by Felicia Jackson

Felicia Jackson is an associate at Carbon International: www.carboninternational.com

In early 2008, EU President José Barroso outlined the Climate Action and Renewables Package, the process by which the EU intends to limit the growth of carbon emissions. The core of the proposal comprised targets of a 20% cut in greenhouse gas emissions by 2020 and 20% of energy from renewables by 2020.  

These targets are the most stringent anywhere in the world, and some EU countries are already showing signs that they may fail to meet existing Kyoto commitments to 2012. Many question the extent to which such targets are achievable.  What will definitely be required are large amounts of investment, the right policy framework, innovation in technology development and implementation and a supportive long-term investment environment.

But it’s not simply the need to move to lower carbon fuels that is driving the market. Many European power plants, transmission cables and pipelines will soon reach the end of their lifetimes and will have to be either updated or replaced.  As power demand grows, replacing existing ageing infrastructure and developing new renewable plants will demand huge investment, and the addition of the carbon cost of generation will only boost the price of fossil fuel. This will make increasingly efficient or renewable power plants more economically attractive to utilities and investors alike.  The pan-European electricity lobby group, Eurelectric, has said that the EU will need about 520GW of new capacity by 2030, and grid networks are expected to require €2 trillion in upgrades over the next 25 years.

Development of renewable energy has proved very uneven across the EU, with Germany providing 43% of the growth in 2006. A number of reasons have been given for this slow pace, such as drought causing below-normal hydropower production, as well as inconsistency in programmes intended to encourage development of renewable power sources. From 2005 to 2006, while renewable energy use in the EU grew by the energy equivalent of 8.5 million tonnes of oil (Mtoe), energy consumption grew by 5.5Mtoe.  

Support for renewable energy development has taken different paths across the EU, underpinned by different policy frameworks. Although there has been a convergence to two main mechanisms, the feed-in tariff (FIT) or a quota system like a renewable portfolio standard (RPS), much debate remains focused on the effectiveness of each for meeting the multiple objectives of energy security, emissions reduction and economic development.

Germany accelerated the implementation of renewable energy through the use of FiTs. This places a legal obligation on utilities to purchase electricity from renewable energy installations, at above market rates. The tariff rate which utilities pay is guaranteed, usually over a long period. It can vary for different technologies, in order to ensure the profitability of each renewables operation. This provides long term certainty for investors and developers, as well as initiatives for innovation in new technologies.

The appropriate policy framework is vital to generate investment interest. Matthew Clayton, Investment Manager for Triodos Bank, argues that the UK’s quota system, the Renewables Obligation (RO), not only highlights the difference government policy makes, but provides a market mechanism to achieve the integration of renewables at the least cost. Yet the RO’s flaw is that, while it fixes the total cost every year, it doesn’t guarantee delivery of a target level of capacity. Last year, Spain installed more new wind generation than the UK’s entire capacity – driven predominantly by the implementation of an effective FiT.   The choice may become one of opting for FiT if speedy implementation is paramount, or quota if the preference is for a sustainably developed market.

Investors need to know that support will exist over the lifetime of the plant they’re developing. Simm believes, “While the planned extension of firm Renewables Obligation (RO) targets to 2020 is a positive move, in the end the RO mechanism doesn’t deliver the capacity and the consumer still ends up paying. What’s needed is for the UK to wean itself off the RO and replace it with a FiT scheme based on declining subsidised tariffs.”

Another area of growing opportunity is energy efficiency. A recent report from the McKinsey Global Institute, ‘The Case for Investing in Energy Productivity’, says half the cuts in worldwide greenhouse gas emissions required to keep climate change under control could be achieved at a net profit to the global economy. It estimated that an international investment push into available energy efficiency measures could halve the growth in energy demand from its current rate of 2.2% a year, and concluded that investment in energy efficiency of about $170 billion (£87 billion) per annum to the year 2020 would yield a return of about 17%, or $29 billion.

So, while governments are taking stock of the need to implement change, or exploring new policies for increasing energy efficiency, the McKinsey report makes a strong commercial case for immediate investment in increasing energy productivity. Encouraging the private sector to see financial benefits in implementing climate change abatement measures must prove a powerful engine for change.

