This article first appeared in Forbes on January 14, 2020.
By Andrew Perry and Matt Cleary
Renewable energy is starting to lose its subsidies because it has proved that it can be as cheap and even cheaper than fossil fuels. For example, China and the United Kingdom, two of the most ardent supporters of green energy, have recently pulled back on subsidies, and the Trump administration in the United States would also like to. But while wind and solar power rates can cost less than traditional fuels, the subsidies are masking another problem — one that is becoming apparent as the subsidies are eliminated.
While renewables have proven they generate cheap electricity, the risks have not yet been fully mitigated.
Where coal and gas generators can ramp up production easily to accommodate peaks in demand and pull back when there’s a dip, wind and solar energy cannot. There’s solar when the sun shines and wind power when there are strong winds. That often prevents renewable energy producers from benefiting from attractive prices that accompany peaks. Sometimes they even find themselves producing when there is an oversupply, selling power for cut-rate or even negative prices — essentially paying customers to take their energy.
As Subsidies Come Off, Growth In Renewable Energy Capacity Is Slowing
Global renewable net capacity additions
GW, 2000 – 2018 actuals, trends to 2020
Source: IEA, IRENA, Oliver Wyman analysis
The intermittent nature of wind and solar means that renewable operations are likely to systematically receive a lower overall market price than the average generator. While volume-based subsidies currently smooth out this problem, returns on investment will likely begin to decline once operators in systems with large-scale dependence on renewable energy can no longer depend on them. No subsidies may mean that many renewable producers will become no longer financially viable, and the current effort to switch global power generation to renewable sources may be undermined.
Oliver Wyman Ideas App
