The Costs of Offshore Wind Power: Blindness and Insight

By Paul Homewood

 

 

h/t Philip Bratby

 

 

Briefings for Britain has a long article by John Constable & Gordon Hughes, which demolishes the latest claims of how “cheap” renewable energy has become:

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In this important contribution to our series on post-Brexit Britain Professor Gordon Hughes and Dr John Constable take on the entire green energy movement in arguing that the widespread view about the falling costs of renewable energy is wrong. They view official government projections of energy costs and hence prices as disgracefully inaccurate. Energy costs will be an important element in the UK’s future economic competitiveness and, if the authors are correct, energy prices are in for huge price rises.

The dramatically falling costs of renewables are now a political, a media, and conversational cliché. However, the claim is demonstrably false. Audited accounts show that far from getting cheaper, wind power is actually becoming more expensive. The failure of the British civil service to detect this fact and, hence, to protect the consumer and taxpayer from the consequences of the looming failure of the renewables sector raises important questions about the analytic competence of the Whitehall machine.

If we asked a random sample of broadsheet newspaper readers about the economics of offshore wind, it is practically certain that a majority of those interviewed would say they believed it was now cheap. A similar survey of investment analysts and advisors might return the same answer. Politicians and journalists would be certain about the matter. However, if pressed for evidence none of these groups could do much more than point to secondary sources. Some might remember that the Greenpeace sponsored an extensive advertising campaign in 2017, with full page adverts in the press. Others might point out that official bodies present offshore wind as the cheapest source of electricity. Those in financial circles might also indicate that almost every report or lengthy article on the future role of offshore wind power is accompanied by a chart which claims to show the rapid decline of costs over the last one or two decades, perhaps with forward projections to 2030 or 2040.

Incredible though it may seem, none of this is true. Neither offshore nor onshore wind has become cheaper; indeed, both have become more expensive over the last two decades.

How do we know this? Because one of us, Gordon Hughes, has compiled data from audited accounts on the capital and operating costs of 350 onshore and offshore wind farms in the United Kingdom, a set which covers the majority of the larger wind farms (> 10 MW capacity) built and commissioned between 2002 and 2019. It is the largest study of its kind to date and will be published shortly by the charity Renewable Energy Foundation, which John Constable directs.

In summary, analysis of the data reveals unequivocal findings:

  1. The actual costs of onshore and offshore wind generation have not fallen significantly over the last two decades and there is little prospect that they will fall in the next five or even ten years.
  2. While some of the components which feed into the calculation of costs have fallen, the overall costs have not. For example, the weighted return for investors and lenders has declined sharply, especially for offshore wind, because of a fall in perceived In addition, the average output per MW of new capacity may have increased, particularly for offshore turbines. However, these gains have been offset by higher operating and maintenance costs (O&M).
  3. Far from falling, the actual capital costs per MW of capacity to build new wind farms increased substantially from 2002 to about 2015 and have, at best, remained constant since then. Reports of the costs of building new offshore wind farms in the early 2020s imply that their costs may fall by 2025, but such reports are consistently unreliable as well as being incomplete. Final costs tend to be significantly higher, so little weight can be attached to forecasts of future costs.
  4. Far from falling, the operating costs per MW of new capacity have increased significantly for both onshore and offshore wind farms over the last two decades. In addition, operating costs for existing wind farms tend to grow even more rapidly as they age. The increase for new capacity seems to be due to the shift to sites that are more remote or difficult to service. Much of the increase with age is due to the frequency of equipment failures and the need for preventative maintenance, both of which are strongly associated with the adoption of new generations of larger turbines – both onshore and offshore.
  5. Turbine manufacturers and wind operators appear to be relying on an increase in load factors (a measure of the generator’s energy productivity) via (i) an increase in hub heights to take advantage of higher wind speeds, and (ii) changes in the engineering balance between blade area and generator capacity. However, the inferior reliability of new turbine generations leads to a more rapid decline in performance with age, so that the ultimate effect on average performance over the lifetime of new turbines is not clear.
  6. The combination of increasing operating and maintenance costs with the decline in yields due to ageing means that at current market prices the expected revenues from electricity generation will be less than expected operating costs after the expiry of contracts guaranteeing above-market prices. The length of these contracts has been reduced, implying a need to recover capital costs over a shorter economic life which pushes up the effective capital charge.

There is an important corollary to these findings. The current set of offshore projects being constructed and planned in North Western Europe are closely akin to speculative property development. They are high risk projects that will only be able to repay lenders and offer a return to equity investors if the average wholesale market prices of power rise to at least three to four times their current level throughout North West Europe. Such a price surge would require either a large and permanent increase in the market price of gas, which experience suggests is very unlikely, or carbon taxation at 8 to 10 times current levels, rising to at least €200 per tonne of carbon dioxide at 2018 prices in 2030. Such a tax would place a heavy burden on the rest of the economy.

This has consequences for financial regulation. To discharge their responsibilities financial regulators ought to impose a heavy risk weighting on loans to offshore wind farm operators, while also advising that green equity investments are too risky for pension funds and small investors. Instead, the chiefs of the European Central Bank (ECB), the Bank of England and other regulators have urged more investment in green assets without acknowledging the risks involved.

 

Full story here.

 

In my view, their comments about carbon taxation are key. You will recall only yesterday Ambrose Evans-Pritchard warning of an “explosive rise in carbon prices” in the EU. On current policy, UK carbon prices would follow those up.

The BEIS study of generating costs, which the article goes on to dissect, itself assumes that carbon tax will add £32/MWh over a 25-year life to the costs of a CCGT plant commissioning in 2025. The Committee on Climate Change used a figure of £43/MWh in their Fifth Carbon Budget, as what they described as the “Target Consistent Carbon Price” in 2030.

Under these scenarios, wholesale power prices could double to around £80/MWh by 2030. Further punitive rises in carbon taxes will inevitable continue after then.

It would appear that investors in offshore wind farms are banking on a rapid rise in electricity prices, both before and during their operational lives, in order to turn a profit. If that happens, of course, they will be allowed to renege on their Contracts for Difference at a small cost.

This leaves us with one further question – why has the BEIS published such an easily debunked set of figures?

The answer is apparent. Government strategy is centred around offshore wind, and the costings that go with it. The cost of going Net Zero is already known to be crippling. Admitting the true cost of offshore wind and renewable energy generally would not be politically acceptable.

via NOT A LOT OF PEOPLE KNOW THAT

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September 23, 2020 at 06:03AM

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