It is difficult to understand the logic behind Britain’s policy toward renewable energy. To meet its plans for a low-carbon economy it has been estimated that Britain requires £1.4 trillion of investment to fund its transition to net zero by 2050 [1], but in the recent budget, the government has announced plans to tax excess profits at a rate of 45% of some renewable energy companies who have been the recipients of past public support to induce investment to raise generating capacity. According to the statement by Jeremy Hunt justifying the decision: “The structure of our energy markets creates windfall profits for low-carbon electricity generation. “
But this statement is disingenuous. The problem is that the market structure referred to by the Chancellor has arisen precisely because of an unplanned regime of previous public support. It would be kind to call this a policy, but state investment support has been used to raise renewable capacity without parallel subsidies or other forms of support to the grid-level electricity storage sector needed to balance electricity supply and demand. The lack of support for storage has led to a steady rise in the demand for, and the price of gas which, along with the Ukraine emergency, is creating the excess profits that Hunt is taxing. The policy of taxing windfall gains might seem to complement the levy on the excess profits of fossil fuel producers, but it does not. Fossil fuel producers have been taxed at a lower rate rising from 25% to 35% in January, but these companies have investment allowances not available to renewable companies. This decision to tax the “windfall” profits of solar, wind, and nuclear generators for five years until March 2028 along with an unbalanced support regime signals to international and domestic investors that the green sector in the UK carries an additional uncertain political risk.
Two Cheers for Britain
Politicians in the United Kingdom congratulate themselves on the country’s success in decarbonizing the economy, or at least in increasing the proportion of electricity generated by renewables, but this seeming triumph is shadowed by a future problem, a lack of storage, and there is no coherent policy to expand it. Nearly a quarter of the country’s electricity is currently generated by wind, the cheapest form of renewable energy, and in August of this year onshore and offshore wind capacity reached 25.5 GW, up from 15 GW in 2017, enough to power 19 million households. [2] As part of the government’s Energy Security Strategy, there are plans to raise offshore wind capacity to 50 GW by 2030 while the Committee on Climate Change, [3] the independent body set up by law, has also argued for the need to sharply increase the UK’s onshore wind capacity from a current level of 14.2 GW to 29 GW over the same period.
Britain’s success in building up wind capacity has been supported by a generous system of public support schemes that have guaranteed a decent return on investment in renewable generation whatever the level of electricity prices. Such support schemes are deemed necessary to expand capacity since wind is the cheapest renewable means of generating electricity with a high fixed cost and low operating costs so profitable investment requires electricity market prices greater than marginal cost. [4] Public support is continuing to drive the expansion of renewables capacity and the results of the latest Contract for Difference (CfD) auction have seen the government approve projects with a total capacity of 11.26 GW which is expected to attract £17.8 billion of investment.
At a time of soaring energy bills, the growth in offshore and onshore wind capacity all seems to be very comforting. If a total wind capacity of 80 GW is reached by 2030 this would generate enough electricity to power all the UK’s households with cheap electricity and go some way towards supporting the extra electricity needed as transport, industry, construction, and household heating decarbonize to meet the 2030 target of 45% of 2010 emissions. But there is a large elephant in the room. Public support for a vast expansion of intermittent sources of renewable electricity generation has, and will continue to, exacerbate the problem of grid balancing which without a large parallel investment in storage will mean a continued reliance on gas to meet demand surges along with high and volatile wholesale electricity prices well into the foreseeable future.
The proposed solution to Britain’s grid-balancing problem due to overinvestment in renewables is not new. A study by researchers at the UAE Norwich Business School in 2016 [5]strongly argued that “as subsidies for setting up renewable energy projects are gradually being removed, because they are reaching market maturity, these funds should instead be used to develop storage systems that could provide viable investment opportunities.” The study explored the potential of energy storage systems to return profits to investors by arbitrage, buying when energy is cheap and selling when it is expensive, by investigating several European electricity markets, and matching trading strategies with storage technologies and market characteristics. It found that revenue was inadequate to justify investment in storage without public subsidies, although energy prices have since become higher and more volatile which will encourage investment from arbitrage alone. If the rapid decarbonization of the British economy is to be achieved by 2050 by increasing generation from renewables, investment in storage is essential with state support granting fast-track planning permission and using financial incentives.
