The future for renewable energy

Tuesday, December 30, 2008

Philip Wolfe, Director General of the Renewable Energy Association

Renewable energy will be a highly dynamic part of the cleantech spectrum for several decades to come. The drivers for the sector are aligned and strengthening all the time. And remember these go beyond just climate change. Energy security too is a key plank of policy, especially in countries like the UK and the US whose domestic oil and gas supplies are a dwindling part of the energy mix.Even economics is now becoming a stronger driver, with wind power achieving parity in many cases and other technologies moving promisingly down the cost curve. Another benefit of renewables in this respect is that the cost, even when higher initially, is predictable for many years after the stations have been installed, whereas the costs of fossil, and even nuclear, energy are becoming hard to predict.It all sounds like a ‘no-brainer’ doesn’t it? So why has growth been slower than expected? Will this change in the foreseeable future? And will the sector be immune to the global recession?Are the market stimulants aligned with the political drivers?Although the economic impetus has strengthened recently with volatility in the oil market, the environmental and security drivers have been recognised for some years. Indeed the concept we now call ‘peak oil’ was first advanced in the 1950’s. However there are few countries where these have translated into strong markets for renewable energy – and this has always been dependent on effective policy intervention. The reasons are self-evident. Climate change mitigation and energy security are not in themselves stimulants in free markets, as their associated price signals are relatively weak. Indeed renewable energy systems are typically more expensive to install, with the financial benefits of the lower fuel and running costs taking some time to come through.In order to achieve a level playing field, these factors need to be monetised through carbon pricing or taxes, incentives for renewables or a combination of both. Germany, Spain, Japan, several States of the US and those other governments that have recognised this, have achieved significant market growth and an early mover advantage for their industry. The wider European Union is now expected to follow thanks to an ambitious sustainable energy package of policies recently negotiated. The Renewable Energy Directive part of this package will give all EU states a target for the penetration of renewables into the total energy mix by 2020. The average will be 20% of overall energy – electricity plus heat plus transport. The UK (as a late adopter) will have a target of 15% - a ten-fold increase on the 2005 level. This requires a huge acceleration in the rate of deployment even from the higher levels achieved since the introduction of the Renewables Obligation.So, although the UK’s target sounds modest compared to other countries, it represents one of the highest growth rates in Europe. The government has acknowledged that existing policies would achieve a level of just 5% - one third of what we need. It has therefore engaged on an intensive programme to develop a Renewable Energy Strategy to bridge the gap.How will these targets be reflected in national policy?The Renewable Energy Strategy is expected to lead to a broad raft of further policies in the sector. These will be focussed around two primary approaches:1. Increased penetration of renewables in the merchant energy sector2. New incentives for decentralised renewables and energy efficiencyI’ll summarise these separately.Renewables in bulk energy supplyExisting policies for renewables have been concentrated in this part of the market and comprise obligations on energy suppliers to source a growing percentage of their electricity and transport fuels from renewable sources.The Renewable (electricity) Obligation (RO), which started in 2002, now delivers about 5% of UK electricity – under 2% of total energy – from renewables, mainly landfill gas, hydro, energy from waste and wind. It had aimed to deliver 15% of electricity supplies from renewables by 2015, and continue at that level to 2027. This will now be extended to at least 2037 and will need to deliver a much higher percentage. Electricity is expected to make a higher contribution to the 15% overall target, so the 2020 penetration of renewable in the electricity sector will need to be over 30%. Policies also need to overcome the delays caused by grid connections and planning consent, which have held performance to date behind national targets.The Renewable Transport Fuels Obligation was introduced in 2008 and designed to similarly achieve a percentage of biofuels in diesel and petrol. This too has had problems and is underachieving. The European directive includes a sub-target to obtain a 10% contribution from the transport sector by 2020.Decentralised energyThe potential contribution of renewables on the ‘demand side’, i.e. by energy users, has traditionally been overlooked and is a major new focus area.In the construction sector, for example, the government has set new objectives that new buildings should be ‘zero carbon’ by 2016 (or 2019 for non-residential). This can only be achieved by high insulation standards and renewable energy.Additionally there is massive potential for improving the energy performance of existing buildings, businesses, government facilities and communities.In both these areas there is substantial potential for the introduction of renewable heating technologies, a historically under-exploited sector, which represents ‘low hanging fruit’ as a fast and low cost way of delivering low carbon energy.The entire decentralised energy sector should receive a substantial boost from 2010, when renewable energy tariffs are due to be introduced. These will pay system owners a defined payment for every kilowatt hour of energy produced. This mechanism should prove attractive for energy users, while the RO will continue to support energy producers.The tariffs were included in the Energy Act, passed in November, and also provide for payments for renewable heat and biogas.What will be the high growth areas?The scale of the growth required and the broader range of sectors to be addressed provide significant investment potential across several industries.Bulk generation technologies, such as wind power, are already attracting attention, and particular focus in the UK centres on the potential for offshore wind. Waste-to-energy technologies also offer substantial growth especially as landfill avoidance is becoming another strong driver. Successful implementation of the Renewable Energy Directive should create a strong market for renewable transport fuels and a driver for the development of biofuels from non-traditional sources – often called ‘second generation biofuels’.The potential growth in decentralised applications may well be even higher, as they have received no support in the past. Solar electric generation from photovoltaics, for example, has seen sustained global growth, while continuing cost reductions should lead to competitive costs in the foreseeable future.While renewable heat technologies are already well developed, a new policy focus in this area will open up expanding market opportunities for solar thermal systems, heat pumps and biomass boilers. Combined heat and power generators such as biomass and biogas-driven CHP systems will be very attractive as the construction market moves towards zero carbon buildings.There will also be exciting niche opportunities, for example in micro-hydro applications and in anaerobic digestion and technologies that can take advantage of the biogas tariffs.Finally there will be emerging opportunities for related systems technologies, such as smart metering and load management.So is the renewables industry immune from the financial mayhem?A naïve question – of course it isn’t.Having said that, the sector clearly has strong underlying drivers and should be a major beneficiary of any ‘Green New Deal’ policies for cleantech investment as a strategy for ending the recession.The ability to raise the required capital for expansion is likely to be a constraint on renewable energy companies, with the fear that good, growing companies may become over-extended.Comparatively, however, this will be a good sector for investment, and the leading companies are already seen to be outperforming the general stock market indices.