By Paul Homewood
It is difficult to avoid concluding that the whole story of the falling costs of renewable generation is sheer fantasy, a sort of energy industry Game of Thrones taking place in a parallel universe that bears an accidental similarity to our own world.
Learning from history and from our own experience is usually reckoned a sign of wisdom. Strangely, that appears not to be the view of those employed at Carbon Brief. They have published a strikingly foolish prediction that renewable generation such as offshore wind will be vastly cheaper than gas generation in the late 2020s. That is a long way off. History tells us that price booms in oil and gas markets are invariably followed by price busts.
Carbon Brief’s argument is based on bids submitted by offshore wind farms in the latest round of the U.K. Government’s auction of Contracts for Difference (CfD), which were announced in July 2022. Carbon Brief claims that the average price of £48 per megawatt hour (MWh) in today’s money is “nine times cheaper” than the £446 per MWh current cost of running gas-fired power stations. For context, and so as not to mislead the naïve, including those who enthusiastically tweeted approval of Carbon Brief’s article, it might also have noted that the cost of running gas-fired power stations in April 2020 was less than £25 per MWh. That figure was, of course, inflated by the high cost of buying carbon dioxide permits.
In other words, the CfD bids were nearly double the recent cost of gas-fired generation, with every reason to suppose that the current prices are an exceptional not a permanent feature of the landscape. Experience tells us that extremely high prices often come down sharply when the crisis passes. Perhaps the Carbon Brief authors have never studied the charts of oil and gas prices since 1970. They should, and so should those who rely on their reports.
Such figures clearly demonstrate that oil and gas prices are highly cyclical. This is why learning from experience matters. Over the last 50 years there have been repeated periods when gas prices are high. At such junctures, doomsters, with U.K. politicians and civil servants prominent among them, declare that gas prices will remain high for the foreseeable future, only to go very quiet once prices start to fall again. One such episode was in the late 2000s and early 2010s when the Department of Energy and Climate Change (DECC), the predecessor to the Department of Business Energy and Industrial Strategy (BEIS), dogmatically persisted with forecasts of future gas prices that were between three and four times the actual prices.
The error made by DECC at that time – and its refusal to change course – is the fundamental reason why we are paying such a high price for electricity today. Rather than underwrite the replacement of older gas-fired power plants, to improve fleet efficiency and reduce costs, they pretended that onshore and offshore wind would fill the gap. Further, they resisted making a commitment to long term contracts to buy liquefied natural gas (LNG), and exposed the U.K. to the more volatile short term markets. As a result, generators are paying much higher prices for gas and using it in power plants that operate at much lower levels of efficiency – and much higher levels of carbon dioxide emissions than is necessary. But for DECC’s errors in the 2010s we would not be facing such a severe crisis this winter and the longer term cost of operating the U.K.’s gas-fired generation fleet would be much cheaper than it is today.
Carbon Brief’s approach is a classic case of bad analysis resulting from a narrow view of the data record. This matters because, prompted by the arguments presented by Carbon Brief, politicians and lobbyists for renewable energy would have us repeat all of the errors made by DECC, plus a few more into the bargain. Rather than cherry-picking odd weeks of data in the middle of a crisis we should consider what we can learn from the period up to the end of 2019. From 2015 to 2019 the average market price at 2020 prices in the Netherlands, weighted by wind generation, was €41.7 per MWh – equivalent to £35.3 per MWh. The Dutch price is a good benchmark since that system relies heavily on gas, and the European benchmark for gas prices is set in the Netherlands, so it is the best reference point for what gas-fired electricity generation actually costs in normal conditions. During this same period the U.K. was paying CfD prices in the range from £150 to £187 per MWh at today’s prices to offshore wind farms and from £96 to £105 per MWh to onshore wind farms. For the avoidance of doubt: in the period 2015 to 2019 the U.K. CfD prices for offshore wind were four to five times that of gas fired generation.
In this historical context it is clear that Carbon Brief are just speculating that onshore and offshore wind farms projected for completion between 2024 and 2027 will deliver power at either a third (for offshore wind) or a half (for onshore wind) of the prices that they were receiving as recently as 2015-2019. We confidently predict that large flocks of pigs will also be seen flying across the skyline.
But a further question arises: What is this promised low price actually worth?
The CfD is a ‘contract’, but are consumers guaranteed delivery of specified amounts of power? No. There is no obligation to deliver electrical energy, only an entitlement to a certain price should the wind farm choose to deliver.
Do we know whether the wind farms will actually be built by the dates promised? No. We have no idea when they will be completed, if at all.
Will the power be delivered at the times and places where we need it, as a proper commodities contract might require so much copper to be free on board in a particular port on a particular date? No. The ‘contracts’ make no such requirement of the offshore wind farms.
Are we sure that we will only pay the strike price of £48 per MWh for the power? No. The wind farms have the choice of either taking up the price they are entitled to under the ‘contract’ or of taking a market price, through a bilateral Power Purchase Agreement with a greenwash thirsty corporate for example.
Obviously, the ‘Contracts for Difference’ are not contracts in any sense that a layman would recognise as a commitment to meet our future need for power. In any other business, professionals would see them as ludicrously one-sided and open-ended.
Furthermore, comparing the delivered cost of power from gas power stations with the strike prices for wind power in CfD contracts is not even like comparing apples and pears. Those are both fruits. Instead the comparison is more like that between apples and elephants, which have no practical similarity in any respect.
Carbon Brief also claims that the renewable generators with CfD contracts for delivery from 2024 onwards will pay large amounts of money back to the Treasury, because their ‘contract’ price will be so much lower than the market price. That is pure delusion. Anybody with commercial experience will see that the CfD contracts are ‘put options’ – they give the right but not the obligation to sell power at the strike price. We have seen in the last year that some wind farms have started to generate power but have not exercised their CfD contracts because the market prices that they expect to earn are so much higher than the CfD strike price. This is entirely up to them: the ‘contracts’ allow them to defer the start date or, indeed, to simply abrogate the agreement. One wonders who drafted these ‘contracts’ – the office cat?
Obviously, if market prices in 2024 and after are higher than the strike prices, then no wind farms will actually exercise their option by commencing their contracts. It seems reasonable to conclude that the wind farms regard their CfDs as nothing more than an insurance option, a guaranteed price if they can’t find a better one.
Consequently, the CfD auction results tell us almost nothing about what it will really cost to build and operate wind farms in the second half of the 2020s. And as audited financial statements accounts show, there is strong evidence to suggest that the capital and operating costs of wind farms have not in fact fallen by anything like the magnitude that would be needed to make economic a price of £48/MWh as bid in the latest auctions.
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August 30, 2022 at 12:59PM