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Momentum in renewable power generation
The move towards renewable power generation has gathered considerable momentum in recent years. In 2015, at COP 21 in Paris, 197 countries agreed to limit global warming to well below 2°C (preferably to 1.5°C) compared to pre-industrial levels in a bid to avoid the worst impacts of climate change. The Intergovernmental Panel on Climate Change, the United Nations body for assessing the science related to climate change, says that to achieve this ambitious goal, net zero (not adding to the amount of greenhouse gasses in the atmosphere) must be achieved by 2050. Since then several countries, including the United Kingdom, France, Sweden, Denmark and Hungary, have adopted legally binding net zero targets, and the EU is considering similar proposals. Renewable power generation will be important to achieve these targets and governments, cities and municipalities around the globe are increasingly adopting policies favourable to renewables. By way of illustration, since 2019 – when the UK enshrined into law its legally binding target to reduce emissions to net zero by 2050 – the government has published a number of plans, such as the Ten Point Plan for an Industrial Revolution and the Energy White Paper: Powering Our Net Zero Future published in Q4 2020, the Smart Systems and Flexibility Plan 2021, a net zero strategy to Build Back Greener by decarbonising the UK power system by 2035, also published in 2021, and most recently, in April 2022, a British Energy Security Strategy, all of which recognise the importance of a quick rollout of new renewables.
The International Energy Agency (IEA) forecasts that global renewable energy capacity will increase by more than 60 per cent by 2026 from 2020 levels, to over 4,800GW. This will be equivalent to the current combined global power capacity of fossil fuels and nuclear. The IEA also forecasts that through 2026, renewables will account for almost 95 per cent of the increase in global power capacity, and that the volume of renewable capacity added is expected to be 50 per cent more over the period 2021 to 2026 than it was 2015 to 2020. It is further anticipated that over this period growth will occur across all regions compared with the 2015 to 2020 period.
According to IEA data, China, Europe, India and the United States account for 80 per cent of worldwide renewable capacity expansion and this is set to continue over the coming years. China is expected to reach 1,200GW of total wind and solar capacity in 2026, four years earlier than its current target of 2030, and is the current global leader in respect of the volume of capacity additions. Meanwhile, Europe and the US are on track to significantly increase their renewable offering, and India is set to double new installations against the period 2015 to 2020.
The rapid rate of innovation and evolution in energy technology, coupled with lower upfront investment and development costs, means that energy is becoming more measurable, decentralised, interconnected and intelligent than ever before.
The speed of development is such that what was recently considered the future is now considered the past. Consequently, energy regulators must keep pace with the rapid rate of change. This was reflected very aptly by the theme of the most recent summit of the World Forum on Energy Regulation (WFER), hosted in Mexico in March 2018, ‘Regulating in a Time of Innovation’. The next WFER summit will be held in Perú in March 2023 and is entitled ‘The Challenge of the Energy Transformation: Competitiveness and Sustainability of Energy Markets, Opportunities and Achievements’, emphasising the centrality of renewable energy as a space necessitating considerable attention. This will encompass topics such as the competitiveness of new energy sources and sustainable management based on energy demand.
This global overview will consider some key streams that are contributing to the momentum evident in the renewable energy market.
Offshore wind regulation
As outlined, many countries (both developed and developing) have introduced formal policies aimed at achieving zero carbon emissions and pledged net zero deadlines. With these deadlines fast approaching, governments are under pressure to improve their sources of carbon-free energy. However, geographical constraints prevent many countries from relying on hydroelectric and solar power, meaning that, for those countries with an appropriate coastline and wind profile, offshore wind generation has moved to the forefront of their clean energy programmes and is likely to remain a growth sector in the coming decade. In fact, the IEA has forecast that offshore wind capacity will more than triple by 2026.
