The Curious Case of Declining Renewable Costs and Rising Electricity Prices

The European energy market is witnessing a paradox of sorts. The curious case of a disconnect between decreasing renewable energy prices and the wholesale electricity market that shows a steady uptick at €21.6 per 100 kWh, according to Eurostat.

How Renewable Energy Costs are Getting Lower

The EU-27 recently recorded 19.7% of its energy consumed from renewables, just 0.3% shy of its 2020 target. It could be because of overall low energy consumption during COVID times, which recorded a 7% dip in energy demand.

There have also been several advancements in product design of wind turbines and solar PVs, more efficient manufacturing and lowered production cost, especially for solar PVs. Leading to an overall cost reduction when it comes to setting up renewable energy sources.

2020 has also been a year where many European countries played to their strengths for renewable energy production. The U.K. government capitalized on Britain’s windy coasts with its commitment to build 40 gigawatts of offshore wind by 2030. Sunny Spain became Europe’s biggest installer of solar last year. In fact, it closed down its last coal plant in June 2020, following the footsteps of Austria and Sweden.

There were news articles on how renewable energy’s costs are crushing coal. Lazard, an investment firm that produces a periodic report on the average cost of generation from different electric power sources or levelized cost of electricity (LCOE) also backs this claim. Solar especially has shown a rapid fall in cost. The costs for utility-scale solar have fallen by about 11% per year compared to onshore wind stats over the past five years. In 2019, for instance, it fell for an average of 6.8 cents (USD 0.068) per kilowatt-hour (kWh).

Most times, lower renewable energy has facilitated cheaper electricity as well ( 56% of utility-scale capacity additions). Yet there is a gap in overall electricity costs incurred by Europeans. Why so?

Costlier Electricity Prices

The cost changes in electricity markets depend on a range of factors, including but not limited to;-

  • geopolitical location
  • national policies that affect taxation
  • network charges or environmental protection costs, and
  • infrastructure maintenance and cost

The prices for electricity procurement and supply have remained stable in Europe over the past 10 years, yet we cannot rule the legacy policies that govern the wholesale electricity market.

And though there has been an increasing usage in renewable energy, it has a relatively weak role in the power price formation in European markets mainly because of:-

  • It’s relatively smaller proportion in terms of overall electricity generation across Europe
  • The cost of clean energy production outweigh the latest LCOE reductions most times

The variable output of wind and solar plants, frequent need to ramp up and down fossil-fuel generators, and the need to hedge their exposure to low or even negative pricing on spot markets may not help in integrating renewables with the retail market. Thus forcing the operators to lean towards the centralized fossil-based options.

Role of transmission grids and better storage

There is also the question of what happens when renewables generate too much electricity during low demand periods. The problem in Germany, where consumers were paid to use the excess energy it produces, cautions us on the need of the hour — flexibility. There is an undeniable need for more efficient, flexible transmission grids.

In order to switch from fossil fuels to renewables, we need better and more efficient transmission grids to transport electricity. It also requires more transmission capacity to manage the resulting fluctuations in electricity supply.

But all this means more cost — in setting up more transmission lines, upgrading existing ones, and so on. Probably the reason many energy observers believe that renewable energy is cannibalizing its own revenue with some project developers incurring annual revenue fluctuations of up to 30%.

We could ride over the expenses with dynamic line rating, better power flow control systems, and more efficient batteries in the future.

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