Insights

Constructing a combustion-free future – part 2.

09/05/2018
Tom Wigg

Author:
Tom Wigg, Graduate Sustainability Consultant

Responding to changing energy costs.

Read part 1 of this discussion seriesShould we be rethinking CHP?

Globally, wind and solar energy – along with storage – are reaching record low prices.

In September 2017, three offshore wind projects in the UK were awarded government contracts at a strike price of £57.50/MWh for 15 years. This is a drop of 50 percent since the last comparable round of contracts were awarded in 2015.

If we compare this to the £92.50/MWh awarded to Hinkley Point C for its first 35 years of operation, the argument for new nuclear becomes increasingly tenuous.

Domestic – increase or decrease?

With the decreasing cost of renewable generation and subsidy-free green electricity on the horizon, one might assume that energy bills would decrease. This year, the commodity price of electricity (the price of the electricity itself) represents around 40% of a consumer’s energy bill, but by 2020 this is projected to drop to around 33%.

However, balancing out this decrease is the fact that the associated infrastructure costs and carbon taxes are both projected to increase.

A shift to less predictable forms of generation and therefore a reduction in ‘dispatchable’ generation means the grid will be increasingly less able to meet the current peak demand.

This may necessitate a transition to a different charging mechanism for domestic electricity consumers.

While there are many possibilities being explored, ultimately the future business case for domestic renewable generation is unclear. Whilst the Feed-in-Tariff (FiT) rates are being rapidly reduced, and will be abolished altogether by April 2019, this is countered by the increasing cost of electricity and the decreasing cost of solar-PV and storage.

Commercial – expect a reversal.

The price of gas on a commercial scale is currently more than 40% cheaper than domestic gas, allowing electricity to be generated relatively cheaply while still offering customers connected to a district heating network a competitive price for their heat.

The business case for CHP is currently strong. But it looks as though it will continue to reduce in the coming decade.

During the next 12 years, the price of gas for a commercial-scale consumer is projected to rise by almost 65 percent (compared to ~15 percent for domestic gas) leaving the commercial gas rate only 14 percent cheaper than domestic.

This is happening in parallel with the progressive strengthening of legislation around CHP as policy makers move to improve air quality and further decarbonise the electricity grid. Together, they paint a clear picture that soon the profit-making potential of CHP will be significantly reduced.