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Wind and solar have destroyed the market

March 7, 2016

By Paul Homewood 

 

h/t Patsy Lacey

 

image

http://www.telegraph.co.uk/business/2016/03/06/wind-and-solar-have-destroyed-the-ability-of-the-market-to-signa/

 

Rupert Darwall provides a thorough assessment of what has gone wrong with the UK’s energy markets.

From the Telegraph:

 

Before the election, high electricity prices made the Big Six energy companies everyone’s favourite whipping boys. A report by the competition watchdog exonerated them. Government-driven social, environmental and network costs were the main drivers of rising electricity bills, the Competition and Markets Authority found. Now the Big Six have put themselves squarely back in the frame. A 125-page report by the electricity industry lobby group, Energy UK, supports phasing out cheap coal power and demands more subsidies for wind and solar.

 

It is a high-risk strategy. In capitulating to “Big wind” and solar, the Big Six energy companies have no one to blame but themselves for the heightened political risk caused by rising electricity prices and the inevitable consumer backlash. Weather-dependent wind and solar power is inherently unreliable and high cost. In addition to subsidies, wind and solar need more grid infrastructure. When the wind blows and the sun shines, they swamp the grid with zero marginal cost electricity, forcing gas, coal and nuclear to reduce their output.

Lower prices and lower output demolish the investment case for building the gas-fired power stations the Government says are vital. These hidden costs are the real killer. As Amber Rudd, the energy and climate secretary, observed in her “smell the coffee speech” last November, “we now have an electricity system where no form of power generation, not even gas-fired power stations, can be built without government intervention”.

 

amber rudd Energy secretary Amber Rudd said last year that Britain will no longer pursue green energy at all costs Credit: Rex Features

 

Advocates of wind and solar claim falling costs mean renewables will soon reach “grid parity”. Anyone who knows anything about electricity understands this is highly misleading. To its great discredit, the Big Six report peddles the grid-parity fib, which ignores the hidden costs imposed on the rest of the system. Rather lamely, the report calls for government and industry to conduct further analysis on the whole-system costs of weather-dependent renewables, something it very well could have done itself.

While the Government insulates wind and solar investors from the damaging effect their output has on the market, the report admits that wind and solar have destroyed the ability of the wholesale market to provide price signals to guide investment decisions. It envisages more wind and solar on the grid, leading to more electricity priced as garbage that consumers are forced to pay someone else to take away during periods of negative prices.

Since last summer, almost 8.5 gigawatts of conventional capacity has closed or faces closure. In 2014, the Big Six made £556m from renewables and lost £1,615m on their gas and coal-fired power stations. Without cheap electrical storage, wind and solar can’t keep the lights on. The report foresees storage as the “single most important technological breakthrough” likely in the next 15 years. One thing’s for sure. It hasn’t happened yet.

 

Thanks to government policies deliberately distorting the market, we have over-invested in wind and solar. It has blighted investment in reliable capacity that can keep the lights on. This is the crux of Britain’s energy crunch. Clearly it was a colossal mistake to have embarked on renewables with storage unsolved.

The Big Six could have drawn attention to a situation where, in a world awash with hydrocarbons, Britain has an increasing shortage of generating capacity. There is no shortage of energy in the world. Oil prices have been falling. Last month, the US started exporting natural gas for the first time. In the first decade of electricity privatisation, around half Britain’s generating capacity was renewed. The market worked.

Now that the market has been destroyed, the real choice is between finding a path back to the market or accepting the Government is running the show. Private ownership and state control is the worst of all worlds. Political risk is borne by the private sector, which in turn means higher electricity bills. Financial efficiency would see new investment being funded off the Government’s balance sheet and reinstating the Central Electricity Generating Board. Instead, the Big Six report calls for more honesty about the impact of more renewables on electricity bills without providing any itself. For the industry, higher bills are primarily a PR problem to be solved by better communication.

 

ice cream In 2004, Green energy minister Jürgen Trittin claimed that the extra cost of renewable energy on monthly bills was equivalent to the cost of a scoop of ice cream Credit: Alamy

 

Energy UK’s chief, Lawrence Slade, goes out on a limb in advocating a British equivalent of Germany’s disastrous Energiewende (Energy Transition). In 2004, the Green energy minister, Jürgen Trittin, claimed that the extra cost of renewable energy on monthly bills was equivalent to the cost of a scoop of ice cream. Nine years later, CDU minister Peter Altmaier said Energiewende could cost around €1 trillion by the end of the 2030s. The cost of feed-in tariffs and other subsidies is currently €21.8bn a year; €20bn is being spent on a new north-south high voltage line and investment in other grid infrastructure is likely to double that number.