In the United Kingdom, offshore electricity transmission assets must be owned by offshore transmission owners (OFTOs), independent companies selected by the UK regulator, the Office of Gas and Electricity Markets (Ofgem), through a competitive tender process. Ofgem grants each OFTO a licence that entitles it to receive a tender revenue stream in return for the operation, maintenance and decommissioning of the offshore transmission assets. In 2021, there were 21 operational OFTOs in place following the completion of various tender rounds. This regime has faced scrutiny from many within the industry who believe that the entire sector would operate more efficiently if there was a single offshore transmission network for all offshore wind farms. Despite these calls for reform, government policy has instead focused on improving the bidding process, and in April 2021, ahead of the seventh tender round, Ofgem published several minor changes to the tender process which were aimed at ensuring that competitions remain efficient and fit for purpose. These changes were required to maintain a level playing field, because UK wind projects have grown in size and become increasingly complex to meet the government’s demand for high-capacity clean energy projects. While calls for reform remain, it is noteworthy that many major offshore projects have been awarded under the current system, such as the 3.6GW Dogger Bank wind farm off the coast of north-east England, which will be the world’s largest offshore wind farm and capable of powering up to six million homes.
Over the coming years, the Global Wind Energy Council (GWEC) expects Asia to become a leader in offshore wind, and its share in the global offshore wind market to grow from 24 per cent in 2019 to 42 per cent in 2025. Until 2025, the GWEC anticipates China will account for more than 70 per cent of the Asian market; however, as utility-scale offshore wind projects go online in emerging markets such as Taiwan, Japan, South Korea and Vietnam post-2025, this is expected to fall. As in the United Kingdom, these countries operate using a tender process, but due to a lack of local experience in offshore wind, many emerging Asian markets have encouraged European contractors to join their auctions. For example, in June 2020, Vietnam granted approval for Mainstream Renewable Power (a UK company) to construct a 400MW offshore wind project. Commentators predict that, as the Asian market develops, corporate power purchase agreements are likely to become the norm – a trend that will only encourage further development and overseas investment. Caution also remains over the significant geographical hurdles that offshore wind farms operators face in Asia, in the form of frequent typhoons and increased seismic activity, when compared to Europe or the US.
In May 2021, the Biden administration in the US approved the construction of the Vineyard Wind 1 project, which will be the US’s first commercial-scale offshore wind project and a significant part of the US government’s plan to install 30GW of offshore wind capacity by the end of the decade. Whilst the US has a well-developed onshore wind industry, there is significant scope for expanding offshore capacity and this has highlighted a familiar debate over the ownership of offshore transmission assets. US offshore transmission assets are built by offshore wind developers who then link each farm to the onshore high-voltage network. The limited onshore connection points along the US coastline have increased calls for a more integrated approach to offshore transmission, with New Jersey regulators considering whether a planned transmission network built by independent developers would be more efficient. Although at the time of writing there has been no final decision on reforming the US offshore transmission network, it is expected to be a key issue in the coming years as the Biden administration attempts to perform a u-turn in US energy policy.
In June 2022, the White House announced the Federal-State Offshore Wind Implementation Partnership, which will encompass a joint effort between the White House National Climate Advisor, the Secretaries of the Interior, Energy, Commerce and Transportation and the Governors of several East Coast states who are early leaders on offshore wind development (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania and Rhode Island) for the purpose of collaboratively growing a strong US offshore wind supply chain. It is also intended to provide a forum for new initiatives, and to further coordinate in respect of existing efforts to address, among other things, transmission needs.
Renewable energy certificates
Renewable energy certificates (RECs) are awarded to generators for each megawatt hour of renewable energy produced. Market operators participate by receiving or buying several certificates to meet the quotas set each year. The implementation of a framework of tradeable certificates has become an internationally prevalent system for meeting such quotas.
Turning to what was the world’s first major carbon market, the EU’s Emissions Trading System (EU ETS) – which was established in 2005 and covers approximately 45 per cent of EU greenhouse gas emissions – the EU ETS was revised in 2018 to enable it to achieve the EU’s 2030 emission reduction targets in line with the 2030 climate and energy policy framework, and as part of its contribution to the 2015 Paris Agreement. The revision focuses on:
In June 2022, the European Commission adopted a legislative proposal for a further revision (as part of its 'Fit for 55' package), to align the EU ETS with the target of a 55 per cent reduction of EU net greenhouse gas emissions by 2030, against 1990 levels. The proposal consists of:
Carbon pricing initiatives are spreading and have been implemented (or are planned to be implemented) in over 60 countries, cities, states and provinces across the globe. In July 2021, after a decade of planning and trials, China officially launched its national emissions trading scheme, which will be the largest in the world and cover 20 per cent of global emissions once fully implemented.
