North East experts ask if falling energy prices could lead to a push-back against renewables?

North East experts examine if rising costs of fossil fuels and a slump in oil prices will curtail development of renewables?

Tekmar Energy CEO James Ritchie
Tekmar Energy CEO James Ritchie

The UK's current climate change policies were drafted 10 years ago when the widely-accepted position was that we were in an era of ‘peak oil’ and the price of fossil fuels would inexorably rise over the coming decades.

However, the US shale gas and oil revolution shifted the global goal posts and after initially dragging the gas price down has now had the same impact on the oil price.

And, with energy bills high up the political agenda at a time of falling energy prices, is there likely to lead to a push-back against more expensive renewable technologies?

Leading energy analyst Peter Atherton, of London-based Liberum Capital, thinks so. He recently said: “Renewable energy subsidies have been mostly sold to the public on the basis of the economic benefits.

“But the economic arguments hinged on the idea that fossil fuel prices would get more expensive, while expensive renewable subsidies would be able to come down over time. That’s looking doubtful now.”

The 2008 Climate Change Act introduced by the then Energy Secretary Ed Miliband established the UK’s mandatory emission reduction target of 80% by 2050.

To help to achieve this, it included a renewable energy subsidy regime which has been subsequently refined and developed by the Coalition with the creation of the Contract for Difference (CfD) regime.

Figures released last month showed that the UK is on target to hit its first 2050 target of generating 15% of energy from renewable sources by 2020.

Under the UK renewable subsidy regime, tidal and marine power secure the greatest levels of support, at six times the cost of wholesale power.

Other renewable technologies including energy from waste, solar power, onshore wind and biomass all receive subsidies which are up to 50% to 100% more than the wholesale electricity price.

Offshore wind is the second most heavily-subsidised technology with the consumer having to pay three times the wholesale cost, although the industry is making strides towards reducing costs.

Paul Verrill of EnAppSys
Paul Verrill of EnAppSys

Paul Verrill, director of energy data analyst EnAppSys, of Yarm, said: “The level of subsidy support and particularly CfDs provided by the UK Government has seen justification provided on the basis of value for money against projected electricity costs.

“These projections assumed an increasing rise in fuel commodity prices and carbon. The public perception has perhaps been that the fuel commodity price is the major input into energy prices, which is not actually the case.

“Analysis carried out by EnAppSys has shown that DECC power price forecasts in excess of £90/MWh assume a significant rise in the cost of carbon, which would account for around 50% of the total energy cost by 2030. This is in stark contrast to its current contribution of 10% of cost.

“If carbon were to grow in line with DECC projections and become the largest contributor to the price of power, the impact of lower oil and gas prices would be more limited given its reduced overall contribution to the price of power against historic levels.

“The outcome of low oil and gas prices is that it will become more apparent how much of the cost of energy is related to environmental elements as opposed to fuel prices.”

James Ritchie is chief executive officer of County Durham-based Tekmar, a company which designs and makes subsea cable protection equipment for the offshore wind industry.

He said: “The renewable industry has to reach cost parity, to become cost competitive.

“At the moment the industry depends on subsidies. The subsidies are very generous, and some of the pressures being felt by the industry over cost are self-inflicted.”

With the oil price fall being most welcome at the petrol pump many commentators say the transport sector will be the hardest hit.

However, Matt Boyle, president and CEO of Gateshead-based Sevcon, a world-leading component maker for electric and hybrid vehicles, believes the electrification of the on-road vehicle sector will continue unaffected.

He said: “The vehicle developers are constantly looking to legislation development and the challenges of emissions reduction that time will bring. So lower oil price, although welcome for the user of the vehicle, isn’t a great consideration for the engineers who have to develop the next range of technologies to improve efficiency and emissions performance.”

Matt Boyle, President and Chief Executive Officer of the electric vehicle control manufacturer Sevcon
Matt Boyle, President and Chief Executive Officer of the electric vehicle control manufacturer Sevcon

Andrew Davison, a partner at Newcastle law firm Muckle and the head of its energy team, says there is a consensus for a balanced energy mix but there are different views on how to achieve this.