Thanks to the high volatility of wind and solar output, 25pc of Germany’s green energy is dumped on other countries at low or negative prices, destabilising the grid of Germany’s neighbours. At home, the situation is just as serious. In 2013, 345,000 households could not pay their electricity bills. In January 2014, Deutsche Bank warned that Germany’s energy cost penalty was already eroding its industrial base. In a 2013 survey by the German Chambers of Commerce, over half of industrial companies reported that Energiewende was having a negative or very negative impact on their competitiveness.

To see a successful energy transformation, you have to look across the Atlantic. In the most telling indication of the Big Six surrender to the green lobby, there is not a single mention of fracking and the US shale revolution. But, as the report states, it is assumed that the UK remains part of the European Union and continues to try to meet its legally binding renewable energy targets for 2020 under the 2009 renewable energy directive. The underlying message from the Big Six is clear: if you want lower electricity bills, vote leave.

http://www.telegraph.co.uk/business/2016/03/06/wind-and-solar-have-destroyed-the-ability-of-the-market-to-signa/

 

The situation described can only get an awful lot worse. As I have noted before, the Contract for Difference scheme (CfD), which is only just coming on stream, enables renewable operators with contracts to undercut conventional power at any price. This is because the government tops up whatever price they get in the wholesale market to the strike price guarantee.

If necessary, wind farms, for instance, can sell at a penny per MWh. This will ensure that conventional plant is squeezed out of the market for most of the time. And as renewable capacity continues to increase, this will happen more and more.

17 Comments leave one →
  1. markl permalink
    March 7, 2016 10:57 pm

    AGW is coming home to roost for the people in the EU. Let the finger pointing begin. The new Capitalists will be the countries the don’t drink the CO2 Kool Aid and become the industrial powerhouses that were once dominated by the West. The dream started by Marx and being carried on by the supporters of the UN and EU is becoming real. Will the people sit idly by and let it happen?

    • March 7, 2016 11:25 pm

      Will the people sit idly by and let it happen?

      Sadly yes, like they normally do

  2. March 8, 2016 12:52 am

    Great post. UK is headed for electricity ruin. Very shortly. Most likely next winter if not the remains of this one.

  3. March 8, 2016 4:53 am

    Build it and they (energy storage miracle) will come. One of your better writeups this year. Bravo.

    Big money is moving into coal btw. Up 100% in less than a week on big volume. Hmmm, one has to wonder if smarties pants are starting to see the handwriting on the wall.

    And yes, BTU (US) went from 2.50 to 5 and that’s all a long way from where it came from, but big money is moving in … it’s not short covering.

    • AndyG55 permalink
      March 8, 2016 5:00 am

      “Big money is moving into coal btw.”

      I wonder how much of that is from money made from wind and solar subsidies?

  4. Marks permalink
    March 8, 2016 8:56 am

    To have gone down the route of variable and inefficient supply without integrating a storage system just shows either technical ignorance or just financial greed.
    In other words the advisers where financiers not engineers.
    The Scottish and Welsh windmills could have been tied into hydro storage but the cost/subsidies would not match the get rich quick driving force.

  5. March 8, 2016 9:33 am

    Not sure Rupert Darwall really understands the motivation of the large power companies. A rigged, regulated and restricted market is exactly the formula they need. It gives them a degree of certainty for their forward planning and makes the ‘entry fee’ for competitive startups that much higher. It confirms the market for them. We shouldn’t be at all surprised when fossil fuel companies back regulatory moves favouring renewables, it’s a great stratagem, as well as good publicity. And power shortages are great for them, too!.

    It’s the same reason that most large corporations fear a UK exit from the EU. It would break their cosy certainties and make their monopoly-building ambitions just that bit more difficult.

    • It doesn't add up... permalink
      March 8, 2016 11:08 am

      I’m not sure you really understand this. Who are you counting as “fossil fuel companies”? Drax, busy switching to “renewable” biomass from cheap coal that is taxed and regulated out of operation, losing money all the while? Exxon, who has no skin in the UK power game at all beyond any power they buy from the grid, and the market price for which wholesale gas sells (currently rather low at <28p/therm, or <1p/kWh)?

      Both in the UK and in Germany, power utilities are bleeding to death as the impact of green regulation enters the territory marked "crazy". I think that senior management in the Big 6 now consider that the only way to restore sanity is to see power supply failure – blackouts – to wake up the politicians and regulators. Several have expressed the view that we need either restoration of a proper market (which would kill most renewables), or an expensive state run behemoth producing very expensive power and crippling economic competitiveness – but at least keeping the lights on.

      • March 8, 2016 12:41 pm

        The big 6 have all diversified into renewables, they know where the money is, that is a big part of the problem, the distorted market is not adequately rewarding what is valuable, but the big 6 still make fat profits.

