Renewables subsidies: Double-edged sword?

Published: Thu 10 Apr 2014
A blog entry by S&C Electric GridTalk

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In Britain, subsidies have become a popular mechanism for enabling fledgling green technologies to establish themselves. In the renewables sector, this has led to the proliferation of low-carbon energy projects including wind and solar. In theory once these technologies have established themselves, market-driven competition will take over in favour of subsidies. Yet in reality, the very mechanism designed to help Britain meet its low-carbon goals has created a double-edged sword.
Subsidies in wind and solar have incentivised operators to heavily invest in renewable generation, with guaranteed returns. So much so that in 2012, Britain’s ‘Big Six’ energy companies profited from almost £900m in consumer funded wind subsidies. Subsidies make sense since unlike fossil fuel power plants; you cannot simply turn on a wind turbine when the wind is blowing. In the absence of energy storage, wind energy that is captured but unused due to a lack of demand is effectively wasted. 
The solution to the problem of aligning renewable energy generation with demand is energy storage, which can store energy when the wind is blowing or when the sun is shining and release it when it is not.  Energy storage can eliminate wasted energy and boost revenues and profits from renewables, which improves the business case for renewables without subsidies and offers a more economical, market-driven solution for the long term. But with firms building their renewables business models around subsidies alone as opposed to market drivers, the incentive to invest or adopt storage technology to solve the intermittency problem is greatly limited. 
Although storage has been proven to enhance the efficiency of renewables, it ironically does not attract the same level of subsidies as wind or solar. 
Traditionally the cost of energy storage technology was prohibitive for mass implementation. However, in recent years, the cost of storage technology has reduced as the technology has matured. For instance improved chemistry and manufacturing techniques have seen the cost of Lithium Ion technology reduce by 30% in the past five years. 
Many studies have highlighted the benefits of energy storage at different price levels for different energy mixes and growth. An Imperial College energy storage report found that Britain could make savings of over £10 billion per year by 2015, if it can develop 15GW worth of storage by then. 
In addition to mitigating intermittency, energy storage can also help operators secure additional revenues through arbitrage or frequency response tenders. A recent frequency response tender in the UK secured an availability of £50 per hour. When you scale this to a renewables operator with 30MW capability with energy storage, they can achieve an above-average, stable return of £13.1 million per year. 
Yet one of the problems holding back investment in storage is a distortion between supply and demand, brought about by lack of knowledge sharing between the four key stakeholders: generators, transmission system operators, distributors, and supply companies. With each stakeholder only focused on a narrow segment, it is hard to define ‘value’ on efficiency since efficiency gains are split four ways.  
In the UK, this broken value chain originates from energy regulator Ofgem’s efforts to make the market competitive by putting barriers in place, in the form of financial penalties to prevent stakeholders from communicating. Ironically the subsequent difficulty for companies to own and gain value from storage is not only stifling the efficiency of our renewables, but is also a barrier to exporting of these technologies. 
One way to solve this would be for a change in policy to make electricity storage a separate market category from generation, transmission, distribution and supply.  Fortunately, the UK government and industry are working together to prove the value of storage. The UK Department of Energy and Climate Change (DECC) has called upon S&C and other organisations in our industry to help to investigate the realistic requirements for electricity storage across the power system and to determine its corresponding value to the UK.
Market environments often lack financial incentives for utilities to innovate and regulatory processes can often limit their ability to conduct trials and adopt new technologies. We are confident that with the technology becoming more mature, cheaper and being increasingly implemented around the world, adoption will advance.
Written by Andrew Jones

Originally published by The New Statesman, Feb 2014

About Andrew Jones
As Managing Director of S&C Electric Europe, Andrew Jones is responsible for the strategy, direction and execution of activity in Europe. In 2008 he was integral in setting up the European business and has overall responsibility for building the business in these markets. Andrew Jones has exceptional technical knowledge in the energy sector, specializing in smart grid technology, and has published over 30 papers and he has been involved as a BEAMA, British Standard, CIGRE and IEC bodies.