Wind and solar generated electricity is becoming more and more pervasive throughout the world. From July to September of this year, renewable energy sources accounted for almost a third of the electricity used in the UK, reported the Guardian. Contributing to this increase in clean energy production is a large number of new entrants to the industry, many of which are unreliable simply by virtue of their small size and lack of financial resources. In addition, the sources of electrical power themselves are inherently intermittent and not exactly predictable; sometimes it’s rainy or cloudy, and sometimes it’s not very windy outside. And, often at those very times, demand for electricity surges.
In a mitigating response to these concerns, the UK created the Capacity Market. Essentially, the Capacity Market is the government buying energy-generation capacity from suppliers before it’s needed. They offer fixed subsidy payments in return for a commitment to provide a set amount of energy generation in times of high stress in the market – those cloudy or windless days. These payments ensure that investors maintain the plant capacity required for emergency power generation reported Engie.
Overall, this government initiative encourages investment in, the development of, and the use of clean energy while making sure that this market shift doesn’t backfire by being more volatile than older forms of energy. The government is making sure that surprise outages don’t turn the clock back on clean energy.
But not everyone in government is in agreement about supporting clean energy to quite such an extent. The feed-in-tariff, a consumer subsidy to encourage solar panel installation, is being allowed to expire without replacement next year. And on November 15th, a court in Luxembourg upheld a challenge to EU state aid for the Capacity Market program. The market was making payments of £1 billion a year to generators guaranteeing available capacity during shortages; those payments have now come to a halt during a probe that will likely last through to 2020 reported Bloomberg.
Enappsys director, Phil Hewitt, has expressed concern that this court decision will basically act as a broadcast to the world not to invest in clean energy generation plants in the UK. A major industry merger between SSE Plc and Innogy SE’s Npower collapsed in the wake of the news and stock prices for the major players have all dropped since then.
In a doomsday-like possible scenario, the investigation prompted by the court decision will determine that all prior payments were illegal and demand repayment of £463 million from power generators to the government. The industry would also lose out on £5 billion more in future payments they had been relying on when preparing their budgets and developing their profit forecasts. Ultimately, older plants would start to shut down, but this would have been expected in any scenario. However, as investors pull out of the industry one by one, new plants will fail to take the place of the old ones going away. The resulting decrease in supply would increase the possibility of power outages throughout the nation noted Bloomberg.
Complicating matters further, the government-mandated price cap on gas and electricity bills is set to take effect on January 1, 2019. The Office of Gas and Electricity Markets (Ofgem), when it announced the new policy in September of this year, stated it would save UK households roughly £1 billion per year. Some feel the price-cap of £1136 per year is still far too high and that customers are being significantly overcharged for energy usage; they fear that the price-cap is a false saviour that will prevent customers from shopping around for cheaper alternatives as they should. But on the other side of the argument is the decreased in subsidies being given to energy generators. Being squeezed between a decrease in income and a limit to what costs can be passed on to consumers will surely push some companies out of the energy industry noted the Independent.
And of course, as with any business situation in the UK today, the impending Brexit in March of 2019 also plays a role here. If there is no deal prior to the divorce from the EU, Britain would take over the investigation from the European Commission. Instead, the Competition and Markets Authority (CMA) would investigate and rule on the matter. But they would likely need to restart the investigation from scratch without cooperation from the EC, lengthening the timetable of uncertainty in the market.
Meanwhile, the Labour party is committed to converting all homes and businesses to run on wind, solar, and nuclear power, using 44% renewable heat sources, and reducing heating demand by 25% by 2030. They also intend to reduce greenhouse gas emissions to ZERO by 2050. The government in-fighting doesn’t seem to have an end in sight, and the warring factions need to decide just how much are they willing to encourage growth in the clean energy market in order to combat climate change.