Conor O'Shea

The first problem I want to explore solutions to is the ‘time of cost’ problem. A more full explanation of this problem is included in my previous post, but to recap, essentially the problem is that renewables have the vast majority of their costs as upfront costs and they have no ability to vary their costs or output overtime depending on the price of energy. This means that to build these power sources you need to have significant upfront investment, with a lot of uncertainty about what you’re going to be able to get in return (what price you’re going to be able to sell energy at) and no ability to hedge or de-risk your investment.

There are two main components of this problem if we boil it down to its essence. First, the upfront cost, and second, the uncertain returns. The upfront costs are difficult to deal with because somebody must foot the bill, whether it’s direct government investment or some corporate entity, somebody has to pay for it initially. When looking at the significant energy generators that we need for the entire grid, the main way we can make progress on upfront costs is improvements in technology that make them cheaper to build. This has been happening at a remarkable rate, and has made these investments a lot more attractive than they were, but it still doesn’t solve the issue of cost distribution over time, and there’s still huge uncertainty about eventual returns on that investment.   

However, this is only when looking at the large scale energy production projects focused on addressing the entire grid, when we look at domestic energy needs and production, a new pathway opens up. What some firms have started to do is create a subscription model for domestic solar panels. How this works is that these firms will foot the bill for the initial installation of these solar panels and the homeowners get a monthly subscription which pays off this initial installation cost, as well as paying for maintenance over a 20+ year term, at which point they can choose to end their subscription or get their solar panels replaced with the latest model and start a new 20+ year subscription plan. This spreads the initial cost, which can be prohibitively expensive to many consumers, over a longer time frame thereby resolving the issue of ‘time of cost’. This works at a domestic level as the initial cost is small enough that the companies providing this service are able to make that initial investment, and through the subscription contract they have a guaranteed return on their initial investment, thereby removing the uncertainty and addressing the second aspect of this problem.

Another approach has been through creating community owned projects. In these cases, companies get upfront investment from individuals in the local or general communities who are buying shares of the overall energy production. This helps spread the initial cost not over time, but over a larger group of people. These people in return get the savings on their energy bills that their energy project provides (i.e. the difference between volatile energy prices and the reliably low production costs ). They still have to pay tax, grid fees etc., so while they are able to reduce the cost of their electricity bills they won’t eliminate it. However, in this situation the individuals are assuming the uncertainty risk, if energy prices in general fall then so do their savings (their return on their initial investment). The individuals also have to make the upfront investment, although they are projected to end up saving considerably more over several years, this upfront investment can be quite a lot for an individual. This approach does not solve the problem of ‘time of cost’, but it can help reduce it by spreading out the risk.

While these solutions are promising, they are generally smaller scale projects for smaller scale energy needs. The main way we have tried addressing this problem has been by dealing with the uncertainty of returns, and we have done this through Contracts for Difference (CfDs). CfDs are contracts between the government (technically a government owned company) and clean energy producers, where the government guarantees a price for energy (a strike price), this guarantees a level of revenue for the clean energy project and thereby reduces the uncertainty and risk, and incentivises investment. The government guarantees that price by agreeing to pay the difference between the strike price and the ‘reference price’, which is essentially the wholesale energy market price. However, on the flipside, the clean energy producers have to pay the difference to the government if the reference price is above the strike price. While this reduces the potential returns from an investment, it also makes the CfD less costly for the government, allowing them to offer these contracts in the first place. The profit for the energy generators comes with how much they can produce energy below the reference price (reducing their costs when the reference price is above the strike price, and increasing their gains when the reference price is below the strike price).

Through these measures, and the decreasing cost of clean energy production, we are dealing with the problems caused by the ‘time of cost’, and are taking important steps down the road of the clean energy transition.