How far will the UK fall short of its renewable generation target?27 Aug, 2012
When the UK Prime Minister David Cameron was elected in 2010, he boldly announced to a gathering of civil servants at DECC that his would be ‘the greenest government ever’. As we set out last week, it appears his Chancellor and the Treasury do not share the PM’s enthusiasm. The government has overseen a number of measures to reduce support to renewable generation including cuts in support for solar and wind development. More broadly the government’s focus on achieving decarbonisation targets has taken a backseat to ongoing efforts to stem the damage from the eurozone crisis and tackle the UK’s deepening recession. But what do these headwinds mean for the potential volume of renewable generation that will be delivered by 2020?
Targets vs reality
The UK government’s primary target is to achieve 15% of energy consumption from renewable sources by 2020 (as set out in the 2009 EU Renewable Energy Directive). The government has not set an explicit target for renewable electricity generation as a percentage of consumption, but DECC openly refers to a 30% electricity target by 2020 based on advice from the Climate Change Committee. Given the much higher costs of renewable penetration in the heat and transport sectors, 30% is probably the minimum electricity sector renewable penetration consistent with the overall 15% energy target.
There are few people left in the energy industry who believe the UK’s 30% renewable electricity target is achievable. But the consensus view on the potential shortfall is less clear. In our view there are a number of factors which may combine to significantly constrain renewable build between now and the end of the decade:
- Capital constraints: With Europe slipping back into recession and the credit markets in a state of permanent unrest, investors are imposing much tougher standards around equity risk/return requirements and lenders are becoming increasingly credit constrained and risk averse.
- Political mood: The conservative faction of the Tory party has declared open warfare on renewable energy as a misuse of the tax payer’s money and a blight on the countryside. While this may not represent the mainstream view in the UK it is having a direct influence on government policy and has been one of the factors behind the Treasury disrupting DECC’s policy implementation. More generally as the UK falls into another recession, the mood of the electorate is likely to shift from the environment towards jobs.
- Regulatory uncertainty: The implementation of renewable support policy under the government’s EMR policies is not running smoothly, as we set out last week. On top of this there is a raft of complex and unresolved regulatory issues constraining the development of offshore wind.
- Infrastructure constraints: National Grid is under immense pressure to deal with a growing backlog of transmission issues relating to the growth in intermittent renewable build. Planning permission is becoming more difficult with public challenges to overhead power lines. But the biggest issue is the huge volume of transmission investment required to support growth in renewable capacity.
As we set out below, these issues suggest to us that the actual share of renewable electricity in 2020 may be closer to 20% than the government’s 30% ambition.
Renewable build over the last 5 years
When it comes to understanding the future, history is always a useful place to start, in the absence of any better guidance. Chart 1 shows historical UK wind capacity developed over the last 5 years.
The rate of wind development will be the critical factor behind renewable generation growth. Onshore wind is the most cost effective renewable technology while offshore wind offers the most promising scalable resource potential. But Chart 1 shows a stagnation in onshore wind development as the constraints described above have taken hold. Offshore wind development has increased steadily but at rates well below those projected by the government.
The other important renewable generation category is biomass, which in reality is made up of a range of technologies covering waste, landfill gas, animal and plant based fuels and co-firing of conventional generation assets. While biomass generation has contributed significant volumes in the UK historically, the growth of most of these technologies is restricted by resource constraint issues. One of the most promising, co-firing, was dealt a blow by the government last month when it only marginally increased support (to 0.6 ROCs) instead of an anticipated doubling of support.
3 scenarios based on historical build rates
Projecting the future is a messy business, particularly given the enormous uncertainty that the UK energy market faces. So our aim in this article is not to forecast renewable generation volumes but to present three plausible scenarios which are grounded in the historical build rates over the last 5 years (2007-11). Projecting based on historical build rates is a somewhat crude approach but benefits from being transparent and illustrating projected build rates as a function of what has actually been achieved to date. We ignore wave/tidal generation volumes because they are not likely to materially contribute before 2020.
Status quo scenario:
Most projections of renewable build that get close to the 30% target involve a ballooning of growth in one or more technologies in the second half of this decade. We do not subscribe to this leap of faith given the constraints we describe above. So our first scenario sets out a continuation of the build rates experienced over the last few years, with adjustments for:
- Growth in offshore wind at double the 2007-11 average build rate or an average of 614MW per year
- A decline in onshore wind growth to 80% of the 2007-11 build rate or 480MW per year (primarily to reflect increasing constraints around sites, planning and connection)
- Biomass continuing to grow at the average build rate of last 5 years or 329MW per year
This scenario results in a 20% share of renewable output in the generation mix (vs DECC’s 30% target), assuming a 1% annual electricity demand growth rate. By 2020 renewable capacity contributes approx. 13.5GW to the UK capacity mix, once it has been de-rated based on average load factors.
Growth vs Historical scenario
Our second scenario assumes a significant improvement from growth rates over the last 5 years for offshore wind (250% increase), biomass (130% increase) and solar (200% increase). We assume onshore wind and hydro continue to grow at the historical average rates.
This scenario results in a 23% share of renewable output, with around 16GW of renewable capacity, once it has been de-rated for average load factors.
In our final scenario we assume that constraints on renewable build continue to get worse. Offshore wind grows at a slower rate (150% increase) and biomass and wind decline marginally (80% of historical rate).
This scenario results in a 17% share of renewable output, with around 12GW of renewable capacity, once it has been de-rated for average load factors.
We do not claim any special ability to divine the future, so if you disagree with the projected build rates in these scenarios hopefully the framework provides you with a useful means to overlay your own assumptions.
The three simple scenarios we have run based on historical build rates suggest a 2020 renewable generation share closer to 20% than DECC’s 30% target, unless there is a step change in renewable policy support, a change of tack in regulatory approach and an easing in capital constraints.
The broader implication of a substantial shortfall in renewable build versus DECC’s target is that it will increase the tightening of the capacity margin in the UK electricity market. This will be particularly important once approximately 15GW of coal and nuclear capacity is retired by the middle of this decade.
It is commonly argued that new gas-fired capacity will be built instead, but we see little chance of that as long as spark spreads remain at their current depressed levels. Rather, it is likely that the UK will need to fall back on its existing thermal capacity, both to manage renewable intermittency but also to meet demand growth and offset plant retirements.