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Forget The Wind Industry Lies, Onshore Wind Is Twice The Price Of CCGT

June 7, 2016

By Paul Homewood

 

 

 

This is an important post – I recommend you bookmark it.

 

 

Last year the Conservative party promised in its manifesto to end any new public subsidy for onshore wind. The Renewable Obligation has already been closed to new onshore wind generators, except those which had already received planning permission. 

The Government has also indicated that onshore wind would be excluded from any future Contracts for Difference rounds (CfDs), but here it starts to get messy.

There have been suggestions from Andrea Leadsom, Energy Minister, that the definition of subsidy may be redefined to allow the CfDs to continue, on the basis that onshore wind is no dearer than other alternatives such as gas.

This proposal appears to have originated from Renewable UK, the industry’s lobby group, in collaboration with Policy Exchange, who prepared an analysis paper, “Powering Up: The future of onshore wind in the UK “.

Renewable UK’s Chief Exec, Hugh McNeal referred to this concept in his interview with the Telegraph yesterday :

 

Although the Government has implemented its manifesto pledge to end subsidies for new onshore wind farms, the industry believes it should be able to deploy more turbines onshore if it can show that this is the cheapest form of new power generation capacity.

Current wholesale electricity prices are too low to spur investment in any new form of power generation, so the Government has already had to make subsidies available to new gas plants.

If financial support required by onshore wind is less than that required by gas, the industry argues it should no longer be regarded as “subsidy”.

“We are now the cheapest form of new generation in Britain,” Mr McNeal said. “If plants can be built in places where people don’t object to them and if, as a result of that, over their whole lifetime the net impact on consumers against the alternatives is beneficial, I need to persuade people we should be doing that.”

 

So, is it really true that onshore wind is cheaper than CCGT?

 

We can start by taking a detailed look at the Policy Exchange paper, which was published last August. This is how the author, Richard Howard, summarised it:

 

 

We recently published a new report, Powering Up, focusing on the future of onshore wind policy in the UK. The report set out the case for a continued role for onshore wind, albeit in a form where subsidies are progressively removed, communities have more of a say, and communities receive more benefit from hosting developments.

The report demonstrated that the cost of onshore wind has already fallen from DECC’s estimate of £85/MWh, to around £75/MWh for the most recent projects, and could fall further to around £60/MWh by 2020 or shortly thereafter. Government has made a manifesto commitment to halt subsidised onshore wind, but our report suggests that future onshore wind projects may be possible on an unsubsidised basis as costs come down.

Needless to say, our report has prompted many responses from those in the industry, media and government. Several people have asked me to elaborate on what exactly we mean by ‘subsidy free’. Indeed, it appears that officials at DECC, and many in the onshore wind industry are asking themselves the same question.

In my view, the notion of ‘subsidy free’ is still open to a degree of interpretation, and there are three possible options to be considered.

The first option, which I think needs to be dispelled, is that ‘subsidy free’ means the withdrawal of support altogether for onshore wind (or renewables more widely). This would imply that new projects would receive income only from selling power into the wholesale market, where the price is currently £40-45/MWh. However, at present no form of generation is investable based on the wholesale price alone. Even fossil fuel power stations (e.g. gas, coal) receive support in the form of a capacity payment. In fact, we estimate that the cost of a new build gas project is currently £57/MWh – with the capacity payment making up the difference between this and the wholesale price. Government will be providing support worth around £1 billion per year through the capacity mechanism from 2019 onwards, predominantly to coal, gas and nuclear plant.

Therefore, the second option is that ‘subsidy free’ could mean that onshore wind receives the equivalent level of support as, say, a new build gas project. This is the interpretation we used in our recent report. Our analysis shows that both onshore wind and new gas projects will be at a cost of around £60/MWh by 2020 (on a levelised cost basis, 2014 prices). In our view, a CfD contract at a level equivalent to the cost of a new build gas plant does not constitute a ‘subsidy’ – although the CfD contract is still necessary to de-risk the project, and to top up the wholesale price.

