For a long time, renewable energies have been accused of being the cause of rising electricity prices, and the reason for this is the incentives that were established at the time in the form of a fixed feed-in tariff for the then experimental renewable energies, wind and, above all, photovoltaics. The idea at the time – and if you look through the newspaper archives you can check it out – was that in 20 years grid parity would be achieved, i.e. that the cost of energy produced by renewable sources would be similar to the average cost.
Certainly, the cost at the time was high – and it is debatable whether it was charged to the electricity system and not to budgets – but the result was that, as a result of those policies in Spain and other countries, wind and photovoltaic are today the most efficient energies in the pool that supplies us. Moreover, they are much cheaper than fossil fuels and pollutants, and have positive externalities.
In this context, the cost per MW produced with gas today is between 150 and 300 euros, while the cost of renewables, including a reasonable return on assets, is around 45 euros. For once, what is good and beautiful is also cheap. Thus, if we were to expand our renewable generation capacity, the price would fall and become more stable and we would achieve energy independence, which would consequently leave us safe from geopolitical ups and downs and make our economy more competitive. On the other hand, while it can be argued that renewables cannot meet all demand because of their dependence on climatic or time factors, this assertion needs to be qualified. In the area of renewables, we believe that government policy should be directed towards three main goals. Firstly, the focus should be on continuing to help replace fossil fuels with renewables. There is no need to enumerate the advantages: in addition to the positive impact these energies have on the environment, they have a lower total cost, are more competitive, improve the external sector and have the potential to create jobs, reducing imports and, at the same time, giving dynamism to geographical areas such as the hollowed-out Spain. Secondly, it should be borne in mind that the way to avoid peaks in consumption of other energies, rather than charging against the ‘benefits falling from the sky’, should be along the lines of obliging hydroelectric plants to produce at times when there is no other renewable production.
In this scenario, it would also be important to change the incentive policy. Instead of massively and uncritically stimulating renewable energies, what we need as a country – a system for storing energy – should be promoted. To this end, pumped hydro and batteries should be promoted – even by creating a public battery park if there is an interest in intervening in the market. In addition, by pure logic, we could also promote electric cars, whose battery park would reduce storage requirements.
Finally, prices should be made stable through long-term contracts. It is true that current prices are unaffordable, but the reverse is not a major problem. Last year, when energy was priced at 9 euros, there were no complaints about the ‘poor wind and photovoltaic companies’ who were losing money, nor were these sectors included among those helped by Covid-19. If we are to limit the increase, in fairness, we must guarantee stable prices. In this area, long-term production purchases could be encouraged – this seems to be the aim of some government measures – and legal certainty could be given to them. Perhaps it would be the market itself that should buy in the long term. The maxim is simple: the more stable the income scheme, the easier it will be to raise resources for these assets, and at a lower cost.
Current energy policy is out of step with reality, as new energies have a very low variable cost and a high payback cost. If the perception of risk is reduced, and, consequently, debt and equity settle for a lower return, the result will be a lower energy price, as the main cost of these installations is no longer to burn the fuel, but to pay for the assets generated. In this context, the retail price could be calculated with a mix of prices between long and day-ahead contracts.
The new renewables auction is being decided at the moment and, although it has improved substantially with respect to previous auctions, there is still room for improvement. The new system establishes a real fixed price, albeit with exceptions, and has a simpler dynamic, but it still suffers from several serious problems, especially two: on the one hand, it encourages a speed that does not fit in well with the administrative problems and, on the other hand, it will not have a significant effect in terms of lowering the price, either by volume or by the operating structure of the energy dumped.
There is still a long way to go in the transition to renewable energies and, in order to get there, paying attention to the realities of the country and adapting energy policies along these lines will be essential pillars.
Jaime Ventura is a founding partner of Austral Venture Gestión.
