The energy sector is highly regulated, and for good reason. Regulations are key to providing stable, affordable and sustainable energy in every economy and society. Therefore, energy belongs in the ‘vital infrastructure’ category. It is a primary concern of all governments as the foundation of modern society and as a key pillar of competitiveness. This remains true, even with the major liberalization of the energy markets in many countries and regions across the world in the last 20 years. However, apart from ensuring the security of supply and more competition, governments in the next decade will need to help secure the transition towards more green and sustainable energy systems. This must be a key political priority for the next decade.
For large energy technologies, the investments needed are highly capital intensive, and it can take years to recoup those investments. Innovation and new technologies also demand capital investment that cannot be supported by market conditions alone. Therefore, governments still play a major role as regulator and facilitator of stable energy systems and the driver of innovation in new energy technologies.
Fifty years ago, governments secured these investments and innovations as part of societal infrastructure. Today, however, a government’s major role is to secure stable regulatory frameworks that allow for more competition, new generation capacity and not least, greener technologies.
Lessons from offshore wind
For offshore wind, a great deal has happened in the last ten years. Installed capacity has passed 20 GW. More importantly, the technology is now more cost competitive and is finally moving to new parts of the world. In North America and Asia, for example, there are ambitious plans for very large-scale offshore wind generation capacity. A major factor in the acceleration of these developments is the radical cost reduction of offshore wind energy, particularly in the last five years.
In the UK, offshore wind generates power at about 39.65 GBP ($48.8/MWh) per MWh, 30% less than the price two years ago which was 57.50 GBP. In Germany and the Netherlands, we have even seen zero-subsidy winning bids in government tenders. And mainstream cost prices are continuing their downward curve in both Europe and emerging markets.
Governments and policy have played a major role in enabling this positive development by:
- Facilitating stable, transparent regulatory frameworks (set by governments).
- Reducing project risk by securing wind resource data, geotechnical studies and even grid connections and transmission to the projects.
- Incubating new technology development (with gradually reduced subsidies and offtake guarantees to the power grid).
- Followed by introducing open auctions which allow for more transparent international price competition from bidders/investors.
This has been the main recipe for successful development of the offshore wind sector in Northwest Europe. Experience has also taught us what constitutes “poison” for the wind industry. Firstly, the use of retroactive regulatory changes, unfairly undermining the basic business-case for investors. Secondly, too rigid and slow-moving consenting procedures. Thirdly, overly rigid local content requirements for establishing local suppliers to the offshore wind industry. Fourthly, limitations in the grid-offtake of power, and finally, insufficient power purchase agreement to balance country and project risks.
Some countries have clearly learnt from industry experience to ensure successful development of their offshore wind projects. The good news is that more and more countries understand their past mistakes and are adapting their approaches accordingly. These learnings provide insight into emerging markets where soil conditions and natural weather systems such as cyclones provide very different challenges to those encountered within European waters. It further reveals that such barriers are only policy barriers which can be changed very quickly – provided local support and agreement is there.
As a result, we don’t need to wait for cost-competitive technology any longer; it is already available. Offshore wind is on a clear journey to become one of the most cost-efficient centralized power technologies. Combined with other low-cost renewables technologies and new storage systems, offshore wind can become the backbone of many modern and sustainable energy systems in the world over the coming decades. But to realise this we’ll need visionary and forward-thinking governments to help with effective energy regulation to accelerate this crucial energy transition.