A light that never goes out

The talk of Europe over the past month has been all about Brexit. Politicians, businesses, investors, journalists and, above all, citizens are still trying to figure out what is going to happen to British and European economies and societies as this unprecedented period in European history evolves. Energy policy is not immune from this uncertainty. Analysts of every sort are now offering their predictions on the future of the U.K.’s energy development. However, rather than adding to the guesswork, it is more useful to examine where British energy policy and market development is today and overlay it to post-Brexit dynamics.

Where are we now?

News of recently added renewable energy installations across the U.K. continue to emerge, and solar is still keeping installers busy. The crucial detail, though, is that current renewable energy installations are the result of past policies that are now either defunct or have been significantly altered. In practice, this means that the only existing policy framework for investors to develop large-scale solar PV projects with subsidies in the U.K. is the so-called Contracts for Difference (CfD) mechanism, which awards the successful bids of a competitive tender process a set premium on top of the wholesale energy price.
The inaugural CfD auction was held in February 2015 but a second auction is yet to be announced. The U.K. government had initially said it would announce a second CfD auction months ago. Not that a new auction would trigger huge PV investment, however: the structure of the mechanism tenders PV systems togetherwith onshore wind projects and thus poses significant barriers to solar.
The second existing market route driving solar uptake in the U.K. is the feed-in tariff (FIT). This is only eligible for systems up to 5 MW, the level of tariffs has been largely reduced since January 2016, and installation activity is capped. The present U.K. solar PV activity that generates news of recently added installations stems from the Renewable Obligation (RO) scheme, which is now completely scrapped but does boast a handful of grandfathered projects that ensure a steady drip of new connections will continue for a little while longer.

The hope that once was

Under such a policy landscape, the U.K.’s solar PV stakeholders have turned their focus on to new and innovative business
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models that bypass subsidy schemes and make new installations viable. Such models, business stakeholders and industry associations claim at various sector conferences and events, will revolve around specific power purchase agreements (PPAs) with customer-tailored projects. Most often, PPA projects will also include onsite storage to maximize the benefit for the end user and make the business case stronger.
In cases where technical constraints are in place, for example the distribution grid being unable to absorb larger amounts of variable power generation, innovative projects might offer solutions. Such is the case of the “Sunshine Tariff” project in the South West England county of Cornwall. The local Cornish community of Wadebridge and surrounding villages was told they could not proceed with their plan to develop a community solar farm due to grid constraints and the only solution on offer was to change the relationship between power generation and consumption. Thus, the community is now trying to shift the power demand pattern and incentivize daytime power consumption so that the generated power from the solar farm is consumed when generated and does not have to be exported via the grid.
This is where Brexit is having an immediate impact. At the annual event of the U.K.’s All-Party Parliamentary Group for Renewable and Sustainable Energy (PRASEG) that took place in London in July, Sara Bell, founder and CEO of Tempus Energy, an innovative utility that also participates in Cornwall’s “Sunshine Tariff” project, told the attendants that Brexit had already left its mark on innovative energy companies and business models.
“To persuade an investor to put money into an early stage innovation company requires them to take an outsized risk,” Bell told the conference. “And the reason you need to do that is because so many early stage innovation companies fail. That’s the reality,” Bell added. “In a safe and calm environment, that is challenging but possible. In the current environment [post-Brexit] it is going to be almost impossible to raise investments for innovation companies,” she noted. “In the last week, every innovation company I have spoken to has cut between 20% to 50% of their staff because they know they can’t fundraise.” Innovative companies cut staff to survive. “This matters,” Bell added, “because if we want to move to a zero carbon system at the lowest price for the customers, we need every innovation company out there.”

