Dieter Adam, 7 February 2024
Most manufacturers use electricity as a power source for machinery and equipment but use little or none to generate process heat. Thus, the price of electricity, while not unimportant, will be less of a concern to most than security of supply at predictable prices. How does the transition to more electricity from renewable sources affect price and security of supply?
Apart from the promise of a reduced carbon footprint, generating electricity from wind turbines and photovoltaic arrays has the attraction of lower cost. There are still set-up and maintenance costs, but the primary source of energy is free. And as the industries involved become more mature, and the scale increases, costs are indeed falling rapidly.
Global levelised cost of electricity from newly commissioned renewables [USD / MWh]. Cost includes lifetime capital and operating expenditures. Source: IEA
And yet, recently and after a lot of investor enthusiasm, the immediate outlook has been a lot less promising recently. Consents for new wind farms, still the first choice among renewables, are slow to be issued, and conditions offered to those building wind farms are often unattractive. In the UK, a recent invitation from government to purchase electricity from off-shore wind farms at a price capped at ₤44/MWh failed to attract any bidders, delivering a serious blow to the government’s pledge to deliver 50 gigawatts (GW) of offshore wind by 2030 compared with 14GW today.
As a result, wind turbine manufacturers, like Vestas and Siemens Energy (Gamesa), have seen their net profit margins going back into red, and the S&P global clean energy share price index has tanked (33% down), while the MSCI World Index grew 11% over the same period. Behind this lies a complex mix of factors – supply chain problems, rising costs of labour and other inputs, protectionist trade practices, etc. Plus, there are the technical challenges and costs associated with designing ever taller turbine towers with ever bigger blades, made out of carbon fibre, rather than glass. These might be short-term disturbances, however. At the annual UN Climate Summit, held in Dubai last December, 118 countries promised to grow their combined total renewable energy capacity to 11,000 GW, up from 3,400 GW last year. And recently prices agreed under power purchase agreements have risen significantly (Source: https://www.leveltenenergy.com/ppa ):
In the medium- to long term, however, secondary costs of solar and wind-generated electricity will create a significant cost burden. Apart from the short-term factors mentioned above, there are structural secondary costs of these sources. And these factors are at work now already. A recent study by Ryan Williams, The Microeconomic Problem of Renewable Energy, published by the British Institute of Energy Economics in September 2023, found that even while Europe was still buying cheap pipeline gas from Russia, the cost of electricity went up as prices for wind and solar energy were dropping. The main cause for this were market mechanisms – at times of oversupply, generators had to sell electricity at a loss, or source additional supplies at a premium when generation from these sources was low. And in these countries, where domestic photovoltaic arrays are rapidly expanding, the weather doesn’t only affect supply, but also demand. In the UK, the cost of these ‘market equilibrations’ amounted to more than ₤4bn between 2020 and 2022; the amount in Germany was just under €2bn for the same period.
In the longer term, and with an increasing reliance on solar and wind, the match between spikes in supply and demand cannot be left to market mechanisms, especially in cases like New Zealand, where there is no option to trade electricity with neighbours. The installation of physical buffers in whatever form (including hydrogen) will be mandatory, and it will be interesting to see where we will end up after the Lake Onslow storage project has been terminated. New Zealand is looking at greatly elevated winter peak prices already, without wind (6.5%) or solar (1%) playing a major role in supply.
Contributions from wind power in particular are expected to rise significantly. New Zealand’s Energy Efficiency & Conservation Authority [EECA], based on work undertaken by the Climate Change Commission, expects the contribution from wind to grow to between 20 and 34% by 2035, with solar contributing a maximum of 6%. It will be interesting to see who will invest in generating the buffer capacity required, and whether that will be in time to avoid extreme fluctuations in supply and price.
There is yet another ‘secondary cost factor’ to wind and solar power. Wind turbines and photovoltaic arrays are dispersed sources, compared to fossil fuel or hydropower generation, or even geothermal. And they are often built away from centres of power consumption, requiring a completely reconfigured and massively expanded national grid. In the UK, cost estimates for that work goes into many billions of pounds, and the associated planning and regulatory work is already more than the system can cope with.
Wind and solar farms are told they may have to wait for years before they can feed power into the grid. Likewise in Germany, where the vast majority of (off-shore) wind power is generated in the far north of the country, while the centres of consumption are in the heavily industrialised and densely populated south. These challenges may be less of an issue in New Zealand, but we also have the additional variable of the future of the Tiwai Point smelter to consider. It will be essential that the planning and execution of any redesign of our grid is tackled without delay.
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