Thursday, 31 May 2018

Vox/Umair Irfan: Europe is building more wind and solar — without any subsidies

Vox

Europe is building more wind and solar — without any subsidies
New renewable energy projects are expected to be profitable with little government support.
By Umair Irfan Updated May 31, 2018, 8:25am EDT
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Wind energy installations are increasingly going up in Europe without subsidies. Florian Gaertner/Photothek/Getty Images

The French electric utility Engie announced last week that it’s going to develop 300 megawatts of wind energy across nine wind farms in Spain, backed by $350 million (€300 million) in investment.

Here’s the key: It’s doing all this without government support. And it’s far from the only European energy company willing to make a bet like this.

In March, the Swedish power company Vattenfall announced it won its bid to build a 700 MW offshore wind farm in the Netherlands, which would make it the first nonsubsidized wind energy project in the land of windmills.

Over in Germany, in the country’s first competitive power auction last spring, the federal grid regulator accepted four bids for a total of 1,490 MW of offshore wind capacity in the North Sea, with an average subsidy rate of €0.44 per kilowatt-hour. That’s low. And why so low? Because one of the bidders, the Danish wind energy firm Dong (now Ørsted A/S), submitted a bid with a subsidy rate of zero.

It’s happening with solar too. There are now at least a dozen unsubsidized solar projects that have broken ground in Europe, as this chart shows:
Solar energy projects without subsidies underway in Europe
The sun is rising. Bloomberg New Energy Finance

All of this is evidence that major renewable energy projects can take off without a financial boost from governments. It’s great timing because the European Union is looking to phase out subsidies for renewable energy as these policies have become expensive with an explosion of wind and solar installations across the continent.

It’s also a sign that these technologies have drastically dropped in cost and are increasingly safe investments for the notoriously stodgy utility sector. As such, we’re going to see more subsidy-free solar arrays and wind farms cropping up in Europe, driving a larger share of the growth.
There are some big caveats to Europe’s “subsidy free” renewables boom

Now this doesn’t mean the training wheels are off, nor that renewables are now on the “level playing field” that every energy company claims to want but can never agree on.

For starters, “subsidy free” is a squishy term that doesn’t have a standard definition. What these projects in Europe have in common is that they aren’t getting governments to pick up a chunk of the retail cost of the power they produce. However, countries are still providing some of these projects support in the form of research and development, renewable energy mandates, manufacturing tax breaks, and so on.

So the recent project announcements don’t quite refute the claim that renewables can’t survive without subsidies. (It should be noted that fossil fuels have long received and continue to benefit from subsidies around the world.)

There’s also the question of integrating these generators on the grid and compensating for them when the sun sets or the wind stops blowing, a service that comes with a cost. Renewable power providers pay for some of this, but the remainder is passed on to utilities or is picked up by the government.

It’s also not clear whether having solar panels go toe to toe with coal power plants in an open market is necessarily a worthwhile outcome on its own. One of the key reasons governments subsidized renewables in the first place was for their environmental benefits. Getting rid of this support altogether would make it harder to finance projects and could undermine progress in bringing down greenhouse gas emissions from the energy sector. Renewable energy’s market share would still grow but perhaps not as fast as necessary to fight climate change.

At the same time, every place in the world without a price on carbon dioxide emissions is effectively giving a subsidy to fossil fuels.

“Overcoming the higher cost of financing subsidy-free schemes is one hurdle; managing variable renewables on the grid is another,” wrote Simon Evans at Carbon Brief. “Meanwhile, governments must weigh the appeal of hoping the market delivers zero-carbon electricity without policy support, against the risks of failing to meet other priorities.”
European utilities are applying the US’s playbook

In the United States, the energy market dynamics are quite different. There is less top-down pressure to deploy renewables in the US, and the main support comes in the form of tax credits on the back end rather than feed-in tariffs or other subsidies on the customer-facing side. These subsidies are applied across the industry and not through a competitive bidding process. As a result, there isn’t as strong a push to get the industry off the incentives that are available.

But one element of the American renewable energy experience is gaining ground in Europe, namely the use of power purchasing agreements (PPAs) with utilities to buy electricity at a fixed price for years at a time.

PPAs are far less common in Europe than in the United States, but some of these new unsubsidized renewable energy projects are counting on them.

“In Europe you have unsubsidized [photovoltaic solar] developers who are desperate to lock into longer-term contracts. In some countries, however, (Spain, Italy) you are not allowed to lock into corporate PPA unless you are a registered distributor. Hence developers are signing short-term contracts with energy traders,” Pietro Radoia, a solar analyst at Bloomberg New Energy Finance, told me in an email. “In the US market, long-term PPAs are the norm, also thanks to the renewable portfolio standards which mandate utilities to increase their production of energy from renewable energy sources.”

Still, the fact that renewable energy project developers aren’t counting on subsidies is a notable new development, a manifestation of the staggering global price drop we’ve seen in wind and solar generation. The technology is changing, and soon the markets will change with it.

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