Cheaper than fossil fuels, renewable energy is starting to lose its subsidies, in particular from the likes of China and the United Kingdom, both of whom are enthusiastic backers of green energy. What’s more, the Trump administration would also like to withdraw support, and, as the subsidies are eliminated, it’s revealing another problem.
In order to easily accommodate peaks in demand and pull back when there’s a dip, coal and gas generators can ramp up production but wind and solar energy cannot. Clearly, when the sun shines it affects solar power and strong winds determine wind power. This is why renewable energy producers are unable to benefit from attractive pricing and, sometimes having to sell power at a loss.
Renewable operations are likely to systematically receive a lower overall market price than the average generator. Volume-based subsidies currently smooth out this problem, but returns on investment will dwindle once operators in systems with large-scale dependence on renewable energy can no longer depend on them.
No subsidies is likely to mean that renewable producers will no longer be financially viable.
Storage for renewable energy allows production to match supply and demand. Renewable storage may make subsidies unnecessary, but the reduction of subsidies must be looked at alongside development of storage in the system. Subsidies shouldn’t be eliminated until enough storage is developed to overcome the problem.
Of course, if storage sounds like a simple solution, it isn’t. It has its own costs and, though they’ve lowered in recent years, it’s still a significant outlay for renewable energy projects. Subsidies could be linked to the timing of generation rather than just volumes. However, it might well be possible to create enough predictable output to ensure that corporate energy customers agree to a longer-term power purchase agreement, with banks able to finance new projects over a 10-15 year period whether or not subsidies still apply. As of this moment, and with the lack of pricing predictability, renewable projects without subsidies or storage are lucky if they can get customers to sign two-year or three-year purchase agreements.
Currently, the combination of renewable generation with storage has largely been restricted to small-scale solar generators, and usually dedicated to a single customer. Once subsidies for renewables are eventually withdrawn, it’s likely that we’ll see the economics of renewable energy large-scale generation projects with hundreds of megawatts, paired with storage.
The first signs of subsidy removal saw development of renewable energy projects in 2018 slowed in almost every region — including China, where growth dropped to 12.1 percent after sustaining a 15.5 percent compound annual growth rate between 2012 and 2017.
Only 28 percent of electricity generation globally in 2018 was from renewable energy, and the bad news is that this is only going to rise to about 49 percent by 2050. With the planet having to cut back on carbon dioxide emissions, the call for net zero emissions by 2050 is pie in the sky.
Subsidisation is clearly needed for the foreseeable future, and while renewables have proven they generate cheap electricity, the financial risks of some of these projects have not yet been fully mitigated.