 2013, the European Union introduced minimum prices and anti-dumping duties on Chinese products, and in the middle of last year lifted these measures. In January 2018, duties on Chinese solar panels were introduced in the United States. This measure was at the beginning of ongoing trade disputes today, followed by duties on steel, damaging the supply chain in wind energy. Later last year, India also introduced comparable duties on foreign products for solar energy. Meanwhile, the United States in early June raised duties on several types of goods from China. Beijing in response introduced barrage tariffs on materials and products that are used in clean energy.
The introduction of these tariffs, duties and other measures to a large extent had the impact predicted by economic theory: they were inflationary within the country and deflationary in the world market. The industry's value chain quickly adapted to political intervention by moving certain segments and production processes to other countries. At the same time, an increase in production capacity has increased excess supply and price pressure around the world. However, the increase in domestic prices was insignificant and did not affect the rate of commissioning of solar or wind power plants. Ultimately, the barrage measures were canceled, mainly due to retaliatory actions by trading partners or complaints to the World Trade Organization.
Against this background, we believe that trade policy decisions create some barriers to the transition to clean energy, but do not become a critical barrier to it. Typically, companies in the sector take on most of the inflationary burden, reducing their own margins and worsening their financial situation. As the economic competitiveness in the sector increases, the influence of foreign trade duties on individual projects and, consequently, on the market softens. With the growth of the clean energy industry, its vulnerability to any unstable state policy, from subsidies to trade measures, is reduced.