There is also a third option which takes a more holistic view of costs. Generally, when we think about the cost of different generation technologies, we think about the direct costs faced by the generator – for example development costs, capital cost of construction, operating costs, and decommissioning costs associated with the project. However, energy projects also create a host of other costs and benefits, which are not felt by the generator but by society as a whole. These costs and benefits are referred to as ‘externalities’ in economic literature. 

http://www.policyexchange.org.uk/media-centre/blogs/category/item/what-exactly-is-subsidy-free-onshore-wind?

 

Note carefully:

The first option, which I think needs to be dispelled, is that ‘subsidy free’ means the withdrawal of support altogether for onshore wind (or renewables more widely). This would imply that new projects would receive income only from selling power into the wholesale market……

In our view, a CfD contract at a level equivalent to the cost of a new build gas plant does not constitute a ‘subsidy’ – although the CfD contract is still necessary to de-risk the project, and to top up the wholesale price.

 

Translation – they want the existing CfD system to continue exactly the same as now.

Let us be totally clear here. The CfD process gives two hugely significant advantages to generators:

1) It offers a 15-year, guaranteed, index linked price, which, as Policy Exchange say, de-risks the project. This in turn reduces the cost of capital.

2) It also effectively allows generators to sell every single unit of electricity they can produce. This is because they can sell, if necessary, at a penny per MWh knowing that the govt will top up the price to their guarantee. This allows them to undercut every other competitor not on CfD.

These advantages are not available to fossil fuel generators such as CCGT. As such, CfDs are an anti-competitive practice, and should be outlawed under competition laws. Without these advantages, it is unlikely that wind farms would ever be viable.

 

They quote a current cost of around £75/MWh for onshore wind, although the CfD round last year awarded contracts at over £86/MWh. They then go on to say that this could come down to £60/MWh by 2020. I’ll take their word for that, but assume therefore that DECC would be unwise to offer any contracts above that price before then.

 

But the real point of contention is that figure of £57/MWh for new build gas. The paper describes the background:

 

image

image

 image

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But is the figure of £55/MWh for CCGT right? To find out, we must go back to the DECC “Electricity Generation Costs” report in 2013, available here.

On page 18, we see this table:

 

image

 

 

The cost of CCGT is given as £80/MWh, but, lo and behold, we find that this includes £18/MWh for “Carbon Costs”. This of course is the Carbon Price Floor, a carbon tax by any other name. This has got nothing to do with the cost of gas generation. Indeed, it is only in place to make renewables appear to be more competitive with fossil fuels.

DECC state:

 The carbon price assumed in the levelised costs presented is at the level of the Carbon Price Floor, which is assumed to stay flat in real terms beyond 2030 at £76/t in 2012 prices.

 

Currently, the price is £18/t, but they do not say how it would phase in.

To be fair, the Policy Exchange do mention carbon prices, but fail to say just how much they add.

Nevertheless, without this wholly arbitrary and artificial “cost”, the real cost of CCGT would be £62/MWh.

But, as the Policy Exchange say, gas prices were much higher in 2013. DECC’s cost estimates were based on 79 pence per therm in 2014.

Currently they are less than 35 pence.

 

image

http://www.catalyst-commercial.co.uk/reports/77/business-energy-market-brief—may16/

 

If we use a figure of 40 pence, approximately the average of the last 12 months, we get these costs:

 

£/MWh DECC 2013 Current
Capital Costs 9 9
Fixed Costs 4 4
Fuel 49 25
Carbon Costs 18 NIL
Total 80 38

  

For the cost of CCGT to rise to £60/MWh, the cost of gas would have to rise to 75 pence/therm. Nobody is seriously forecasting anything like this in the foreseeable future, but if prices did rise that sharply, wholesale power prices would also rise sharply.

 

There is one more crucial issue, capacity loading, but before we come to that, a couple of minor points:

 

1) DECC’s costings assume an operating life of 25 years for CCGT. (For some reason, onshore wind is 24 years.) I would have thought that a modern gas plant would expect to last at least 35 years. This would replace capital costs by about £2/MWh.

2) CCGT generators are charged £6840/MW/yr for Connection & Use of System charges by the National Grid(according to the DECC costings), yet onshore wind only pays £4510/MW/yr. If onshore wind paid the same as CCGT, it would add £1/MWh to its costs. 

 

 

None of these costings, of course, include indirect costs, such as grid expansion, short term response plant and the cost of standby capacity.