Competitively priced auctions
An increasing number of countries are also relying on auctions to develop their energy capacity (often awarded on an annual basis), which are appealing owing to their flexibility in design and transparency in the market. In 2020, the number of countries that had held auctions for renewables reached 109 (REN21, 2004–2020). The UK’s most recent auction round in July 2022 saw a record amount of renewable energy secured through the largest ever round of the scheme. Almost 11GW of clean energy capacity was delivered, nearly double the capacity achieved in the previous round. However, the limitations of auctions include the risk of underbidding to win the contracts and the risk of driving smaller entry-level players out of the market. Therefore, auctions are commonly implemented alongside other initiatives, such as RECs, or simply backed by government guarantees (as is the case in Argentina and Zambia).
Feed-in tariffs and feed-in premiums
Administratively set feed-in pricing policies (FIPs) have been crucial in encouraging renewable projects worldwide, providing stable income to generators, in turn increasing the bankability of energy projects, such that by the end of 2019, according to REN21, 113 countries had adopted feed-in tariffs (FITs) and FIPs (up from 34 in 2005). FIPs have proved to be successful across the world, no more so than in Japan, which, marking a change in its energy policy following the disastrous Fukushima earthquake, introduced its FIT scheme in 2012. Since then, Japan’s solar photovoltaic capacity has increased markedly, and Japan is forecast to have 111GW of installed solar by 2025, according to solar consultancy firm RTS Corporation.
In 2019, the FIT scheme in the UK closed to new applicants. However, the UK government has recognised the need to pay small-scale renewable energy generators for electricity exported to the grid, resulting in the introduction of the Smart Export Guarantee by the Department for Business, Energy and Industrial Strategy in January 2020. The initiative requires some electricity suppliers to pay small-scale generators for low-carbon electricity that they export back to the national grid (if certain criteria are met). Provided the installations are in Great Britain, up to a capacity of 5MW, or up to 50kW for micro-CHP, the following technology types could be eligible: solar photovoltaic (solar PV), wind, micro combined heat and power (micro-CHP), hydro and anaerobic digestion.
Energy storage
To ensure all electricity grids maintain a stable and safe electricity supply, consumption must be perfectly balanced with the generation of electricity. The development of energy storage can help address fluctuations in demand and generation by allowing excess electricity to be saved for periods of higher electricity demand. In turn, energy storage technologies can contribute to better use of renewable energy in the electricity system, as renewable energy produced can be stored when conditions are optimal but demand may be low. Similarly, the right of consumers to produce and consume their own electricity may lead to an increase in demand for storage services and small-scale storage solutions.
In May 2020, the European Commission published the paper Study on Energy Storage – Contribution to the Security of the Electricity Supply in Europe. The study made various findings, including the following:
Although energy storage is a growing industry, problems still arise concerning the classification of storage, as in the UK. In October 2020, Ofgem implemented clarifications to current regulation, in particular amending the existing electricity generation licence as follows:
Changes to the Connection and Use of System Code have also been approved, which end the double charging of storage that previously adversely impacted energy storage facilities in the UK. Despite the lack of clarity surrounding the designation of energy storage, energy storage is considered an integral part of the UK government’s plan to achieve net zero emissions targets, whether as standalone projects or co-location with new or retrofitted generation projects. In the 12 months to April 2022, the total UK project pipeline for energy storage projects that are operational, under construction, consented or being planned increased from 16.1GW to 32.1GW. These storage projects consist mainly of lithium-ion battery, lead-acid battery, open-loop pumped hydro storage, closed-loop pumped hydro storage and modular compressed storage.
