I have been in the power markets for about 25 years now, dating back to the infamous Enron. Funny story: I worked for Enron Europe and in January of the year of its demise – 2001 – we formed a renewable energy unit. We thought we were too late for wind project development (!) - keep in mind we had a wind turbine manufacturer at the time (a unit that was subsequently sold to General Electric), so we have boots on the ground and oodles of market intel. Still, we were seeking the New New Thing and so we settled on digging deeper into wave and tidal technologies.
And then 9/11 happened, the financial markets became spooked and, well, Enron Europe went bust on 30 November 2001 (followed a day later by the US parent).
How times have changed since 2001!
I’ve remained in the power markets since, working for a variety of organisations, ranging from a project developer / independent power producer (IPP), a small PE investor and two global OEMs. The diversity of my roles & organisations stretching over a 20-year timeframe has granted me a front-row seat to witness the fundamental shifts occurring in the power markets.
Yet up until relatively recently – I’d say until about 5 years ago – it was very much status quo. Renewable energy (i.e., primarily wind & solar PV based technologies) needed government support in order for investors to receive their required returns. Put simply, electricity generated from wind and/or PV was simply too expensive when compared with traditional thermal power production technologies.
Stepping back to provide more context, ever since I began working in this space, the combined cycle gas turbine (CCGT) set the “marginal price” (i.e., the price at which buyers and sellers would most likely transact) for most electricity markets. Enron was one of the main IPPs back in the day, developing CCGTs all around the world. Obtaining all the required permits for a natural gas facility was easier than that for either coal or nuclear based technologies and construction periods were also shorter. As a result, market players would calculate forward power prices based on a CCGT 36-month construction period (with a permitting period added on, the length of which was dependent on the market in question), using forward gas prices (usually based on forward oil prices) and assumed gas turbine technology improvements.
And this is how most electricity markets worked for decades. If power prices in a given market ever rose for more than a short period of time above what a new-build CCGT could deliver, a flurry of gas turbine project development would typically ensue.
It was in 2016 and 2017 when I first detected a seismic shift occurring in the power markets.
I was at GE at the time and we were supporting both wind project developments as well as CCGT project developments in various countries around the world. There were two markets in particular where we had both a wind and a CCGT play running concurrently. The natural assumption of most involved was that the new CCGT would be the most cost competitive solution. What a surprise we had when an international renewables developer won most of a technology-neutral auction based on “cheap renewables”. Now, one could argue this particular developer perhaps bid too aggressively but the die had been cast. The other market did not have an auction to highlight pricing differences head-to-head; rather renewable projects were offered a (now quite “old-fashioned”) feed-in-tariff (i.e., a subsidised price) that was lower than what a new CCGT could deliver.
In 2018 and 2019, auctions proliferating around the world and, in a vast majority of times, confirmed what I had witnessed in these two early markets. Governments would call an auction for a set volume of electricity (most were renewable specific, but not all) and market participants would compete on price. Lo and behold, wind and PV quickly “moved to the margin”, becoming the cheapest form of new power generation in many markets around the world.
The renewable energy markets experiencing today what I’ve termed as the “Age of Paradigm Shifts”. Price competitiveness is the first fundamental paradigm shift that I have witnessed. There are several more – a subject for a future post – that further drives renewable energy growth worldwide.
In short, the dawning of renewables has arrived, and the world is a better place for it. Better due to more competitive pricing for society, less harmful emissions, lower technology risk and increased decentralisation.
(end note – we are still waiting for wave and tidal to be at the margin! But innovation continues apace, and it may also play a role in the future power markets)