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More to Come: A Self-Reinforcing Cycle in the UK Power Market is Encouraging Further Renewable Generation

A self-reinforcing cycle is emerging in UK fossil fuel generation, where falling capacity factors are pushing up costs, encouraging more renewables and putting further downward pressure on capacity factors. Such a cycle is supportive for the installation of additional renewable generation.

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It is well known that solar farms are unable to produce power at all times – there is no sun at night, and even during the day it varies considerably due to the weather and the season. So a UK project that might be producing 5MW of power during peak times may average out at just 12% of that level when measured over the whole year. This gives a capacity factor of 12%. Similarly, UK wind farm output varies according to wind conditions and typically has a capacity factor of 30%.

By contrast, UK fossil fuel plants are not impacted by the state of the sun or the wind, and can operate at high and predictable capacity factors. Historically, baseload plants have only had to switch off for seasonal demand and maintenance – leading to capacity factors over 70%. This allows the high fixed costs of generation to be split over a large output, to deliver a lower unit cost.

But the widespread introduction of renewables is now impacting the capacity factor for baseload fossil fuel generation. Whilst coal and gas plants have high marginal costs in the form of additional fuel for each unit of generation, the marginal cost of renewable power is much lower. For Waste2Energy, fuel costs vary by project but are generally low, whilst for wind and solar fuel costs are zero. Hence renewable energy – when available – will always be chosen in preference to fossil fuels. As a result, the output from fossil fuel generation falls, the capacity factor for fossil fuel generation falls, and the unit cost of fossil fuel generation increases.

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Source: Digest of UK Energy Statistics (DUKES)

This quickly becomes a self-reinforcing cycle: higher unit costs for baseload coal and gas generation encourage greater installation of renewable energy, which reduces the capacity factor for coal and gas further, which increases coal and gas generation prices, which encourages greater installation of renewable energy. And so the cycle continues.

This poses serious questions for developers of large baseload coal and gas power generation. Historically, one of the great strengths of fossil fuel generation was the ability to model high and stable capacity factors in the cost calculation. But now developers must consider the possibility that output continues to decline year on year and power plants face ever-increasing periods of idle time. That is a frightening concept given the magnitude of the investment required.

The end result is that in each region of the world, the lifetime cost of large baseload coal and gas projects is rising considerably, whilst the cost of renewables is doing exactly the opposite. A tipping point has been reached that encourages greater investment in UK renewable energy.

Distributed renewable energy generation including UK Solar PV and UK Anaerobic Digestion are the cornerstones of Oxford Capital portfolios. We believe these assets are well positioned to deliver high and predictable returns to our investors, whilst also benefitting from the structural change – including falling capacity factors in fossil fuels – that distributed energy is bringing to global energy markets.