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Green boom coming to an end

Image: World Bank Photo Collection

A dramatic fall in the cost of green energy technology has eaten into the profitability of green energy companies.  According to By Anna Hirtenstein at Bloomberg Businessweek:

“Green technology such as solar panels and wind turbines are increasingly mass-produced, so basic supply-and-demand economics dictate that they get cheaper. There’s also another layer of competition eating away at profitability.

“As nations try to make good on their Paris climate agreement pledges, renewable energy is being installed in just about every corner of the world. But rather than governments fixing the price of clean electricity, they’re now letting the market find it.”

In effect, green energy is a victim of its own success.  By bringing prices down to the point that government subsidies are no longer required, the original green energy companies have set up a market place in which competition is going to be king:

“Developers must now compete against each other to win the right to build projects. The switch to such auctions has sent prices for power from onshore wind down as much as 60 percent and solar by half in some markets.”

This, however, may be just the start of green energy companies’ woes.  The big remaining market anomaly is that electricity generated from wind, wave and solar enjoys a huge hidden subsidy from the legacy (fossil carbon and nuclear) generators who provide the balancing power to cope with intermittency.  Among the proposals in the recent UK government’s Cost of Energy Review was the proposal to develop “single equivalent firm power capacity auctions” for pricing green electricity generation:

“The auction would be on an equivalent basis. This means that the de-rated contribution of intermittent capacity is taken into account… The EFP of wind is the average contribution of wind power to the de-rated margin. It is the quantity of firm capacity (ie, always available) required to replace the wind generation on the system to give the same level of security of supply…”

If the UK (and other) governments go down this road, it will initially increase the cost of intermittent green energy as companies will be obliged either to provide a firm supply using storage and/or backup generation, or meet the costs incurred by another provider in supplying these.

While we can anticipate howls and screams from green energy companies that have enjoyed years of government subsidies and consumers paying the intermittency costs, this is, in the end, how markets operate  (unless we go down the nationalisation route; in which case the companies won’t exist any more).  Government (and consumer) subsidies are only intended to act as stabilisers while a new industry finds its feet; and only then because the sector is a social good.  As the price of green technology reaches the point of stabilisation, then the stabilisers have to be taken away.  Will this result in company closures?  Youbetcha!  It will also follow the usual market route of bankruptcies, mergers and acquisitions that happen in every emerging market sector; with the result that a much smaller number of more efficient national and multi-national green energy companies will emerge in future.

Crucially, it is only in this way that the energy market can provide incentives to develop the new storage technologies that are essential to any model of a green energy future.  So long as green companies can get away with passing the intermittency costs onto consumers, there is no incentive to develop these.  But once green companies are obliged to provide firm power, the more and better their storage capacity, the higher their profit margins are going to be.

As you made it to the end…

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