“Cheap” offshore wind power is an illusion
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.
As at the year end (31 December 2019), Moray East was still in the early phases of development. The foundations were not quite complete, and the transmission assets were under construction, but far from finished. Ducting for some of the cables had been completed. How much would we expect the company to have spent thus far? I used the cost breakdown analysis published here to work out percentage of total cost represented by each of the main components. I then applied these, and a guesstimate of how complete each component was, together with Hughes’ £3.8 billion total come up with an expectation. The answer: just over £1 billion.
And the actual spend so far? £1.2 billion.
It seems almost unarguable therefore that this is a £3.8 billion windfarm, not a £1.9 million one (which is what it would have to be to be profitable under the CfD, even making the most generous assumptions about the capacity factor that it might achieve).
It could be argued that my guesstimates are wildly wrong, but think about it in another way. To make a profit at £60/MWh, Moray East’s capital cost must be well below £1.9 billion. The only way it can do this is to complete the rest of the capital works – including the turbines themselves – for £0.7 billion. This isn’t going to happen.
Electricity is either going to become very, very expensive, or certain investors in the offshore wind business are going to lose their shirts.