One question that is no longer open to debate is whether or not there are sufficient resources to generate 20% of total energy supply from renewable sources (33% of electricity). In the UK alone, relatively mature technologies generating clean energy from waste and wind could technically supply over 40% of current power requirements. Within Europe there is a broad range of technical capacity dependent on geography and resource, but the EU’s plans for cross-border power and renewable certificate trading, combined with suggestions for a pan-European super-grid, could eliminate that disparity.

Europe already gets more than 3% of its electricity from wind, produced by 50,000MW of installed capacity.  In 2006 more than 7,500MW of new wind farms were constructed and 180,000MW could be operational by 2020. Yet, if the targets are to be met, deployment must speed up. While there are obvious problems in the supply chain, many believe that the biggest bottleneck is the planning system. In the UK, for example, the regulator Ofgem calculates that about 14,000MW of renewables projects are stuck in the current system.

Solar is also playing an increasingly significant role, especially in Germany and Spain, driven by strong FiTs. Germany is currently installing around 1,000MW per year on homes, farms and commercial buildings. Yet there are clear problems with solar deployment, ranging from the inefficiency of the systems to the high cost of solar panels, resulting predominantly from the lack of supply of silicon for manufacturing.

Many believe that wave and tidal have a significant contribution to make, but the industry is currently where wind was 20 years ago and still requires government support. Simm says,    “It would be impractical to expect a large contribution within a decade, although by then we should have operating small-scale farms in both wave and tidal. We need a twenty year vision for marine power.”

Waste to energy also has a potentially exciting role to play in meeting a variety of policy targets – including emissions, energy and landfill.  The biomass content of waste counts as a renewable fuel – although not all waste can generate clean power, as it includes recyclates and non-flammable waste. Incineration can release particulates and toxic compounds into the atmosphere, and can result in around 25% residue for landfill. But advanced conversion technologies (ACTs), such as waste-to-energy group Advanced Plasma Power’s Gasplasma, produce little to no polluting gases or emissions, provide over 99% landfill diversion and power plants with a negative carbon footprint.

Nuclear is still supported by many as the best way to generate large-scale baseload emissions-free power, but there remain problems to overcome. The plants will take time to be built, and the lack of focus on nuclear power in recent years has resulted in fewer engineers being trained. With uncertainty surrounding the cost of development, as well as security and nuclear decommissioning, nuclear power will need its own stable legislative framework to be a success.  Matthew Clayton, of Triodos Bank, believes that an unintended benefit of increased focus on nuclear could actually be to help support renewables in the short term, as it could take up to 15 years to deploy new nuclear.

Grid interconnection is key, and the ability of the grid to transport the power generated remains questionable. Renewables projects are often small and sited a long way from demand – the opposite of what the grid system was established to handle.  In the US, the American Wind Energy Association says that the capacity of the grid to deliver wind energy to customers is one of the biggest constraints on the industry’s growth, while the China Wind Energy Association recently announced that more than one quarter of the country’s 5,600MW of installed capacity was unable to provide power because of a lack of grid connections.

The instability of renewable power remains a concern to many. The conventional wisdom is that in order to keep a power grid stable with regard to frequency and voltage, flows of power into and out of the grid must always be equal. As wind energy penetration grows beyond 6 10% of energy delivered, grid imbalances imposed by rapid changes in wind power output must be stabilised. These can first become noticeable and problematic at valley load periods. While it’s broadly accepted that there are few technical issues with the integration of up to 20% of intermittent renewable power, above that figure issues of grid management and power distribution become critical.

The development of significant amounts of distributed generation would of course help to smooth output – whether this comes from solar or through the development of micro combined heat and power (CHP) facilities.  Chief Executive of the investment company Low Carbon Accelerator, Mark Shorrock, believes, “One of the most important short-term changes that we can make is to develop distributed micro-generation. Distributed generation can reduce network losses and improve network stability, despite a number of barriers including network connection costs, the operation of net metering and in some cases the application of market liberalisation. Resolution of these issues and efficiency gains in conventional technologies will eventually lead to easier and faster integration of distributed generation and significant growth in distributed generating capacity.”

