The high price of electricity is mitigated by renewable energies

Bloomberg — The summer of 2022 has not been a stable season for global energy. Fossil fuel supplies are tight, demand is soaring due to heat waves and the worst may be yet to comethe International Energy Agency said this week. Some events may be localized, but global supply and demand pose challenges – potentially crises – for everyone.

Global trends that are pushing prices up are no stranger to renewable energy. The construction of new onshore wind farms has increased by 7% over the past year, because of inflation and supply chain issues. The cost of solar energy has doubled and the cost of batteries for storage has increased by 8%. A wind or solar project built today would have electricity at the price of what was produced in 2019, marking a change in the more than decade-long downward trajectory of wind and solar electricity costs.

But, at the same time, faced with rising electricity prices, renewable energy could provide some relief. The details of the energy markets that operate these new wind and solar projects are perhaps more important than the absolute costs.

The consequence is that the existing disparity between wind power and solar power (which are generally the cheapest options in most developed grids) and coal and gas increased, they did not disappear. La de la energía eólica y la solar, y la del carbón, es más amplia que hace un año, pero todavía no es tan grande como en 2020. Las diferencias entre la energía eólica y la solar, y el de gas, jamás han sido tan big.

While the levelized costs of onshore and solar wind have increased, the cost of offshore wind has decreased. In 2014, the base cost of offshore wind power was more than double the cost of gas-fired power. Today, it is only 7% higher. Power system planners and power company executives, if they expect fuel prices to be high in the future, they can look at that narrow gap and plan for fuelless technology.

Supply chain pressures are still very real and hard felt by businesses, but at least one key indicator is far less acute than it was at the start of the year. The cost of shipping a container from Shanghai to Rotterdam, an approximation of the routes from Asia to Europe that many electrical equipment would take en route to projects, it has gone from almost $15,000 to less than $10,000 since October 2021. Yet these fees are still four times higher than they were before the pandemic!

With inflation soaring, June’s consumer price index rose 9.1% from a year earlier, a figure not seen since 1981. But inflation outlook has eased considerably. In fact, the U.S. five-year equilibrium inflation rate, which indicates the rate of inflation that market participants predicted five years from now has fallen by more than 1% since April. This does not mean that inflation is about to disappear right now, but rather that the market no longer expects current levels to continue in the future.

There is the assumption of what a global energy cost modeling exercise shows and there is the reality of what energy market players have promised to do. The most recent UK renewable energy auction, where developers of this type of project offer minimum viable prices for the sale of energy in the future, this is the clearest indication we have that the industry expects a reduction in costs.

With the award of 10.8 gigawatts of contracts, more than half of the total volume was allocated to energy offshore wind, is now the largest auction in history. For the first time, offshore wind was the cheapest, below onshore wind and solar. The lowest price of offshore wind, £37.35 ($44.61) per megawatt hourare around a quarter of the current UK energy priceonce adjusted for inflation.

The major utilities and project developers, who won the UK auction with these record prices, managed to do so thanks to a number of factors. One of them is the grand scale; the average size of these projects, 1.4 gigawatts, is larger than the world’s largest offshore wind project, currently under construction. Scale implies greater purchasing power for equipment and greater operational efficiency. Another factor is time. The start of these projects will take until 2027.

Finally, the result of the British auction also indicates that theOffshore wind developers see benefits even in highly volatile markets. Traditionally, offshore wind projects sold all their energy through a fixed 15-year contract.

On this occasion, several of the British promoters they have only secured part of their energy purchases via a firm 15-year contract, preferring to sell the rest via over-the-counter contracts directly with major customers, or directly on the wholesale energy market. These strategies have three objectives.

In the first place, they allow the country to protect itself from high wholesale prices for fifteen years. Second, cushion the blow of high prices (and volatile) to large customers who can lock in wind power prices over the long term. And third, allow developers to have some degree of advantage, if they are willing to take risks shaping the energy market for the future.

Markets today are very difficult and risky, and consumers around the world are feeling the effects of rising energy prices on global inflation. At the same time, renewable energy prices are rising with all energy prices, they continue to be the cheapest option in most markets, with the possibility of keeping these prices for years. Low fixed costs, with no carbon dioxide emissions, could be a point of economic relief.