Even the Committee on Climate Change admit that the cost of intermittency is around £10/MWh.

 

image

https://www.theccc.org.uk/publication/sectoral-scenarios-for-the-fifth-carbon-budget-technical-report/

 

The reality is that currently the cost of onshore wind is more than double that of new build CCGT.

 

Capacity Loading

All of the above cost calculations assume that both wind and CCGT operate at their de-rated capacity. In other words, the maximum they can realistically expect to generate from a technical point of view, allowing for maintenance down time, etc.

The assumption is that onshore wind and CCGT run at 28% and 93% respectively.

However, because renewable energy has been given preferential access to the market, CCGT runs at well below 93%. Last year, according to DECC, CCGT plants produced at only 31% of capacity, down from 58% in 2010. (Coal utilisation has also fallen sharply since then.)

This lack of activity plays havoc with the economic viability of these plants. As the capital and fixed costs have less throughput to be spread over, unit costs rise. At last year’s level of 31%, this would add an extra £26/MWh to the cost of CCGT, in other words bringing total cost up to £64/MWh.

It is this problem which Hugh McNeal refers to when he says:

Current wholesale electricity prices are too low to spur investment in any new form of power generation, so the Government has already had to make subsidies available to new gas plants

 

The intrinsic operation of CCGT is not economically unviable at current wholesale prices. What is making new gas plants unviable is government regulation that prevents them from competing on a level playing field with renewable energy.

Strip away the subsidies to wind, the anti-competitive system of CfDs and carbon pricing, and new investment will take place in gas without any need for any “subsidy” at all.

17 Comments leave one →
  1. June 7, 2016 2:24 pm

    Great review, unfortunately it is likely to be read by the AGW people only.

    The hidden costs of subsidising non-reliables is well covered-up in subsidies and carbon penalties. It used to be the case that if a generator could not supply when demand required he was penalised under the CEGB costing system. That system was based on capital costs, fuel costs, O&M, efficiency and availability of power plant and made investment decisions simple. The present costing penalises reliability by rewarding unreliable plant whenever it is able to generate and increasing the cost of generation on the stand-by suppliers. It is a subsidy based power costing system.

    Without the ludicrous carbon penalties, the UK would be producing as much coal-based electricity as Germany is and producing lower cost electricity for our industries.

  2. June 7, 2016 4:20 pm

    Nice analysis. We found something similar in the US. Correctly calculated wind LCOE about 2.5x CCGT. One difference is the lower gas price in US thanks to fracking.

  3. Peter Fournier permalink
    June 7, 2016 5:21 pm

    I have a serious problem with all of these analyses of comparing CCGT to Wind and that is how the capacity factor is included.

    In this article compensation for the capacity factor of wind is mentioned as £10/MWh.

    However, and to make comparisons easier, let’s say that the capacity factor of CCGT is 100%. To be fair that means we should add about 7% to capacity factor of wind 28%, or 35% (search for 28% above for the reference) since the quoted capacity factor of CCGT is 93%.

    OK, now we have a fair apples to apples comparison.

    Now let’s build a CCGT capable of 1 MWh. According to the first table that’s £80/MWh. The CCGT needs no backup, so no backup costs are involved (remember we are assuming 100% capacity).

    Now let’s build a wind turbine rated at 1 MWh. According to the table that’s £101/MWh. However the whole of the “renewable” energy crowd is incredibly optimistic so let’s drop the price to the same as CCGT — £80/MWh — just to make them happy.

    However, that wind turbine with a rated capacity of 1 MWh has a capacity factor that reduces it actual output to 0.35 MWh. We are missing 0.65 MWh.

    You can see where the confusion comes in. Is the first table a comparison of rated capacity or actual capacity?

    If it is a comparison of rated capacity the surely the £x/MWh is the cost of getting 1/MW, not the MWh after capacity factors have been taken into account.

    So, is the following true or not, based on my assumptions:

    — Cost of CCGT to get 1 MWh produced = £80/MWh
    — Cost of wind to get 1 MWh produced = £80/MWh for the 0.35 MWh produced
    from wind and 0.65 x £80/MWh for backup from CCGT = £80 + £52/MWh = £132/MWh

    But actually it’s worse than that. If we invest £80/MWh in anything, it’s because we need the MWh. Since wind sometimes delivers basically nothing the real cost is simply the cost of wind generation + the backup at 100%.

