By Paul Homewood
Back in 2017, there was great excitement among environmentalists and the media, when it was announced that two offshore windfarms had bid remarkably low prices into the government’s Contracts for Difference auction, offering to supply electricity to the grid for around half the price that had been seen in earlier auctions.
How had this remarkable change in the economics of offshore wind power been achieved? Nobody really knew for sure, although eco-minded correspondents in the mainstream media were insistent that the change was real.
In a paper published shortly afterwards, Gordon Hughes et al. pointed out that there was little evidence that costs of offshore windfarms were falling at all. Indeed, they were generally rising, as developers moved into deeper waters in search of more reliable wind speeds. Even discounting factors like this, like-for-like costs seemed to be only falling slightly. There was absolutely no sign of revolutionary change. Defenders of the green orthodoxy argued that the Hughes analysis was backwards looking, and couldn’t take into account technological advances (although they never said clearly what these were).
In contrast, Hughes’ theory, outlined in a later paper, is that the low CfD bids are in essence a gamble on future electricity prices. He thinks that the developers are hoping that electricity prices will be so high by the time the windfarms come on stream in 2022 that they will be able to walk away from their CfDs and take the market price instead. There would be only small contactual penalties for doing so. Hughes et al. have continued to argue that the cost of offshore wind power remains very high to this day.
Recently, some more hard evidence appeared showing that Hughes is correct. One of the low-bidding windfarms published its latest financial accounts, and these allow us to get a feel for whether the cost reductions are real. Moray East is a 100-turbine, 950MW behemoth that is currently under development off the Scottish coast. The developers have said that it will cost £2.6 billion to build, although this figure comes with caveats. It almost certainly doesn’t include the offshore transmission assets that the company has to build and the sell back to the grid. Moreover, announced costs for windfarms are invariably understated. Hughes thinks that the ultimate cost will be somewhere around £3.8 billion. If the windfarm is to make a profit at around £60/MWh, its costs need to be less than half that level (on an optimistic assumption about how much electricity it will generate) and more realistically a third of it.
Full story here.
It is worth reflecting on historical electricity price trends and projections.
When Moray was being planned, wholesale power prices were typically between £40 and £50/MWh.
The BEIS do not publish projections of power prices (as far as I am aware). But their projections for gas prices give us a clue:
With real prices rising from 44p per therm in 2017 to 67p by 2030, this would inevitably push up power prices in real terms. (Remember as well that CfD prices are index linked each year).
BEIS estimates of levelised costs, published in 2016, suggest that fuel costs account for about half of the total cost of CCGT generation. Therefore a 50% rise in gas prices could potentially add around £15/MWh.
But that is not the end of it, as carbon taxes need to be added. According to BEIS, this could double by 2030, adding £29/MWh to a CCGT plant commissioned in 2025, based on lifetime costs:
As a result of carbon taxes, CCGT generation costs would rise to £82/MWh, at 2016 prices.
Add on inflation in the next five years, and wholesale power prices could be over £90/MWh. At this price, Moray can easily cancel its CfD, and cover its costs in the market place. Meanwhile, consumers will end up paying the price.
As for those promises of “cheap wind power”………………….
via NOT A LOT OF PEOPLE KNOW THAT
August 12, 2020 at 09:15AM