In the United Kingdom, the lack of storage capacity and the location of projects close to renewable generators rather than where the demand for electricity presents a serious problem for policymakers that is not being properly addressed by the government. According to a report by RenewableUK, operational battery storage project capacity grew by 45%, from1.1GW to 1.6GW while the size of projects under construction more than doubled to 1.4GW. In 2021, the UK generated around 304 billion Kwh of electricity producing an output to storage stock of 0.52%, admittedly higher than the current ratio in the US, but the growing problem of grid balancing is more serious in Britain with the proportion of electricity generated, by wind and solar totalling 27.9% of the electricity generation mix [6] RenewableUK estimates that the UK will require at least 30 GW of operational storage capacity by 2030, but despite a rise in the pipeline of submitted and planned projects (as of 2022, 1.4 GW of capacity was under construction, 10 GW had received planning consent, 7.7 GW had been submitted to planning and 10.9 GW was in development, but without the submission of a planning application), the UK is likely to underinvest in storage.
This will be costly. In recent years, the Electricity System Operator (ESO) in the UK has been managing an increasing proportion of balancing trades in part due to the rising volumes of intermittency due to renewable generation in the system. The National Grid estimates that constraint costs are running at around £0.5 billion per year currently up from around £167 million in 2010, but congestion cost may reach a net present value of £2.5bn in 2025 if planned renewable generating capacity comes online.
The subsidization of renewable generation has already led to a serious misallocation of resources in the energy sector which is pushing governments into short-term policy responses to combat the substantial economic rents earned by beneficiaries at the expense of household and commercial consumers of energy. For example, the most recent average generation price agreed upon by the government[7] in the latest CfD auction was around £48 per MW/h which was nine times cheaper than the cost of generating electricity by gas and is substantially above spot wholesale electricity prices and while the margin is returned to the government for the most recent publicly supported renewable projects, for older subsidized projects the difference is collected by the asset owners such as Ventient Energy[8], which is close to US bank JP Morgan Chase and Spanish energy conglomerate Iberdrola. As announced the Chancellor of the Exchequer Jeremy Hunt now plans to tax these excess profits at a rate of 45% on economic rents generated because of wholesale electricity prices over £75 MWh, which the government arbitrarily supposes to be “the average price above which generator returns are considered to be exceptional”.
The budget statement follows the European Union’s decision to impose a price cap on low-carbon energy producers. In a European Council decision on September 30 energy ministers ordered a cap of €180 MWh on revenues earned by wind, solar and nuclear generators from December until the end of June. Profits earned above the cap will be transferred to national governments. These moves have been widely criticized by affected parties in the renewable energy industry and are seen as sending contradictory market signals to investors, but while the EU price cap is unlikely to impact the business case for new wind and solar investments, the imposition of a tax on profits in the UK at a much lower price adds a further distortion to a market where previous government policy has misallocated resources. But to meet its renewable generation objectives the government should not signal that investing in green energy has increased its perceived risk at a time when capital costs rates are rising. Already SSE, a major renewable generator in Scotland has announced that the budget’s generator levy could lead to it cutting back some investment plans[9]. Furthermore, Dr. Charles Rose chairman of Hainsford Limited whose company is an active investor in renewable generation in Europe and Africa has complained about government policy: “This makes a mockery of the commitment to reach net zero but is consistent with the shifting sands of UK energy policy. Meanwhile, the cheapest power comes from onshore wind and new developments in this sector have been effectively banned by the Tories.”
