The current decade will represent the critical foundation for Europe’s onward progress to ‘net-zero’ by mid-century. As the region aligns itself to deliver the ambition of a 55% emissions reduction target by 2030, renewables take centre stage.
Up to the mid-2020s, approximately 70% of wind and solar development activity will be supported by auctions. However, data from across the region highlights that market-level dynamics are shaping the approach of would-be developers. As such, auctions alone will not be enough to deliver much-needed capacity, according to Wood Mackenzie.
Peter Osbaldstone, Wood Mackenzie Research Director, said: “The assumption that every auction mechanism will deliver its full quota of capacity, promoting high levels of competition between bidders and resulting in more attractive prices than previous rounds must be challenged.
“Our analysis of onshore wind auctions across Europe shows that after initial sharp falls, price outcomes have remained relatively flat over the last three years. Dynamics vary from market to market, but we now see undersubscription in German, French and Italian auctions due to formidable planning bottlenecks, keeping average prices flat.
“Introducing policies to streamline the permitting process and de-risking project delivery can reverse this trend, bolster competition and push prices downwards, as we have seen recently in Greece.”
Rory McCarthy, Wood Mackenzie Principal Analyst, said: “These are the realities of Europe’s increasingly mature renewable power sector. This is an expected change and our analysis continues to identify other notable trends in the sector’s transition, such as the material impact on power prices of moving to systems based largely on variable renewables.
“As production from wind and solar continues to represent an increasing proportion of overall power supply, those sources face a growing risk of cannibalising their own value in markets. As a result, the discount between market average prices and the capture prices of renewable power will expand.
“The extent of cannibalisation suffered by wind and solar generators in decarbonising markets will be shaped by various factors, including technology type and concentration, network capability, and power demand conditions. Portfolio diversity, considering both renewable technologies and other flexibility options such as battery storage, can mitigate the threat of cannibalisation. Power systems must adapt as the carbon-intensity of electricity falls.”
In 2020, power prices tended towards zero when variable renewables reached 60% of supply or more in most key European markets, signalling a lack of flexibility. In other words, the ability to store, shift or export large amounts of zero-marginal cost electricity to areas or times where it is needed more.
However, markets are changing. Wood Mackenzie’s power modelling reveals that by 2040, power prices in those same countries will not fall to zero until variable renewables reach 110% of supply or more. This shift is enabled by the growing flexibility fleet. Power is stored and exported in low price hours by a growing asset base of storage and interconnectors, thereby reducing the amount of low-cost or “free” power on the wholesale power market.
McCarthy added: “It should not be assumed that a higher proportion of renewables will always result in increased zero or negative priced hours and growing instability in power markets. Improved flexibility will play a key role in facilitating change.
“The scale and speed of this build-out is still highly uncertain, with question marks and policy gaps remaining around how this much needed flexibility will be brought to market.”