energy

How renewables crowd out fossil fuels

Over the past couple of years it’s been encouraging to see the economics of energy generation turn in favour of renewable energy. The long expected grid parity has been reached in many places, and it’s genuinely cheaper to build renewable capacity rather than burn fossil fuels. In Britain we’ve seen coal use pushed back as renewables expand, especially solar power. The government’s proposed phase-out of coal by 2025 looks entirely possible.

uk-electricity-generation

In his book The Switch, which describes this whole process, Chris Goodall explains how investment in renewable energy naturally makes more sense once you pass a certain point:

“Electricity from PV is free to produce and so even if the market price of power falls close to zero, solar power will still be shipped out into the grid. Once installed, PV (and wind-generated) electricity will always be able to undercut all other sources of power.”

On a national grid, electricity is bought on demand, with producers pitching their price for the next hour. The costs of renewable energy are almost all up-front. Once installed, there’s no fuel to pay for and so it will always be cheaper to draw on renewable energy than on gas or coal. Renewable producers will always be able to offer a lower price than coal or gas, and become the default supplier whenever there’s a choice. The more renewable energy we have on the grid, the more time gas and coal power plants will spend offline.

“If solar or wind are producing enough electricity, coal and gas power stations will be idle, not even earning the money needed to pay staff or maintenance costs, let alone the interest on the money borrowed to construct the plant.”

If you already have a conventional power plant operating, it still makes sense to keep it going, not least because solar power in Britain is highly seasonal and you know you can make money in the winter. But if you’re an investor and you’re deciding whether to fund renewable energy or new fossil fuels, the latter is an increasingly tough sell.

The useful thing about this is that it’s a market dynamic. It doesn’t rely on the government doing the right thing. Renewable energy just makes more sense economically, regardless of the official support for a new age of fracked gas. Naturally it would be better if the government did get it right, as it should be wind power picking up in the winter rather than fossil fuels, but the tables have turned. Renewable energy has the upper hand.

4 comments

  1. As much as I support renewables (and I think we need urgently to transition to non-polluting energy sources), I think this misses a few important points.

    First, renewables have become very cheap because the price of credit has become very cheap (interest rates are very low) — if this changes, expect the roll-out of renewables to slow.

    This also feeds into a second point — the idea that renewables having their costs upfront being an advantage in undercutting fossil fuel generation. Again, this is only true in an environment of low interest rates. When interest rates are higher, the net present value (NPV) of renewables is reduced because the costs are upfront, whereas the benefits are deferred.
    On a related topic, this is also an advantage to fossil fuels — their benefits are upfront, but their costs (climate change) are deferred.

    To my mind, this is why we need to keep pressure on pricing carbon emissions and not be complacent just because things are going “our” way right now.

    Cheers, Angus

    1. Yes, I imagine low interest rates are making it easier to finance new renewable capacity, but cheaper borrowing ought to make it easier to finance a gas power station as well as a wind farm, so I’m not sure how much of an effect it has.

      As I understand it, the biggest gains are technological. Investment in renewable energy is actually down on this time last year, but capacity continues to rise regardless – you get more for your money.

      I do take your point that there’s no reason for complacency though, both on interest rates and vested interests.

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