Cheap renewables could generate additional 1GW in Scotland

22 May 2017 Consultancy.uk

As Scotland continues to move towards sustainable energy generation, Scottish Renewables is exploring the costs of deploying an additional 1 GW of renewable capacity in the region. The organisation commissioned Baringa Partners to run an economic analysis of the potential auction price and related costs, and according to the firm's analysis, no additional cost to consumers would occur from renewables, while adding a potential 1 GW of capacity over and above the wholesale cost of power.

As part of the transition to a sustainable energy network, in line with targets set out in the Paris Agreement which aims to limit average global temperature increases to below 2.0C, a range of renewable energy generation stock is being installed. On the back of technological advances, the investment price for renewables begun to fall significantly.

In line with its ambition to add a further 1 GW in renewables capacity to its energy mix, Scottish Renewables recently commissioned Baringa Partners to explore potential outcomes of the initiative in relation to the auction price. 

Renewable auction prices are falling

The new capacity, which would be auctioned in 2018/19, would come online between 2021 and 2023, with a project being contracted under the Contract for Difference* (CfD) scheme from the Low Carbon Contracts Company (LCCC) for the first 15 years after their commissioning.

As part of the firm’s analysis for Scottish Renewables, recent trends in auctions prices for renewable projects across the globe were considered, and the document ultimately shows notable variation of auction prices for the different types of generation, solar PV and onshore wind, in 2013.

When it comes to solar PV projects, the lowest price per MWh was produced in Chile, at $29, followed closely by the UAE, at $30. Mexico and Peru too offer relatively low price solar PV auction prices, at $32 and $48 respectively. The highest cost projects were found to be Brazil, at $122 per MWh, and France, at $120 per MWh. Onshore wind projects too were found to have a relatively broad spread for costs, at $30 per MWh in Morocco and $38 per MWh in Peru, to $90 per MWh in the UK.

Onshore wind and solar PV LCOE auction price

To understand the changes in pricing for onshore wind projects, as well as current pricing for Solar PV, the firm analysed an internal database of consented GB onshore wind and solar PV projects, which totals around 5 GW in capacity. The vast majority of the onshore wind projects in the analysis (70%) are located in Scotland, while the vast majority (95%) of solar PV projects are situate in England and Wales.

Using a range of metrics the firm estimated the Levelised costs of energy (LCOE) for onshore wind and solar PV projects in the space. The LCOE for the 1 GW in capacity sought after by Scottish Renewables, assuming that developers bid their LCOE into the auction, is estimated at £49.4/MWh.

The result, the consulting firm notes, is in line with auctions across the world, which go at between $40-60/MWh, and well below the £80/MWh for the most recent UK CfD auction from early 2015. The analysis, in addition, found that the cheapest solar PV project would auction at around $60/MWh.

LCCC topup rate

The authors also considered the wider effect of rules surrounding CfDs. The study concludes that, “under the CfD regime, projects are paid the difference between the auction clearing price and the day-ahead hourly wholesale price at the time of generation (known as the ‘capture price’).”

Researcher’s projections stated that for the first five years of production, the LCCC would need to pay out an average £8 million per annum (£42 million in total), to support the projects under the current CfD regime. However, an increase in wholesale prices, in line with projected commodity price increases, will see the LCCC receive a total net payback of about £85 million of the 12 proceeding years. Over the project as a whole, the firm estimates that the LCCC gains £43 million in net payback for 1 GW in onshore wind capacity in 2017 terms. With the public sector WACC discount rate of 3.5% taken into account, the firm finds that the LCCC would receive a payback of £18 million in real 2017 terms.

Renewable energy

According to EY’s 2016 figures in their ‘Renewable Energy Country Attractiveness Index’, the UK currently ranks 13th in the world’s top 40 nations for green and renewable energy, and these further findings from Baringa suggest potential for the UK and Scotland to further improve their standing in the future.

Niall Stuart, Chief Executive of industry body Scottish Renewables, which commissioned the report, said: “The study’s findings reinforce that onshore wind can make a significant contribution to ministers’ ambitions for the Industrial Strategy. At these kinds of prices, the technology can continue to play a key role in cutting carbon emissions whilst keeping bills down for businesses and households – an important priority for Government. It can also secure inward investment and jobs across the country and drive the renewal of our ageing energy infrastructure.”

* A Contract for Difference (CfD) is a contract between an RES-E generator and a CfD Counterparty. Low Carbon Contracts Companies (LCCC) are wholly owned by the UK Government. The CfD is based on a difference between the market price and an agreed “strike price”, which could see the LCCC payout the generator or vice versa, based on market energy prices.

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