Centralized forces receive a boost

Another area of British energy policy that might be affected by Brexit dynamics is the centralized character of the U.K.’s energy system. As innovative business models in energy lose impetus, the centralized character of energy in the U.K. could, on the contrary, be set to gain.
The victory of the centralized energy system forces was confirmed two years earlier when the U.K. adopted the capacity market mechanism to remunerate existing and new fossil fuel-based andnuclear power plants. Traditional power market incumbents had argued that their income has been severely cut (partly due to the rise of renewables), leaving them unable to build new power plants or keep operational ones viable. Responding to this, the U.K. government introduced the capacity market, arguing that the country faced a looming energy supply gap as old nuclear plants and many of its polluting coal-fired stations are due to close by the end of the decade. A capacity market will make it affordable to replace them. Otherwise, DECC argued, the country risked blackouts as early as 2018. The U.K. ran its inaugural capacity market auction in December 2014 and a second capacity market auction in December 2015, subsidizing about 49 GW and 46 GW of coal, gas, nuclear and diesel power generation.
The move to a sustainable and decentralized energy future will not come via the energy market incumbents, which most of the time block innovation because it works contrary to their own, established business model, Bell told the PRASEG conference. “Nowhere is this more evident than in the case of the capacity market, where incumbents protected their generation assets at the expense of their customers,” she pointed out.
Rather interestingly, Bell added that “we took legal action at the European Court of Justice (ECJ) to appeal the state funding for the capacity market because it is an anti-competitive measure that subsidizes coal assets, nuclear plants and diesel installations. But as a result of Brexit we will not be able to enforce any ECJ judgments, and all of the U.K. electricity bill payers will be paying for the capacity market subsidies.” Not that an ECJ ruling is certain to rule against the U.K.’s capacity market, which had previously been cleared by the European Commission. However, the case is an indicator of the policy dynamics emerging following the U.K.’s departure from the EU. As a member, the U.K. had to comply with European competition laws that play a role in the British renewable sector.
Some believe the argument that the EU competition law might protect the U.K. renewables industry that has grown on the back of public subsidies to be bizarre. But it is not. The U.K. electricity market has stopped being the poster child of the liberalization efforts that it once was, and now relies entirely on public subsidies (mainly via the capacity market and to a lesser extent via past renewables subsidy schemes) to keep the lights on. Every single power generation technology is subject to state subsidies and the state alone decides the generation mix. In the absence of EU competition laws, the U.K. can decide to boost the market incumbents even further without consulting an alternative EU voice.

Targets, what targets?

Last but not least, the EU renewable and emissions reduction targets will no longer be binding. It is true that U.K. has its own ambitious climate change bill in place, and in late June the government also announced a new carbon target for the early 2030s. The U.K.’s Department of Energy & Climate Change (DECC) set the target of reducing carbon emissions 57% by 2030 on 1990 levels, which is tougher than the carbon emissions target it signed up to as part of the EU, which requires a 40% reduction by 2030 on 1990 levels. This is a positive development that was also welcomed by the country’s renewable energy associations, including the solar industry. However, a question remains: the new U.K. target, the so-called “fifth carbon budget,” is legally binding, but who can punish the state if it is not met?

Think what you wish

Of course, all is not lost. Perhaps the British policy-makers develop a sudden zeal for renewable energy and a decentralized energy system, foster the move to the digitization era and reconsider their passion for nuclear power. Specifically, the latter might happen even if they do not wish for it.
Speaking at the PRASEG event was Jeremy Leggett, Solarcentury founder, who said that “U.K. nuclear energy policy is a fiasco,” while the clean energy revolution is unfolding faster than most predicted. The Hinkley Point C nuclear plant expected to be developed by France’s EDF, which keeps postponing a final investment decision to build the plant, is certainly not going to be built following Brexit, said Leggett. It was actually never meant to be built despite the massive U.K. state subsidies, simply because the business case does not work, he added. But the risk is even higher following the Brexit referendum result.
So if this proves true, what is going to fill the gap and provide the U.K. with the electricity that it needs? A rational answer, of course, is renewables. A recent report by the National Grid, the company that owns and operates the U.K.’s transmission lines, said that the U.K. could adopt solar, electric vehicles (EVs) and batteries much faster than what was expected only one year ago. The 2016 Future Energy Scenarios report published on July 5, sees up to 39 GW of solar PV installed by 2035, up from around 12 GW today. Two years ago, the National Grid expected as little as 8 GW and no more than 17 GW of solar by 2030. Now, its low scenario is 15 GW.
Similarly, the National Grid’s expectations for the number of EVs on British roads in 2035 have been increased dramatically, while future scenarios also include, for the first time, a significant future role for battery storage. National Grid is expected to announce the results of its 200 MW frequency response energy storage tender this summer.
All in all, the U.K.’s energy landscape is characterized by its holding on to of the past centralized energy model and Brexit dynamics might boost, at least politically, this direction even further. However, in light of the certain risks that Brexit entails, especially for the nuclear sector, and the constant reduction in solar PV, battery storage and EV technology costs, investors might finally sway towards the latter. Energy incumbents and British establishment politicians will most likely try to block this, and the final battle is going to be won only via technological improvements. U.K. energy policy will merely react to, not shape, the country’s energy future.