Chile is a great country. Almost an island in South America, surrounded by mountains, desert and ocean, it has consistently pursued market-oriented economic policies for many decades, marking it out from its neighbours. Earlier this month, Chile’s electricity regulator announced the results of the country’s largest ever electricity supply auction for over 3GW of capacity. True to Chile’s principles, the auction was open to all generators, incumbents and new entrants, fossil and renewable, domestic and foreign. The auction was won, comprehensively, by renewable energy generators who out-competed the incumbents, and squeezed out new gas plants.
My company, Mainstream Renewable Power, won one third of the capacity on offer. The average price we bid for new onshore wind generation of around USD40/MWhr represents a very significant reduction in the cost of electricity in previous tenders, which had been in excess of USD100/MWhr. Not only did incumbent coal generation not match this price, but new gas plant also struggled to compete.
The results of this auction tell us several things. First, that onshore wind and solar PV power are now outcompeting gas and coal generation across the world. Over the last year we have seen prices comparable to those in Chile in Africa and Asia. The result from Chile is the first example of a truly “open” auction, where renewables have competed directly with fossil generation – including fully amortised plant – and still won.
Second, incumbent generators are struggling to compete in the new reality. The phenomenon of the “utility death spiral” is understood, and some far-sighted companies like ENEL, E.ON and RWE are restructuring to compete in the future. But, in many markets, parastatal utilities, protected from competition from their inception are having their lunch eaten in front of them. Attempts by some of these companies to slow down renewables’ progress have been largely unsuccessful as governments see the economic and social benefits of clean energy.
Third, the speed of the price decrease in renewable generation is making what was tomorrow’s technology redundant. In the UK, the Hinkley C nuclear plant no longer looks like the future, as the cost of renewable energy has fallen so dramatically to make offshore and onshore wind and solar photovoltaic hugely more competitive than new nuclear.
What is really exciting is that this is not the end of the story. This is just the end of a particular chapter.For ages my industry was told that we could never compete with incumbent fossil generation. Now we have shown that we can. The next chapter is about technology. How better demand management, storage and flexible response will enable variable renewable generation to provide very significant levels of electricity generation.
In addition, further development in generation technology in wind and solar power will enable us to reduce our costs still further as we produce more power from every unit. In late 2013 the UK government awarded a series of contracts for new offshore wind at £150/MWh. In July 2016 the Dutch government announced the winning bid in its offshore wind auction was EUR73/MWh. The costs are not directly comparable, but it represents a very significant fall in price over three years, driven by improvements in technology, scale and risk mitigation.
In June this year, the International Renewable Energy Agency reported that the cost of solar and wind generation could fall further by as much as 59% between 2015 and 2025. I think that is a conservative estimate. Innovation in design and use of components, whether carbon fibre in the blades of wind turbines, perovskite in solar panels, or graphene for storage, will drive cost reduction through efficiency and capacity gains.
Even taken on their own merits these price falls and technology advances are dramatic enough. What makes them truly significant is that we have to replace the world’s existing fossil generation – and not build any new fossil power – if we are to meet the imperative of limiting the rise in global temperatures by 2 degrees celsius. Only this month, NASA and the NOAA confirmed that July 2016 was the hottest month since monitoring began in 1880. The month’s global average temperature was 1.57 degrees celsius above the 20th century average. This is a trend that cannot be allowed to continue. Not burning fossil fuels to generate electricity is one way we can help to lessen this upward trajectory.
What has happened earlier this month in Chile is another page in the unfolding story of the once-off transition to sustainability that we are witnessing across the world. In the face of what many feared would be catastrophic climate change, mankind has responded through innovation and sheer hard work to develop an alternative to burning fossil fuels to generate electricity. The world may have been watching the games in Rio and cheering on the action, but the real global victory occurred across the Andes in Santiago, in the results announced by Chile’s National Energy Commission.