O Beware My Lord of Jealousy It is the Greeneyed Monster Which Doth Mock the Meat It Feeds on

"O, beware, my lord, of jealousy; It is the green-eyed monster, which doth mock the meat it feeds on"

Hugo Lidbetter

Energy Partner at Osborne Clarke

Published May 31, 2019

For those wondering about the quotation - it is a stretched reference to biting the hand that feeds you and definitely not an unkind characterisation of green energy!

An interesting dynamic is taking root in the wholesale power market.

On the one hand there is a need for a massive increase in low carbon generating capacity – according to some estimates, as much as a threefold increase to get to an ambitious target of 150 GW by 2050). This is the level at which there is some confidence the UK can meet its Paris Agreement commitments of holding the rise of global average temperature to "well below 2°C above pre-industrial levels" and also "pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels". Similarly, the CCC have recently recommended that the UK should target net-zero GHG emissions by 2050, upgrading the existing (binding legal) commitment of ensuring GHG emissions are 80% lower than their 1990 level. That is the renewable capacity challenge.On the other hand, the growing proportion of renewable generation is presenting some unique challenges to the system operator. The principle of balancing the energy system relies on effective visibility over supply and demand. Imbalance typically arises where supply or demand is out of kilter with forecast, or where the market is not able to allow supply to meet demand (e.g. because of a constraint on the system). Supply side forecasting has generally not been too much of a challenge – baseload generators (nuclear, coal and CCGT) can pretty reliably forecast generation and dispatch as required (and unforeseen trips, being expensive, are rare). Similarly, the increasing sophistication of Demand Side Response means high-volume energy users can moderate their consumption or leverage relevant technology, like battery storage, to arbitrage price difference and optimise periods of low market prices. But higher volumes of renewable generation is already challenging that system balance: the sun don't always shine and the wind don't always blow when you expect it to. This was seen on 26 May 2019, when UK power prices turned negative for a record nine consecutive hours due to a shortfall in demand (2 GW below forecasts) combined with high wind generation (which provided almost 40% of demand). During this period, wholesale power prices fell to -£71.26/MWh, requiring NG ESO to pay over £6.6 million in balancing costs, compared to just £300,000 the day before – demonstrating in one 24 hour period the volatility introduced by high capacity intermittent generation. That is the system volatility challenge.

So where does the mocking green eyed monster come in? The renewable capacity challenge compounds the system volatility challenge – and cannibalisation often follows. The view goes that the increasing proportion of subsidised non-dispatchable renewable generation (i.e. wind and solar) on the system gives rise to an effect known as "price cannibalisation", which over the long term erodes wholesale market prices. Price cannibalisation arises where "must-dispatch" technology (which could also include nuclear) creates an over-supply on the system, pushing down wholesale market power prices, sometimes negatively. That effect is magnified by the greater capacity of subsidised must-dispatch capacity on the system relative to other technologies (which is where the renewable capacity challenge comes in), meaning projects that are forced to become reliant on wholesale market prices (in the absence of policy support like FiT, ROCs and CfD) end-up chasing diminishing returns. This is not a massive issue for subsidised projects, which still recoup revenue through their relevant subsidy or support (and can therefore even sustain periods of negative pricing without making a loss) – but it would hit unsubsidised generation (which is also increasingly seeing an erosion of embedded benefits). That is how renewable generation could end up biting the hand that feeds it.

The answer (assuming no new support regime) will almost definitely rely on the extent to which long term PPAs (corporate or utility) can help insulate renewable developers and investors – which requires offtakers to take a robust view of future power prices. Otherwise, without that buoyant outlook, for unsubsidised renewables and power prices, it could sadly be a case of "I kissed thee ere I killed thee"…

Just as well then that the market is rife with new ideas for delivering the renewable capacity challenge. The CfD floor price proposal could be worth an early flutter…

O Beware My Lord of Jealousy It is the Greeneyed Monster Which Doth Mock the Meat It Feeds on