Whether the new British tax on renewables significantly deters the investment planned to meet its 2030 renewable plans, the country still faces a growing problem in balancing the grid because of its one-sided policies and lack of storage. These mistakes are not being made by the EU and the USA.
Brexit Blues
In contrast to the UK, as long ago as the year in which Britain voted in a referendum to leave the EU, the European Commission recognized that energy storage has a key role to play in the transition towards a carbon-neutral economy. As early as 2016 the Commission published a document on a proposed definition of storage and a set of principles to promote it which was followed by a staff working document in February 2017 and the policy document, Clean Energy for all Europeans, [10] adopted in 2019. The Commission has been clear about the role of storage in balancing grids and saving surplus energy to facilitate an efficiently functioning internal electricity market. Apart from its general policy encouraging grid-level storage, the Commission has also taken practical steps by allowing public support for storage projects by waiving state aid rules. In September of this year, the Commission approved a plan by the Greek government to provide a subsidy of €341 million to fund the construction and operation of a grid-connected 900 MW energy storage system. The projects will be selected through a competitive bidding process, with contracts awarded by the end of next year with a project completion date of the end of 2025. The state aid takes the form of an investment grant during construction with annual support for 10 years equivalent to €380,000/MW. This decision has been followed by the approval of €19.8 million in state aid by the government of Croatia to energy storage operator IE-Energy [11] for a series of grid-connected projects taking the form of a direct grant to cover around 30% of capital spending. The Commission agreed to the aid to address a market failure of inadequate balancing services available by the Croatian transmission system operator HOPS (Hrvatski operator prijenosnog sustav). Croatia is also participating in a trial project SINRO.GRID with Slovenia to see how a 50MWh battery system can help the two countries collaborate to help grid flexibility in both.
The Inflation Reduction Act
The United States has finally become more serious about combatting climate change and is encouraging storage as well as renewable generation. The importance of battery storage in delivering renewable goals without unbalancing the electricity grid is explicit in the provisions of the Biden administration’s Inflation Reduction Act (IRA). The Act introduces subsidies that will support capital expenditure for standalone energy storage projects. Previously investments in renewable energy and storage projects were subsidized by the Investment tax credit (ITC) and the Modified Accelerated Cost Recovery System (MACRS) depreciation deduction, but only for storage projects that were tied to solar PV generating capacity. The Federal Tax subsidies for storage projects taking energy from PV projects vary depending on the percentage of electricity stored from this source according to the National Renewable Energy Laboratory, [12] but now stand-alone battery storage projects can qualify for the 7-year MACRS deduction which is equivalent to a 20% reduction in the project’s capital cost. This is important because storage facilities can now be situated in locations closer to where the demand for power easing grid congestion rather than next to supply sources. Decoupling storage from PV generation will hasten the development of storage capacity.
According to Energy-Storage.news , “Previously, if you did renewables-plus-storage, you would think about development from the perspective of getting land and getting permits and going through interconnection [processes] in a combined fashion [13] ” In 2021, over 93% of battery capacity that went online was co-located with solar, but according to Fluence Energy, [14] a listed global leader in the provision of grid-level energy storage, the IRA’s supportive policies could double demand for energy storage in the US by 2030 to 140GW from a forecast of around 70GW to 75GW previously. [15] This represents a sharp acceleration in the growth of the battery storage industry with capacity already rising by 230% to reach 4.6 GW in 2021 from 1.4 GW in 2020 according to the American Energy Information Administration (EIA). [16] In that year the total grid-level electricity generated was 4,116 billion Kwh [17] producing an output-to-storage stock ratio of only 0.11%. However, as the generation by fossil fuels in the USA, predominately coal and gas contributed 61% of the total, with intermittent renewable sources such as wind and solar PV generating only 9.2% and 2.8% respectively, the incentives promoting storage under the IRA should allow the USA to maintain grid balancing as the economy moves to its net zero targets by electrifying the transport and other crucial sectors of the economy. Furthermore, the investment in renewable energy will have a big impact for the demand for strategic metals such as copper. Copper’s durability, efficiency, reliability, superior conductivity and safety play key roles in the energy storage and transmission since the range of copper content found in storage installations is from 0.3 to 4 tonnes per MW of capacity.