Another means is to use enabling technology, such as energy storage. By acting as a buffer between the source of power and the user, it can smooth spikes in power supply, strengthen the grid by storing power near its point of call and transform intermittent and erratic output into smooth predictable power flow. For example, Canada’s VRB Power Systems has developed an efficient energy storage system which not only allows for the storage, management and integration of intermittent power within the grid system, but also dramatically improves the economics of renewable generators, making them more appealing as an alternative.

Tim Hennessy, Chief Executive of VRB says, “For renewable energy sources like wind, it has the ability to dispatch power on demand, can fulfil moment-to-moment fluctuation requirements as well as providing longer term storage for load balancing. Additionally, the VRB Energy Storage System (VRB-ESS) can provide a range of ancillary services, from black-start provision, power quality support, energy management, arbitrage and premium power.”

One option would be to change the way in which we manage power generation and the grid, through the decentralisation of generation combined with an ongoing upgrade of the existing grid. This would ensure power being generated closer to the point of need, with lower losses in transmission. Belgium’s virtual utility, Thenergo, combines generation with power trading in a new business model, operating as a distributed utility using cogeneration plants (also known as combined heat and power or CHP).

Each plant is linked back to one central control centre, allowing the company to maximise revenue by allocating generated power to the point of demand, while at the same time ensuring no energy is wasted. This process means that Thenergo can provide utility scale output on a decentralised basis – while traditional utilities may have one centralised plant pumping out 100MW, Thenergo could have ten plants generating 10MW each in a range of localities. This makes the system more responsive to local demand; it means that less power is lost in transmission; it uses local feedstock from local suppliers; and generation can be turned up and down as required.  It is a responsive solution that can take advantage of peak demand in order to maximise revenues, but it is also environmentally sound as it doesn’t waste energy and operates on a local, decentralised basis.  

There are a number of issues, ranging from investment framework and regulation, technological capacity to political will, that will need to be addressed if the EU is to meet its targets. However, solutions clearly exist which would enable that goal to be achieved. While government support may be necessary for large infrastructure projects, many believe industry should focus on exploiting and developing existing technologies. What is vital is to focus on finding solutions to problems of cost, speed of implementation and integration of low-carbon solutions into the energy mix.

Where government can play a role is in supporting these technologies, regulating for and demanding these new products and services. As Shorrock says, we need to focus on “those technologies which are designed to solve an existing problem in an existing or fast emerging marketplace. What we need is a long-term framework of support in place, in order for smaller technology firms to develop and compete.”

One of the biggest issues to overcome is the difference in investment perspective between technology investors and project financiers, who issue or underwrite the debt for the development of renewables projects. Project financiers have a tendency to be conservative and risk-averse, providing funding only when a technology has been proven at a commercial scale. However, given the rapid pace of development by cleantech companies, a substantial technology risk may still remain, even as the commercial financing is being raised.  

Nick Pople, Director of Ludgate Investments, believes that what we need now is a two-pronged approach.  He says, “We need to accelerate the wave of innovation and further enhance the business environment in order to create the right conditions for investment to flood in.  The Government needs to set the right legislative framework, create conditions favourable to environmental investments, and to regulate firmly but lightly.”  

He continues, “Some forward-thinking businesses have been investing in these areas already for a number of years now, but most have not.  What businesses now need to do is ramp up their investments in these new areas, so that, as quickly as is possible, they can replace our dependence on fossil fuels, and use energy and natural resources more efficiently.“

Of course it’s difficult to make fundamental structural changes to a society and manage economic growth at the same time. Simm stresses that, “Right now, Government’s number one priority in this area is to make sure the lights aren’t going to go out in the next few years.  Getting new power plants on stream is vital, and renewables have an important part to play.”  

There is no doubt that we will need to transform our energy infrastructure to reach the 2020 targets. While it’s a target we can reach technically, perhaps what we ought to be thinking about is how we can effectively make the greater transformation. We must be aware of the difficulties in making structural changes to our energy environment – this is a fundamental economic issue affecting industry and development. Whatever happens, we’ll need bold decisions, a high degree of innovation and robust investment to get us there.