    On a truly level playing field wind would cost £80/MWh for itself + £80/MWh for 100% CCGT backup or £160/MWh assuming we are talking about rated capacity.

    If the wind industry (and government reports) wants to keep talking rated capacity, then the costs they quote must include their costs + 100% backup.

    As it is the wind industry is costed at rated capacity then subsidized for the electricity they produce and the 100% backup because sometimes their actual capacity drops to zero.

    Compensation for the capacity factor of wind is mentioned as £10/MWh but it should be at least £52/MWh and more fairly £80/MWh.

    What have I got wrong? I don’t understand.

  4. David Richardson permalink
    June 7, 2016 6:07 pm

    Thank you Paul – another great review of the lunacy.

    I could beat Usain Bolt over 100 metres if they hacked off one of his legs and made him carry a hundred weight sack of lead.

    This week has seen a few headlines that tend to show that many European countries have finally understood the cost of the whole scam – even Denmark it seems. But how long before it dawns amongst the politicians in the UK?? Will it ever dawn?? Eventually it has to I suppose, but I am not holding my breath.

  5. Bloke down the pub permalink
    June 7, 2016 6:41 pm

    It would be nice to think that post a Brexit vote, the UK would come up with a sensible energy policy.

  6. Graeme No.3 permalink
    June 7, 2016 9:20 pm

    How much would the Carbon Cost be for coal fired generation? I can’t see it being less than the £26 for OCGT, so presume that the amount coal fired gets is £27 or less per MWh.
    Since coal fired in Australia supplies at £15 per MWh from a cheaper coal price but with an estimated £2.4 extra cost (government fiat based on evil Carbon), I just wonder how the Government can claim that it is trying to lower electricity prices to consumers.

  7. Derek Colman permalink
    June 7, 2016 11:27 pm

    The main reasons for the rising price of gas generated electricity are the carbon taxes which wind does not pay, and the fact that the power stations are often forced to run intermittently and on stand by to accommodate the use of wind power. Without these constraints gas would easily be half the price of onshore wind.

  8. June 8, 2016 12:25 am

    Reblogged this on Climate Collections.

  9. June 8, 2016 7:24 am

    A good article. It proves yet again that you cannot trust anything that comes from the wind “industry” or its propagandist arms, RenewableUK and all the other QUANGOs. Deception and lies are the wind industry norms. Successive Government energy ministers have believed the lies and there is no sign any change in the gullibility of this Government.

    • June 8, 2016 9:33 am

      I think that’s exactly why Hugh McNeal has gone on board.

      He will know all of the corridors of power at DECC, and use his influence and contacts to press Renewable UK’s agenda

  10. CheshireRed permalink
    June 8, 2016 1:08 pm

    Blown apart yet again. Well done Paul. I tire of saying ‘one day common sense will catch up with these scammers’ because it seems EVERYONE is now on the scam.
    So-called ‘RenewablesUK’, HMG, ex-ministers / civil servants, the lot. What a racket. And to think these are the types of people who accuse ‘deniers’ of pedalling lies. Unreal.

  11. A C Osborn permalink
    June 8, 2016 3:29 pm

    The Danes are using the problems with the EU “renewable energy tax (PSO)” to cancel all future Offshore Wind.
    Perhaps they are finally beginning to wake up and smell the coffee.
    http://www.thegwpf.com/denmark-cancels-all-coastal-wind-farms-delays-new-built-until-2025/
    http://www.thegwpf.com/denmark-cuts-green-tax-scaps-offshore-wind-farms/
    and
    http://www.thegwpf.com/denmarks-liberal-government-to-roll-back-renewable-energy-policy/

  12. marija113@hotmail.com permalink
    July 12, 2016 9:37 am

    If we wanted to look at true levelized costs, oil&gas production subsidies should also be taken into account. https://www.odi.org/publications/10058-production-subsidies-oil-gas-coal-fossil-fuels-g20-broken-promises

  13. August 19, 2016 8:26 am

    A tour-de-force. And yes I will bookmark it! I would love to see a similar demolition of the hype surrounding the solar PV farce.

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