Economic shocks could prompt energy sector innovation

Written by James Todd, a renewable energy expert at Pinsent Masons, the law firm behind Out-Law.

In the UK renewable energy sector, a combination of political, economic, social, technological, environmental and legal (PESTEL) factors have driven a sustained shift in the UK energy consumption habits over a relatively short time frame. However, more needs to be done if the UK is to meet its tough climate change targets, creating new impetus for political actors to look for ways to encourage technological innovation.

Covid-19 has led to a substantial fall in global energy demand in the short term, with the annual global energy review produced by the International Energy Agency (IEA) estimating a 6% fall in demand by the end of this year. However, several countries are now looking for routes to a 'greener' economic recovery, as can be seen from recent comments by French president Emmanuel Macron and the UK and Scottish governments. Moreover, the IEA's report also anticipates that renewables will be the only fuel source to see increased demand in 2020, as a combined result of increased capacity and a significant decline in fossil fuel output.

Innovation often requires dramatic, sudden changes in circumstances in order to persuade authorities and industry that unprecedented steps are not only justified, but urgent. We have already seen the UK government taking steps to expand support for certain forms of low carbon electricity generation as part of proposed changes to the contracts for difference (CfD) scheme. Could the economic shock caused by the coronavirus speed up the pace of reform?

Change in the renewables sector

The UK renewable energy sector has grown dramatically since the turn of the century, and particularly in the last 10 years. For example, onshore and offshore wind and solar photovoltaic (PV) went from contributing 1.09 terrawatt hours (TWh) per quarter in 2006 to 20.58TWh/quarter in the first three months of 2019 according to official Ofgem statistics - a huge shift over a relatively short time period. Solar PV grew from close to zero installed capacity in 2008 to 13GW in 2018, while electricity generated from renewables as a whole overtook fossil fuels in the third quarter of 2019, according for 40% of the overall electricity mix.

This growth cannot be explained solely by the availability of the relevant technologies. The UK's first commercial windfarm opened in Cornwall in 1991, and the first working solar cell dates back to the 19th century. Even floating offshore wind, tipped to be a renewables 'rising power' in the coming years, was conceived in the 1970s, with the first turbine not being deployed until 2008 in Italy.

There are a variety of factors which contribute to the development and deployment of new technologies, and those factors will vary in different countries and in different industrial sectors. A PESTEL analysis can give us a rounded view of these factors, while identifying opportunities for future deployment and barriers to continued development.

Looking at the development of wind and solar PV in the UK, there was firstly the political will in the early-2000s onwards to provide more low carbon, renewable electricity generation. This led to the introduction first of the Non-Fossil Fuel Obligation and then the first financial support mechanisms: the feed-in tariff (FiT) and Renewables Obligation (RO) regimes - also, of course, a significant economic factor.

However, onshore wind in particular lost momentum when the RO was closed to new generation in 2017 and onshore wind and solar PV were prevented from participating in the CfD regime. Legal changes were also introduced to the planning process in England which made it more difficult for onshore wind to secure planning consent. These factors saw an 80% drop-off in installation of new onshore wind in 2018, according to RenewableUK.

The story for solar PV differs slightly, with economic and technological factors contributing to significant falls in the cost of the technology from $0.36/kWh in 2010 to under $0.10/kWh in 2018, resulting in deployment continuing to climb despite the loss of RO support.

For offshore wind, meanwhile, political support has remained resolute. Not only has CfD support been made available, but the government announced an offshore wind sector deal in 2018, aiming to support new offshore wind development and to leverage additional support from the industry for the UK supply chain. This support resulted in substantial deployment throughout the 2010s alongside a marked reduction in costs.

On the societal side, greater political awareness of climate change and environmental issues, along with strong and consistent support from the public, has contributed to a much more favourable environment for renewable energy generation. The fact that the UK has now committed to the 2015 Paris Agreement on climate change and to achieving net zero by 2050 should, it is hoped, create a more hospitable political environment to drive forward new renewable electricity generation.

While technology could not have been the sole driver of growth for renewables, it is of course important: the widespread availability of cheap solar PV components, particularly from China, has made a significant contribution to deployment of solar PV in the UK. Technological advances can also help to improve the performance of renewables generation projects - including deployment of storage technology to decrease issues caused by intermittency; improvements in offshore wind turbine blades by increasing blade length and by reducing leading edge erosion; and improving the monitoring, repair and maintenance of offshore turbines using robotics and autonomous technologies.

Lessons for the future: floating wind

Looking to the future, a PESTEL analysis can help us to identify relevant factors for how floating offshore wind, a relatively more nascent technology, might develop in the UK.

Political will and economic factors which could support this technology are evidenced in the government's proposal to include it as a distinct technology in 'pot 2' for CfD allocation round 4, due to take place in 2021. Meanwhile, research has suggested that the Crown Estate making suitable seabed development rights available to floating offshore wind could be a key legal factor which could drive deployment of the technology in the UK.

There are also unique environmental factors which create opportunities for floating offshore wind. A key strength is that floating offshore can be deployed in far-shore, deep water locations which are unsuitable for 'fixed bottom' offshore wind turbines. In the UK, that would enable developers to look outside of the traditional locations in the southern North Sea and the Irish Sea and into areas such as south west England, Wales and Scotland, offering opportunities to increase deployment of large scale renewables in the UK even as shallower water sites become harder to find.

The House of Commons Environmental Audit Committee has recently begun an inquiry into offshore wind which will look at the potential impact of technological innovation – including floating offshore wind but also other technological factors relating to conventional offshore wind such as blade technologies, foundations and transmission technology. The hope is that this will help in generating further interest and debate around innovation in the renewables sector.

There is also significant global interest in floating offshore wind, with countries such as Japan, the US, China, South Korea, Norway, Spain and Portugal all having suitable deep water sites. This could create an economic opportunity for the UK supply chain and developers, with global demand resulting in increased production and potentially lower costs, similar to, if perhaps not as dramatic as, what happened with solar PV.

Although developers and manufacturers will carry out far more detailed analyses than this one, having a rounded picture of the factors which have contributed to the success of UK renewables as well as the opportunities and challenges is essential. As has been seen from the experience of onshore wind since 2015, it is possible for progress to stall if the industry rests on its laurels and loses sight of the bigger picture.

James Todd is a renewable energy expert at Pinsent Masons, the law firm behind Out-Law.