      • It doesn't add up... permalink
        March 8, 2016 3:12 pm

        I think you are out of date.

        nPower/RWE results report today:

        http://www.dailymail.co.uk/money/news/article-3481683/Energy-giant-Npower-confirms-plans-slash-fifth-UK-workforce-reports-losses-100million.html

        £1.6bn writedowns are expensive.

        EdF had its finance director resign because it finances are in such a parlous state.

        the future E.ON and its
        roughly 43,000 employees in Europe and the United States will
        focus on three core businesses: renewables, energy networks,
        and customer solutions. Three other businesses—power generation
        in and outside Europe, exploration and production, and
        global energy trading—will be assigned to a new Düsseldorfbased
        company called Uniper, which will have just under 14,000
        employees. This new setup takes effect on January 1, 2016.

        They’re dumping the bits they expect will go bankrupt.

  6. Jack Broughton permalink
    March 8, 2016 11:10 am

    The shambles has a simple short-term solution, needing a bit of pride-swallowing by Amber.
    The existing fleet of coal fired boilers could be refurbished and offer another 25 years of reliable and efficient power for the UK: similar to the German approach. Given the world’s low energy prices, they could even burn oil!

    As a long term shaker, admittedly unlikely: the low-cost but well proven Rosatom (Russian) technology for Nuclear power could be imported at about $5m/MWe: far cheaper than EdF troubled design. This would cement ties and give some escape from the American dominance of our politics and their wish to continue the cold war as long as possible.

  7. March 8, 2016 11:17 am

    ‘Without cheap electrical storage, wind and solar can’t keep the lights on.’

    There isn’t going to be any cheap electrical storage, in the foreseeable future at least.
    There isn’t going to be much expensive electrical storage either.

    In other words, there isn’t going to be much electrical storage at all.
    Dreaming politicians need to get used to these realities soon, or better still, now.

    If not, they will be out of a job at the first election after the blackouts start.

  8. It doesn't add up... permalink
    March 8, 2016 11:30 am

    I’m trying to get my head around the CFD system. The contracts and GT&C amount to about 425 pages full of defined terms that obscure meanings, and require quite a lot of specialised knowledge about how electricity markets operate alongside practical operational details of physical supply. There do at least seem to be some provisions preventing CFD cashout prices going negative for more than 3 hours at a time. There are to be separate cashout price indices for “intermittent” and “base load” power – and presumably money to be made arbitraging between them. Part of the problem here is that generators who are integrated don’t have to trade their output via the markets where prices are monitored and included in the cashout marker price. My suspicion is that the marker prices can be manipulated wildly, with little or no apparent evidence that it is happening. I’d expect some of the bigger beneficiaries will be those banks with sophisticated trading operations who pay for the best brains to work it all out.

    If you want to have a go, start here:

    https://www.gov.uk/government/publications/contracts-for-difference-standard-terms-and-conditions-december-2015-update

  9. Joe Public permalink
    March 8, 2016 11:45 am

    The boast:

    “High-power storage unit stabilizes grid frequency more efficiently than conventional power plants

    Europe’s largest commercial battery power plant was connected to the grid today in the presence of Vice-Chancellor and Energy Minister Sigmar Gabriel and Mecklenburg-Western Pomerania’s Minister-President Erwin Sellering. The 5 megawatt lithium-ion unit was designed by the Berlin-based grid and storage specialists Younicos for WEMAG, a supplier of green electricity based in the northern German city of Schwerin. The commissioning of the fully automated unit marks the first time in Europe that a stand-alone battery is stabilizing fluctuations in grid frequency, thus helping to safely integrate wind and solar energy into the existing grid.”

    http://www.younicos.com/en/media_library/press_area/press_releases/022_2014_09_16_Wemag_Open.html

    The reality:

    Cost was €1.3m; meets German electricity demand of 1/4 second.

  10. Jack Broughton permalink
    March 8, 2016 12:50 pm

    Thanks Joe Public, I have been following battery development for a while. The article is interesting in what it omits: the key with batteries is kWh stored more than power available. The 5MW may only be for a few seconds.

    We used to use batteries only for black-start, but they are clearly essential to unreliable power generation technologies.

    Assuming that the battery is sized to match the generator, this would add € 260/kWe to the capital cost of wind or solar generators for no extra output. Approximately, for a 5 MWe solar station generating 6000 MWh / year with 10 year simple payback applied = € 22/kWh to add to subsidies. Small price to save the world from itself!

    • markl permalink
      March 8, 2016 7:30 pm

      Jack Broughton : “… the key with batteries is kWh stored more than power available. The 5MW may only be for a few seconds….”

      +1 Could be nothing more than a fail safe while the backup power readies for task. It doesn’t take much thought to understand that today ‘renewable’ energy is not ‘reliable’ energy.

  11. A C Osborn permalink
    March 8, 2016 5:45 pm

    It is a pity that there are no comments on that article, but it is in the “business” section, not the general news section.

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