No alternative: Europe’s low-carbon energy transition will come of age in 2017

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“Alternative energy”. Is that still a common phrase? In some quarters, it is. In a recent New York Times Trump-themed article, the phrase was in the headline, while market operator Nasdaq continues to publish a monthly Alternative Energy Stock Outlook. In July 2016, the phrase even snuck into an ICIS article.

But this is 2017. We are two years on from when the hover-board scene in Back to the Future II was set. What was once the future is here today, and the European low-carbon energy transition is on the brink of entering a second phase, as energy market 2.0 starts to become a reality in many countries.

Alternative – also known to many of us as renewable – energy, is no longer the alternative. And the shift of the energy transition into phase two promises to open up opportunities for energy market participants.

If phase one of the energy transition, from the 1980s to the present day, was about pulling new technologies through to market via generous subsidies, building out capacity at pace and driving down costs in the process, phase two will be different.

While fixed, centralised subsidy was the favoured model for upscaling solar power or capital-intensive offshore wind in phase one, the model of choice across Europe in 2017 will be a competitive one based on market forces:

In a sense the low-carbon transition has flipped Europe’s power generation landscape on its head. Phase one of the energy transition required a massive pot of financial incentive so that renewables could be brought online, driving down carbon emissions. But capacity development has now reached the stage where wholesale power prices have also been driven down and governments are instead scrambling to find models capable of pulling new capacity that was previously the backbone of power supply – thermal, predominantly gas-fired power plants – through to market as back-up to variable renewables. For example:

Renewables are not yet fully capable of standing on their own two feet, free without question from a need for financial support, but they have taken their first tentative steps in this direction. In Spain, a renewables company won the right early in 2016 to provide a major amount of wind- and biomass-fuelled power capacity by committing to do so free of financial subsidy. Also in 2016, a UK renewable energy company unveiled plans for that country’s first subsidy-free wind farm.

The low-carbon transition is nothing short of the energy sector’s industrial revolution. And this requires some upheaval in market design, which will also come to the fore in 2017:

  • In late 2016 the EU approved proposals for a new market design to aid the transition
  • Germany’s transition, or Energiewende, which places renewables, energy efficiency and demand management front and centre, will accelerate in 2017
  • And from the big to the not-so-big, the Irish power market is undergoing a wholesale redesign to bring it in line with the EU model

So how can energy market participants benefit from these new realities, where what was the alternative is no longer alternative?

What might be seen as a series of threats to an established order can also be seen as a collection of new opportunities. The EU has called for sharper price signals to help drive market-based renewables development, and grid operators have responded. This will open up new, more lucrative avenues of profit for responsive power generation technologies.

More renewables means balancing markets must be enlarged and modernised to cope with the additional demand of variable generation. In 2017, more power will be traded on an intra-day basis across multiple borders. This new borderless system will open up geographic arbitrage opportunities.

For less responsive generators, revenue streams that were not previously there will emerge in the shape of Europe’s patchwork of capacity mechanisms and reserves, potentially saving some thermal generation from closure or even paving the way for the financing of new plants.

Going into 2017, Europe’s low-carbon energy transition will affirm itself by putting in place the foundations that will allow it to extend  further. The year will be less one of transition, more one of consolidation. Market participants should also look to consolidate their place in energy market 2.0.

There is no alternative.

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