Unwinding Failing Renewables Policies
Brazil has started the process of cancelling contracts for wind and solar projects in an overheated market facing falling electricity demand. European governments should be making contingency plans for the similar necessities.
Global news about renewable energy development is generally positive, a fact that is in itself surprising and sufficient to arouse interest if not suspicion. In any technological sector there is always and regularly some bad news of a substantial kind, and yet on the face of things renewables are oddly free from the blotches and blemishes that are usual to even established sectors.
So it is particularly interesting to see the recent announcement by the Brazilian Electricity Regulatory Agency (ANEEL) that as a result of a reverse auction, nine unbuilt solar projects and 16 wind farms, with a total capacity of about 557 MW were being withdrawn, their contracts cancelled, with the developers forbidden to bid again in the next two power auctions (English press article here. Press release in Portuguese here).
This problem has been boiling away for some time. In March, Reuters reported that ANEEL believed that about 1.3 GW of wind and solar projects with contracts were in fact unlikely to enter operation due to weak prospects (“With power demand weak, Brazil mulls an auction to cancel projects”). In fact, the December 2016 auctions attracted no bids at all from new solar and wind plants.
The fundamental cause suggested for this slump in renewables development momentum is falling electricity demand; Brazil’s consumption fell by 2% in 2015 and a further 1% in 2016, largely as the the result of economic turbulence. That decline is doubtless a very large part of the explanation for the willingness of 500 MW of solar and wind to back out of its contracts, but it would hardly have caused such difficulties, requiring the construction of a reverse auction, if the market had not been so excited by favourable policy in the first place.
Indeed, the story serves to remind us that a sector overheated by enthusiastic policy remains vulnerable to real world realities that lie beyond easy control, such as falling demand. This is particularly interesting for those in the United Kingdom, where demand is also falling, beginning in about 2005, and continues to fall, now standing at levels, about 280 TWh a year, not seen since the early 1990s. Renewables, however, continue to grow quite rapidly, with about 4.5 GW of capacity becoming operational in the year to July 2017, and a further 6.5 GW officially described as “under construction”. Even with very favourable terms of market access, and in spite of medium term hopes for electric vehicles, this narrowing market opportunity must be giving renewables projectors and exiting owners cause for concern, at least in the short term.
All this makes one wonder whether whether governments with major commitments to renewables, such as those in Germany and the United Kingdom, have made any contingency plans to extricate either subsidising consumers or subsidised renewables owners should circumstances require it. One suspects not.
Governments in the EU have tended to proceed as if renewables should be by virtue of their moral superiority exempt from normal business risk, and indeed those governments have take extraordinary measures to exempt renewables from normal risks. Nevertheless, as the Brazlian case reminds us, some substantial degree of risk remains and is irreducible. It may be falling demand, or general economic stagnation. It might be unrelenting and unacceptable cost to consumers, which itself could be responsible for falling demand economic recession or even depression. It might be rapid progress in a new, cheap, clean energy source, or that the inadequacy of renewables reveals itself as stubbornly resistant to remedy through technological change.
And while the daily news may not contain much that is bad, the global statistical headlines, the secular trends, are just not that encouraging: After decades of market favours, tax credits, portfolio standards, carbon taxes, guaranteed above-market prices, income top-ups, direct grants, relaxed environmental regulations and avoided costs, the modern renewables, wind and solar, still only accounted for only 1.5% of global Total Primary Energy supply in 2015, the most recent year for which there is data (IEA Renewables Information Overview, 2017). This really doesn’t look like a going concern.
This is much more than having a Plan B for the energy supply. In some senses that's the easy bit; natural gas is right there, and so is coal if push comes to shove. The really awkward question for governments such as that in Germany or the United Kingdom, is how to respond if they are faced with the necessity of unwinding the vast contractual commitments made to renewable energy generators of all types and sizes, 30 GW of them in the UK, 95 GW in Germany? This is a much bigger problem than purging the planning queue of unbuilt and unwanted wind and solar farms, and it will require much more than a reverse auction. To all appearances the governments most in need of such forethought are the most completely unprepared.