Is Wind Power Really Cheaper?

By Paul Homewood

 

http://www.independent.co.uk/environment/wind-power-now-the-cheapest-source-of-electricity-but-the-government-continues-to-resist-onshore-a6685326.html

 

According to the Independent:

 

Onshore wind energy has become cheaper than electricity from any other source in the UK for the first time, in what could be a landmark moment for renewable energy in Britain.

Yet the Government has been accused of scuppering Britain’s best chance of meeting the country’s ambitious environmental targets through its continued resistance to onshore turbines, despite growing evidence that they are the most affordable option.

However, new figures show they not only produce cheaper energy than coal, oil or gas power stations, but also remain far cheaper than offshore turbines, which the Government is championing.

 

 

Onshore wind farms currently produce about 60 per cent of the UK’s wind power output. Although they are set to remain the predominant form of renewable energy in the next few years despite opposition in Westminster – which has stopped subsidies and given the final say on whether a project should go ahead to local residents – supporters of green energy say the country is missing a chance to maximise their potential.

The cost of onshore wind power has fallen from $108 (£70.20) per megawatt hour (mWh) a year ago to $85 today, as they become more efficient and cheaper to build.

Over the same period, coal-fired power stations have seen their costs rocket from nearly $98 mWh to $115 and gas from $100 to $114, after the EU agreed new rules that will greatly increase the amount they must pay for their carbon emissions. Offshore wind costs $175 mWh, according to the research, by Bloomberg New Energy Finance.

A steep decline in borrowing costs, with bank lending rates hovering around all-time lows, is also much more beneficial for wind farms than for fossil-fuel plants. This is because far more of the cost of renewable energy projects relate to their construction, which is funded by loans.

“There’s still a tendency for the general public to believe that renewables are really expensive, while coal and gas are really cheap,” said Seb Henbest, of Bloomberg, which conducted the research. “This is how it used to be not so long ago, but over the past five years technology costs have come down significantly, along with financing costs.”

The Independent, being the Independent, apparently don’t realise the irony, when they continue:

 

But campaigners say the Conservative Government has made it considerably more difficult for new onshore wind farms to be built since it took office. They argue that, while onshore wind may now be the cheapest energy source, it could still benefit from subsidies and point out that nuclear power and fossil-fuel power plants also receive government support.

“There is no technology in the UK system at the moment that doesn’t receive subsidies,” said Jimmy Aldridge, a research fellow for energy and climate change at the IPPR think-tank. “There are new subsidies at the moment to pay for coal, gas and nuclear to compensate for the fact that the business case for those technologies has changed in response to new cheaper renewable technologies.”

 

First of all, let’s get rid of the commonly made but fallacious claim made in the last paragraph.

The payments he refers to are Capacity Market ones. In return for these payments, agreed via auction, power providers commit to providing standby capacity for when demand is high and renewables are not producing. This is a payment for a service rendered, and in no way is as subsidy.

 

Let’s also examine some of the Bloomberg claims in more detail. The actual report is here.

 

One of the key paragraphs is this:

 

Among the country-level findings of the BNEF study are that onshore wind is now fully cost-competitive with both gas-fired and coal-fired generation, once carbon costs are taken into account, in the UK and Germany.

 

In other words, onshore wind is not cheaper than coal or gas per se, only after the latter have been taxed. The effect of this is seen when the EU cost of coal power, $105/MWh, is compared with the US, which is $75/MWh.

Another significant factor, which is only briefly mentioned, is that the report is basing the costs of fossil fuel power on the assumption that they were built from scratch now. The reality, of course, is that we have a host of coal and gas power stations already in existence and with enough capacity to make renewables irrelevant. Because they do not need to be built from scratch now, their costs are much lower. This is why they can they afford to sell for less than £50/MWh, which is where market prices have been for the last year or more. (Latest wholesale prices stand at £42.20/MWh)  

 

 

However, the Bloomberg study fails to mention the crucial point, which totally undermines their claims, at least as far as the UK is concerned. Because of the way the Strike Price works, wind power is effectively in a position to sell all of the power it produces.

Let me explain. Whatever price a wind farm operator gets for the power it sells on any particular day, the govt tops it up to the agreed Strike Price, index linked and guaranteed for 15 years. This process is known as Contracts for Difference (CfD). So, in effect, the wind farm can give away its electricity for nothing, safe in the knowledge it will still get its guaranteed price from the govt.

As a result, other suppliers will be crowded out, leaving wind and other renewables to dominate supply.

But first, let’s backtrack. Most electricity is sold by forward contract, whether day ahead, month, or year ahead. OFCOM show this well:

 

https://www.ofgem.gov.uk/sites/default/files/docs/2015/09/wholesale_energy_markets_in_2015_final_0.pdf

 

 

Well over 80% of total power is traded as baseload, and most of this is sold on 2 month contracts or longer.

Wind power cannot be sold in this way, because delivery cannot be guaranteed. Without the preferential access to the market given by CfD’s, as well as other mechanisms, wind farm operators would have no guarantee that they could sell anything like their full output, and certainly not at an economically viable price. For much of the year, of course, demand for spot power is low, and competition high.

This guaranteed access to the market is simply another subsidy in disguise. The Bloomberg analysis is essentially based around the assumption that most, if not all, wind power output can be sold. If, say, only half is, this would make their cost per MWh much higher, given that most of the costs are fixed.

 

 

Of course, I might be wrong about all of this!! But if I am, these super efficient wind farms would have no need of any subsidy or preferential treatment at all. In the last CfD auction round, earlier this year, the average Strike Price for onshore wind came out at as much as £82.50/MWh for 2018/19.

 

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407465/Breakdown_information_on_CFD_auctions.pdf

 

If their cost really is $85/MWh, we are being taken for an extremely expensive ride!