As Scotland continues to move towards sustainable energy generation, a new
economic analysis of the potential auction price and related costs by
Baringa Partners has concluded that – with no additional cost to consumers
from renewables – an additional potential 1 GW of capacity over and above
the wholesale cost of power could be developed over the next five years.
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.
The London-based energy consultancy analysed recent trends in auctions
prices for renewable projects across the globe, and the report ultimately
shows notable variation of auction prices for the different types of
generation, solar PV and onshore wind, in 2013.
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.
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.
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
based 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 – assuming that developers bid their LCOE into the auction – is
estimated at £49.4/MWh.
The result 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.
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 preceding 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.
According to the figures in the EY 2016 Renewable Energy Country
Attractiveness Index , the UK ranked 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.
A spokesman for Scottish Renewables 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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