Forget The Wind Industry Lies, Onshore Wind Is Twice The Price Of CCGT
By Paul Homewood
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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.
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:
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:
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.
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.
If we use a figure of 40 pence, approximately the average of the last 12 months, we get these costs:
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.
The reality is that currently the cost of onshore wind is more than double that of new build CCGT.
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.