Large renewable-based battery storage projects such as these may become the norm in the UK owing to the government passing the Infrastructure Planning (Electricity Storage Facilities) Order 2020, which relaxed planning rules so that battery storage projects (except pumped hydro) above 50MW in England and 350MW in Wales can go ahead without needing approval through the national planning regime. This was achieved by carving them out from the Nationally Significant Infrastructure Projects regime in England and Wales.
Developers across the globe are currently working to find new and innovative methods of energy storage. In July 2022, researchers in Finland installed the world’s first fully operational sand battery which can store power from renewable energy sources for months at a time. It is hoped this will solve the issue of year-round supply. The sand battery is charged up with heat from solar or wind which it stores at around 500°C. It is anticipated that this will be used to warm homes in winter. This is especially pertinent for renewable power in countries across the Nordic region, as they receive very little sunlight during the winter months, impacting the amount of energy that can be generated from solar at that time of the year.
Energy crisis
At present, global energy markets are in turmoil. In 2021, internationally traded gas prices more than quadrupled, which has had a knock-on effect on the price of renewables. This is because in wholesale electricity markets, it is the most expensive generator that sets the price. Several suppliers in countries across the globe have already gone bust and the potential for further price increases could make lenders nervous about their exposure to the sector. Meanwhile, the lasting impact of the covid-19 pandemic continues to affect construction-stage projects due to ongoing supply chain disruptions, with potential delays to the start of commercial operations. Lenders will continue to closely monitor the impact of delays on their financings, and it is unclear how the pandemic will affect the development of new renewable projects and long-term developments.
At the height of the covid-19 pandemic, lockdowns across the world precipitated a unique and sustained drop in energy demand (including for electricity). As people worked from home, it manifested in many different ways including by reducing demand for power across the transport sector. Changes in work- and home-life patterns resulted in variations of peak usage times and both residential and commercial demand curves. The International Energy Agency estimated that weekly electricity demand decreased 10–35 per cent across affected regions. However, this has changed markedly since restrictions have been lifted, and global demand has skyrocketed. This increase, coupled with the war in Ukraine, has contributed to a surge in global energy prices as concerns mount about supply. Consequently, governments around the globe have their attention firmly on security of energy supply, and renewables are considered integral to achieving this. It is, therefore, anticipated that over the coming months and years government policy globally will centre around facilitating renewable power generation.
Since 2021, inflation has risen globally. In May 2022, the annual inflation rate in the US was 8.6 per cent, its highest level since 1981, and in June 2022 the inflation rate in the UK hit a new 40-year high of 9.1 per cent. As a result, the UK is currently experiencing what has been termed the ‘cost of living crisis’, which refers to the fall in real disposable incomes (adjusted for inflation and after taxes and benefits). To ease this crisis, the government has implemented the Energy Profits Levy, an additional 25 per cent tax on North Sea oil and gas operators alongside the current 40 per cent special corporation tax rate, due to the exceptionally high profits being gained by fossil fuel traders amid soaring oil and gas prices. The purpose of this tax is so that the windfall can be used to help ease household bills, with the three-year levy partially funding a £15 billion support package for energy users. However, there are growing expectations this could be extended to energy generators and renewable projects, to garner more money from the energy sector and help alleviate the cost of living crisis. Such a tax might discourage investment in renewable power generation.
Conclusion
There has been considerable momentum in the move toward renewable power generation in recent years. One of the main drivers of this has been a shift in government policy as a result of the need to cut carbon emissions to avoid the worst impacts of climate change. Globally, this has resulted in an increased focus on schemes connected to offshore wind, renewable energy certificates, competitively priced auctions, feed-in tariffs and feed-in premiums, and energy storage.
Fluctuations in the price of electricity and the energy crisis will be an area worth monitoring in relation to renewable energy generation over the coming years. The contracts provided at the UK’s 2019 auction round were awarded at record-low prices; however, the increase in global energy prices means if the same contracts were awarded today, it is likely they would be priced considerably higher. This will be the same for other offtake agreements concluded in recent years, and it remains to be seen whether the economics will continue to stack up.
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