How free markets are embracing renewable energy

BY Adam Bruce   /  22 January 2019

The recent decision to confirm Santiago in Chile as the host for the 2019 UN Climate Change Conference is fitting and significant. Chile has clearly demonstrated how a market economy can transition the balance of its electricity mix from fossil fuels to renewable energy. It is also one of the most liberal markets in the world, ranking 20th in the Heritage Foundation’s Index of Economic Freedom, just two places below the USA and above Germany, Japan and South Korea.

Chile did not offer subsidies or incentives for renewable energy. Rather, it amended the law to enable wind and solar PV technology to compete in annual auctions for electricity capacity. Then it let the market get to work.

Over four years from 2013, the auction price for a megawatt hour (MWhr) of electricity fell from USD130 to just USD32.50. This extraordinary collapse in costs was driven by two factors: the dramatic fall in the cost of wind and solar energy technology; and gas and coal’s inability to price match.

Chile is an archetype of how rapid advances in wind and solar power are enabling renewables to outcompete both new and existing fossil fired generation in markets around the world. The fall in costs of generation, coupled with the increased reliability and efficiency of the technology, means that wind and solar are now the low-cost option for electricity companies and regulators the world over.

Critics of the technology can no longer argue that wind or solar generation is “too expensive”, evidenced by the number of countries reversing out of commitments to build new coal-fired generation or LNG facilities. In 2019, storage costs are likely to fall, as battery technology improves, and regulators reshape rules to enable renewables and storage combinations to enter the market.

The first week in January of this year saw Hawaii Electric announce six new solar PV plus storage projects all at around USD80 MWhr. The comparative cost of oil-fired generation in the State is USD150 MWhr. The quoted price represents a 42 percent fall in the cost of the combined technology over three years. This is not a one-off Pacific Island phenomenon. It represents yet another step in an inevitable and inexorable transition to a new normal: the generation of cheap, reliable and clean electricity at scale.

What does this mean for governments and regulators in markets with large amounts of fossil fuel generation? Last year, the Carbon Tracker Initiative published its first analysis of the impact of falling renewable energy prices on the world’s coal fleet. Their conclusions were stark. In liberalised markets, such as Chile and the Philippines, where power generators are subject to competition, coal capacity will be forced to shut if it cannot secure payments outside the market. In regulated markets, where governments typically pass on the cost of generation to consumers, governments can either subsidise coal and keep electricity prices high or subsidise prices. Neither option represents prudent policy and tends to militate against long political careers.

There has been so much talk of “tipping points” in the global power sector, but the shift in the cost of renewable energy and storage last year certainly feels genuine. Even the International Energy Agency, which has consistently under-forecast the transition from fossil generation to renewable energy, reported in its late 2018 report World Energy Outlook that global coal use peaked in 2014. It found that renewable energy will continue to fall in price, further imperilling planned investment in new fossil fuel generation, and undermining the economic case for existing coal and gas generation.

According to the IEA, Solar PV power and onshore wind are “cheaper than ever”. Add the falling cost of storage and the continued growth in electric vehicle production into the mix and it becomes possible to convincingly argue that we have arrived at, or travelled past, a renewable energy tipping point.

Chile will make an excellent host for 2019 UN Climate Change Conference. It has shown how a country can transition from fossil fuels while maintaining economic growth and reducing the cost of energy. There can be few better jumping off points for this year.

Adam Bruce is Global Head of Corporate Affairs at Mainstream Renewable Power, a global developer of renewable energy power plant