“Clean Energy”–But At What Cost?

By Paul Homewood

The government and wind lobby (is there a difference?) has been getting excited about the results of the latest CfD auction:

https://www.gov.uk/government/news/clean-energy-to-power-over-seven-million-homes-by-2025-at-record-low-prices

(Doesn’t it look dodgy when unrelated bidders come up with exactly the same price?)

As usual, things are not quite as simple as they are presented to us!

For a start, the prices are at 2012 levels, so you can add 13.3% to them, giving us a range of £44.92 and £47.15/MWh. This is only slightly lower than the wholesale price of around £50/MWh.

This all begs the question, of course, of why these offshore projects have not already been started with the intention of selling at market prices, rather than waiting for the CfD auction.

Given that the CfD prices are index linked, they could well be up to £55/MWh by the time the projects are commissioned.

Wholesale prices, of course, may have also risen by then, and this is where the the operators can play the market. If market prices are well above the CfD price by the time of start up, it would make good business sense, (and still be perfectly legal), to simply cancel the CfD contracts, and earn the higher market price on offer. There would be a small penalty to pay, but I suspect they would still be quids in.

On the other hand, the CfD contract offers a guaranteed, index linked price, which is itself very valuable.

Either way, they can keep their options open. By going in at an ultra low auction bid, these operators, who have clearly colluded, have managed to exclude other higher bids, and cornered the market for themselves.

Of course, what the proponents of wind power never mention is the cost of intermittency, as standby capacity has to be paid for.

It is well accepted amongst energy experts that you cannot directly compare costs of wind power with dispatchable sources, such as gas. The proper comparison is between the TOTAL COST of wind power, and the MARGINAL COST of gas power, etc.

The logic is that we still have to pay for the fixed and capital costs of gas generation anyway. Wind power only makes sense if its total cost is less than the marginal cost of gas generation, principally the gas itself.

To achieve that, wind power would probably have to come in below £30/MWh.

But what I really wanted to comment on is this report in the Telegraph from AEP:

Wind has won the argument. The auction prices for offshore projects announced today have blown away the competition.

Four projects on the Dogger Bank – more than 60 miles out into the North Sea, and invisible even to the most outraged Nimby armed with a telescope – will have five gigawatts (GW) of capacity at a strike price ranging from £39.65 to £41.61 per megawatt/hour (MWh) from 2023 to 2024.

A further project off Scotland will come in at similar price levels.

https://www.telegraph.co.uk/business/2019/09/20/rejoice-britains-huge-gamble-offshore-wind-has-hit-jackpot/

Gamble? What he fails to mention is the enormous, obscene cost already paid or committed to, in order to get us to this stage. This cost, as we will see, is well over £100bn, and all for what? So that we can eventually have offshore wind coming in at the same price as conventional sources!

So let’s take a closer look at these costs.

1) Renewable Obligation Certificates (ROCs)

These were the original method of subsidising renewable energy

In the last financial year, they awarded subsidy payments of £3.3bn to wind power operators, on top of the value of electricity sold.

These payments will increase each year, broadly in line with inflation, and will continue for the life of each project.

Although the system has now been abandoned for new projects, at current rates the subsidy will cost bill payers something in the region of £82.5bn, at current prices and assuming a 25-year life, over the lifetime of the assets.

2) Contracts for Difference (CfDs)

Prior to this latest round, contracts awarded under CfD have totalled 7541 MW, at an average price of £119.40/MWh:

https://www.lowcarboncontracts.uk/cfds

Given that the current market price is about £50/MWh, this represents a subsidy of £69.40/MWh, index linked for 15 years.

Assuming a capacity utilisation of 40%, producing 26.4 TWh a year, the annual subsidy equals £1.8bn, which is payable for 15 years.

3) Capacity Market

Because of the hopeless intermittency of wind power, the Grid has to pay for standby capacity. This year alone this will cost bill payers £1.0bn, and this is forecast by the OBR to rise to £1.2bn by 2023.

Given that all of the current coal capacity will have gone soon after, this figure will undoubtedly rise substantially in years to come, as spare capacity gets tighter:

https://notalotofpeopleknowthat.wordpress.com/2018/11/01/cost-of-green-subsidies-rises-to-66bn-in-next-5-years/

4) Constraint Payments

Because of the innate unpredictability of wind power, there are times when there is too much generation on the system for the grid to absorb. At times like this, the Grid has to pay wind farms to switch off.

Last year this cost bill payers £124m.

However this is the thin end of the wedge. As wind power capacity grows, there will inevitable be many days in the year when there is far too much power available. Independent experts reckon that these constraint payments could soon rise to £1bn a year in the foreseeable future.

5) Total Costs

If we add all of this together over the lifetime of the wind power assets, the subsidies amount to:

a) ROCs – 25 years at £3.3bn

b) CfDs – 15 years at £1.8bn

c) Capacity market – £1.2bn a year

d) Constraint payments – £1.0bn a year

This comes to a total of £165 billion, over the 25-year lifetime of wind power assets, either already operational or under contract.

And this is not even counting other, uncosted items, such as investment in new transmission networks, balancing services and so on.

AEP likes to pretend that we would not have got these new low prices for offshore wind , without expending hundreds of billions. However this is Bull. Denmark and other countries have been trying to develop offshore wind for years. Instead of wasting billions doing it ourselves, we should have let them or the Chinese do it themselves, building up technology and economies of scale, and then taken advantage of the results ourselves.

If anybody had suggested ten years ago that we should spend £165 billion in order to develop a new energy source that still cost more than the existing one, they probably would have been regarded as barmy.

Unfortunately the barmy has become normal these days.

	Price	MW
Beatrice	158.73	664
Burbo	170.03	258
Dudgeon	170.03	402
EA	136.08	714
Hornsea	158.75	1200
Hornsea Project	65.09	1386
Moray	65.09	949
Neart	129.88	448
Triton	84.56	860
Walney	170.03	660
WEIGHTED AV	119.40	7541