He said: “Essentially this comes down to a question of principles versus economics. Basic economics show that renewable energy is more expensive.

“The fall in oil price may put pressure on those wanting to act in an environmentally-friendly way, but it will depend on how long the lower oil price lasts.

“The current policies have been based on an eventual point where the costs of fossil fuels and renewable energy reach parity, but that graph has now changed.

“Nevertheless, this is a Catch 22 situation and we need to have renewable technologies for when finite oil and gas resource runs out.

“Perhaps, in the short term the subsidies required to attract people into renewable energy will have to rise?

“But there may be a push back – it’s entirely possible if the gap widens. It’s very hard to justify. Why should they be asking someone to increase their cost base?”

The mandatory policies currently implemented by the UK and the EU are mirrored across the world and these continue to support the growth of renewables.

Efforts to get a new global climate deal culminate in Paris in December, and the environmental lobby will hope for new global emissions’ reductions targets.

After limited success at the previous talks in Kyoto and Copenhagen the outcome is unclear, but there is little doubt mandatory emission cuts will continue to impact global policy-makers.

Mr Verrill believes there is widespread support for the global drive to cut emissions and says we have now reached a point in the battle against climate change where the cost of the carbon emitted needs to counted into the overall cost of using fossil fuels.

He said: “On this basis, the current support for renewables would be expected to be sustained with on-going backing for increased carbon costs and subsidies where appropriate.

“Where renewables are able to generate power on a competitive basis, before accounting for the cost of carbon or for any subsidies, the net benefits to the overall power system would be considerable.

“Until that point, however, the costs of renewables are real, but should be viewed for what they are: an investment in our immediate environment and not a means to save on household bills.”

The UK Government has acknowledged these carbon concerns and introduced the CPF (Carbon Price Floor) as one of a number of tools to allow it hit mandatory emissions targets.

The CPF was introduced in 2011 and sees larger UK carbon emitters charged £18 for every ton of carbon dioxide they emit, which is way above the European carbon price of £4.50.

But the North East has witnessed at first hand the damage it caused with Alcan at Lynemouth closing its smelter, with the loss of over 500 jobs, shortly after the CFP was announced – saying it would wipe out is annual £40m profit.

Guss Weiss of GDF Suez Energy
Guss Weiss of GDF Suez Energy

Guss Weiss, who heads Leeds-based GDF Suez Energy, a business targeted at delivering energy services to industry and business, also highlights how the cost of supporting the green energy transition is set to rise to 50% of the total energy bill.

Mr Weiss said: “The weird thing is the energy molecules are becoming less expensive but total energy costs are getting more expensive. Most people do not realise how expensive renewable energy is.”

But perhaps there is an alternative way to reducing emissions without adding to energy costs; a way outlined by two close environmental and liberal allies of President Obama, former senators Tim Wirth and Tom Daschle.

They want to see the whole treaty framework of mandatory emissions limits scrapped in favour of a greater focus on energy innovation and adaption. In a recent paper they call for a new era of climate pragmatism saying: “Lowering energy costs through technological innovation, cleaning up the air, expanding modern energy services to the global poor, and making societies more resilient to natural disasters are all types of actions that benefit people today, while also helping us mitigate and adapt to changes in the climate in the future.

“This would change the psychology of the climate change issue from one of burden to opportunity, and change the likely outcome from one of hand-wringing about failure to excitement about tangible action to build a better world.”

One renewable technology experiencing sharp cost reductions as a result of technological innovation is solar power which is likely to reach price parity with fossil fuel technologies, in some locations, over the next few years.

The offshore wind industry is also making major cost-reduction strides. In the latest UK auction for financial support its cost has come down by over 20%, and if similar advances can be made across the renewable piece then this downward pressure on costs – and energy bills – will be welcomed by all.

Follow Peter McCusker on Twitter @mccusker60

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