By Paul Homewood
Ambrose Evans-Pritchard is away with the fairies again:
The economic argument over wind power has been settled. Britain’s national gamble on offshore wind arrays in the North Sea and the Irish Sea has been vindicated in spectacular style.
This should be proclaimed, assiduously nurtured, and expanded where compatible with marine ecosystems. If you are looking for a turbo-charged venture to lift British fortunes after Brexit, offshore wind is as good as it gets.
The prospects are suddenly so enticing that we could in theory be an aeolian superpower by the 2030s or 2040s, trading places with Saudi Arabia to become the energy sheikhdom of the northern seas. The deeper question is not whether we have the technology to do it, but whether we should compromise the ecological integrity of the North Sea in such a fashion.
Industry insiders are not surprised by the strike price of £57.50 per megawatt hour unveiled this week for two giant wind projects, half the levels struck in contracts two years ago. They already knew that the technology is advancing by leaps and bounds. But it seems to have stunned everybody else.
The UK is the world leader by far in offshore wind with 10 gigawatts (GW) of installed capacity planned by the late 2020s, as is fitting given the near perfect mix of shallow waters and optimal wind speeds through the North Sea. The depth at Dogger Bank off Yorkshire is 50 feet in places – it was once a Paleolithic hunting ground, with woolly rhinos.
Let’s first address his claim that the economics are now settled.
The strike prices agreed for the three new projects this week range from £57.50 to £74.75/MWh. But these are at 2012 prices, so we are actually looking at prices up to £81/MWh, which is nearly double the market price.
Even then these prices are only viable for wind farm operators for two key reasons:
1) Low interest rates
Being a highly capitalised industry, the viability of offshore wind farms is particularly sensitive to the level of interest rates.
For instance, Triton Knoll, one of the successful applications, is estimated to have a capital cost of £3bn. Rated at 860 MW, output will be about 3 TWh a year.
Therefore an increase in the cost of capital of 1% would add £10/MWh to the cost.
We currently live in an era of negative interest rates, which are maybe 3 to 4% below “proper” long term rates. How long these can be maintained for is anybody’s guess, but a return of interest rates to “normal” levels would drastically put up the cost of offshore wind in future.
2) Guaranteed Income Stream
Under CfD, offshore wind farms receive a guaranteed, index linked price for 15 years. Moreover, the system effectively guarantees that they can sell all of their output, thus providing a guaranteed income stream.
This makes the projects much more attractive for investors, thus reducing the cost of capital still further.
In short, would any of these three projects be going ahead if they had to compete on the open market?
AEP’s claim that the economic argument is settled seems largely to rest on the fact that offshore wind is now cheaper than new nuclear. But, as usual, he misses the point that he is not comparing like with like.
The UK power grid needs large amounts of dispatchable power, both reliable baseload and flexible generation for demand fluctuation. Wind power cannot fulfil either requirement.
To get around this problem of intermittency, AEP really does fly off to La la Land!
He talks about using surplus wind power to produce hydrogen via electrolysis.
Some excess power …….could be turned into ultra-green hydrogen through electrolysis, to be exported worldwide or kept as a reserve source of back-up power.
Even Lord Oxburgh made clear in his report last year, Lowest Cost Decarbonisation for the UK: The Critical Role of CCS, that electrolysis could not produce hydrogen to the scale needed, and was “cost prohibitive” (page 66).
AEP then goes on to claim that :
Ultimately, new designs will be required to use it [hydrogen] in pure form at very high temperatures but that is just a matter of time. We are nearing the point where solar and wind will be able to generate their own reserve power at viable cost. The curse of “intermittency” is being conquered. It will cease to be an insurmountable barrier in the 2020s.
So surplus wind power will be used to (very expensively) produce hydrogen, which will then be burnt to provide electricity when the wind does not blow. And he claims this is viable? What planet is he on?
As for his wild claim about rivalling Arabia, the actual statistics show it to be nonsense.
Current offshore capacity in the UK is 5 GW, and AEP says this may double during the 2020s. But that will put no more than a dent in Britain’s overall energy needs.
He has a vision of the UK exporting wind power to Europe, but currently there is only a small amount of interconnector capacity.
But even if somebody was prepared to build a lot more, why would anybody in Europe be prepared to pay the guaranteed price that offshore wind farms have contracted to get?
When there is surplus wind power in the UK, there will almost certainly be even more across northern Europe, and power prices will be low. Who will then pick up the difference between the market price and the strike price? Probably the good old British taxpayer!
AEP rather naively believes that within a decade offshore wind will be generating revenue for the Exchequer:
By the mid-2020s, the turbines will be approaching 15 megawatts, and by then cost projections will be dropping towards £45 per MWh. The UK will be sitting on a lucrative low-carbon resource, doubly valuable once global CO2 pricing takes hold and ratchets above $50 a ton.
At such levels the discussion will no longer be about subsidy but about how much revenue is being generated for the Exchequer.
Tens of billions have been raised from North Sea oil in recent years, but I cannot see how wind farm operators can stump up tax without putting their prices up.
Interesting as well that he sees a global CO2 tax of $50/t by the mid 2020s. If renewable energy really was so attractive, there would be no need for such a tax.
The idea that the rest of the world is going to hamstring their economies in this way is frankly ridiculous. Even in the EU carbon pricing has collapsed.
Of course I might be wrong! But if AEP is right, the government should be able to cancel all future CfD auctions and just wait for Dong and co to start building hundreds of wind turbines in the North Sea, without any subsidies or other guarantees.
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September 15, 2017 at 01:24PM
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