The only economically tenable justification for subsidies to renewables is that they will accelerate major cost reductions. Recent price bids for offshore wind in European waters have suggested to some commentators that costs might be falling significantly. However, empirical data throws doubt on this point, and suggests that other explanations lie behind the low prices taken by wind developers.
In the last few weeks I have commented on two sharply contrasted views on renewables, that of the Daily Telegraph’s columnist, Ambrose Evans-Pritchard) and those of the distinguished power engineers, Colin Gibson and Dr Capell Aris. Coincidentally, new publications from both bring their respective positions into still sharper contrast.
The title of Mr Evans-Pritchard, piece in The Telegraph, “Cut-throat competition is slashing offshore wind costs to unthinkable levels”, is self-explanatory. Pointing to apparently remarkable contract prices, €72.50/MWh, bid by DONG Energy for a wind project offshore the Netherlands, and €60/MWh for a Vattenfall project offshore Denmark, Mr Pritchard argues that this is “spectacular vindication of offshore wind technology”. Certainly the contract price compares favourably with the figure of about £120/MWh given in UK Contracts for Difference for offshore wind, and the guaranteed price offered to Hinkley Point C nuclear power station, but it would be naïve to assume that the contract price tells us all we need to know.
Firstly, as Gibson and Aris point out in their new study, An Examination of National Grid’s Future Energy Scenarios: How much do the scenarios cost:
“Although we hear that the costof renewable energy is coming down, and in some cases, can reach parity with conventional sources, this is misleading since it relates purely to the cost of generation and takes no account of necessary additional costs, particularly transmission and backup” (p. 3)
A cheap bid price does not mean cheap electricity to consumers.
Secondly, it is not clear that the capital costs of wind projects are as a matter of fact declining. In two charts, reproduced below, Gibson and Aris report capital costs for onshore and offshore wind projects in the UK, the figures being gleaned from many diverse public domain sources, including the local press stories in which such details are frequently more easily located than in carefully edited corporate websites.
Figure 1: Capital Cost of UK offshore wind farms 2000 to 2016. Red dots indicate sites sites awaiting construction. Source: Figure 8 in Colin Gibson and Capell Aris An Examination of National Grid’s Future Energy Scenarios: How much do the scenarios cost? (2016).
Figure 2: Capital cost of UK onshore wind farms 2002 to 2015. Source: Figure 13 from Colin Gibson and Capell Aris, An Examination of National Grid’s Future Energy Scenarios: How much do the scenarios cost? (2016).
Capital costs for onshore wind start in 2002 at somewhere near £1m per MW, and are now somewhere in the region of 3.8% higher, a modest increase, true, but not a fall in cost. The capital cost of offshore wind seems to be increasing at around 18% per annum.
These are admittedly raw numbers, and no deflator has been applied, but even so the trend lines in the figures are to say the least quite remarkable. It would appear that, and contrary to industry information, the actual capital cost of wind farm construction in the UK is rising, and very markedly so as offshore projects move into more distant and much deeper waters. (It is relevant here to recall the confirming fact that the earlier offshore projects in the UK were subsidised at roughly half the rate of the later ones, reflecting their lower capital cost.)
The question then arises as to why, if capital costs are in fact rising, companies such as DONG and Vattenfall are willing to accept much lower bid prices than has been historically the case. One possibility is that the capital costs of these particular projects are low for site specific reasons; but if this is true, then these are special cases and do not support Mr Evans-Pritchard’s conclusion that the entire sector is moving towards being fundamentally competitive.
Perhaps there is a more obvious explanation, one hinted at in a comment by Paul Bradley, of Canada’s Northland Power, quoted in Mr Evans-Pritchard’s article:
“People are being very complacent about taking on risks they don’t fully understand, […] The margins are too tight. They are overlooking the costs of operation and maintenance. If there are financial problems you are going to be road kill pretty quickly.”
In a personal communication to me, Colin Gibson, tersely summarised this perspective by observing that “The question is, Have the wind companies got their sums right?” In other words, have the companies underestimated the risk of the projects, and therefore settled for a rate of return that is too low to offset the actual risks?
Alternatively, have they knowingly bid low in order to secure a subsidy income from increasingly reluctant governments, but with the expectation that they will be able to recover their capital and make a return with an early exit, selling the scheme on to purchasers who underestimate the O&M costs and consequently overestimate the economic longevity of the projects?
More prosaically, and perhaps most probable of all, low price bids in the electricity sector are hard to understand without seeing the entire contract, and it would be wholly unsurprising to discover that the terms were very favourable to the generator, transferring a great deal of the risk to the consumer in ways not reflected in the simple price obtained.
One can do no more than speculate which of these explanations is correct. What is clear, however, is that the capital costs per MW installed of on- and offshore wind farm projects do not, from the data reported in Gibson and Aris’s work, seem to be falling in the UK. If this is a fair indication of the trend in the overall sector, it is a very important finding indeed. For once, the self-serving academic conclusion that ‘more research is needed’ is entirely justified. UK consumers, alone, have spent about £9bn ($12bn) in subsidising the wind sector since 2002. Is this industry any closer to standing on its own feet?