According to Marcus Edwards-Jones, chairman of Phoenix Copper an AIM listed British copper company seeking to source the metal from Idaho, “the push in the United States and Europe for a rapid, but balanced move towards electrification will have a major impact on the demand for copper. This is a result of a necessary grid-level investment programme needed to source electricity from renewables while keeping the lights on at a time of rising energy costs.”
Who’s in Charge?
While Britain was one of the few European countries on track to meet the 2030 goal of reducing carbon emissions to 45% of 2010 levels, this target is looking less likely. The British government’s energy policy looks as confused as recent official pronouncements on fiscal policy, controlling the cost-of-living crisis, managing public sector debt, and promoting economic growth. The transition to the legally mandated national target of net-zero emissions by 2050 will result in an expected 212% increase in electricity demand (from 304TWh in 2022 to 628TWh) as transport and other critical sectors such as construction switch from using fossil fuels to electricity. This anticipated switch in energy use for generating economic activity and in the total demand for electricity as its prime input has changed the requirement of energy storage from a useful tool to a critical requirement for UK electricity infrastructure and for energy security. RenewableUK’s Director of Future Electricity Systems Barnaby Wharton said: “The fact that the battery storage pipeline has doubled within the space of twelve months shows that the enormous appetite among investors for this technology is continuing to grow fast. But developers still need access to cheaper capital. Government can help by setting out a long-term vision for the sector, including a clearer and more stable route to market for energy storage. Although we’re making great progress, we’re still some way from delivering the 30GW of operational flexibility that the Government requires by 2030”. Unfortunately, while a long-term policy would have involved phasing out subsidies for generation and transferring them to storage to help balance the overinvestment in renewable generation, the government has succumbed to the short-term policy of taxing the unwitting beneficiaries of its previous mistakes and sending out a signal to international investors that the government of the UK, unlike the European Commission and the Biden administration cannot see the impact of a Green Revolution on economic growth and employment.
[1] https://www.windpowermonthly.com/article/1805603/industry-dismay-uk-government-plan-45-windfall-tax-renewables
[2] https://www.renewableuk.com/news/613936/Wind-power-reaches-new-milestone-of-25-gigawatts-powering-two-thirds-of-UK-homes-.htm
[3] https://www.theccc.org.uk/
[4] https://www.renewableuk.com/news/610619/Biggest-ever-auction-secures-record-amount-of-low-cost-renewable-energy-capacity-.htm
[5]https://www.researchgate.net/publication/303636326_The_value_of_arbitrage_for_energ
y_storage_Evidence_from_European_electricity_markets
[6] https://www.nationalgrid.com/stories/energy-explained/how-much-uks-energy-
renewable#:~:text=Breaking%20records%3A%20The%20UK's%20renewable%20energy%20i
n%20numbers&text=Zero%2Dcarbon%20power%20in%20Britain's,with%20over%2075%25
%20in%202010.
[7] https://www.carbonbrief.org/analysis-record-low-price-for-uk-offshore-wind-is-four-
times-cheaper-than-
gas/#:~:text=The%20projects%20are%20all%20due,running%20gas%2Dfired%20power%20stations.
[8] https://www.ventientenergy.com/
[9] https://www.energyvoice.com/renewables-energy-transition/462085/sse-windfall-tax/
[10] Clean energy for all Europeans package (europa.eu)
[12] https://www.nrel.gov/docs/fy18osti/70384.pdf
[13] Kumaraswamy told in an interview at the California show
[14] https://fluenceenergy.com/gridstack-grid-energy-storage/
[15][15][15] https://www.energy-storage.news/transformational-change-is-not-easy-fluence-head-of-commercial-kiran-kumaraswamy-at-re-2022/