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Offshore Wind: Definitely Expensive

August 12, 2020

By Paul Homewood

 

From GWPF:

 

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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.

Full story here.

 

It is worth reflecting on historical electricity price trends and projections.

When Moray was being planned, wholesale power prices were typically between £40 and £50/MWh.

 

chart

https://www.ofgem.gov.uk/data-portal/all-charts/policy-area/electricity-wholesale-markets

 

The BEIS do not publish projections of power prices (as far as I am aware). But their projections for gas prices give us a clue:

 

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https://www.gov.uk/government/publications/fossil-fuel-price-assumptions-2017

With real prices rising from 44p per therm in 2017 to 67p  by 2030, this would inevitably push up power prices in real terms. (Remember as well that CfD prices are index linked each year).

BEIS estimates of levelised costs, published in 2016, suggest that fuel costs account for about half of the total cost of CCGT generation. Therefore a 50% rise in gas prices could potentially add around £15/MWh.

But that is not the end of it, as carbon taxes need to be added. According to BEIS, this could double by 2030, adding £29/MWh to a CCGT plant commissioned in 2025, based on lifetime costs:

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https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/566567/BEIS_Electricity_Generation_Cost_Report.pdf

 

As a result of carbon taxes, CCGT generation costs would rise to £82/MWh, at 2016 prices.

Add on inflation in the next five years, and wholesale power prices could be over £90/MWh. At this price, Moray can easily cancel its CfD, and cover its costs in the market place. Meanwhile, consumers will end up paying the price.

As for those promises of “cheap wind power”………………….

FOOTNOTE

When the Committee on Climate Change formulated their Fifth Carbon Budget in 2015, their projections assumed a wholesale power price of £84.37/MWh in 2030.

These were at 2015 prices.

22 Comments
  1. Nancy & John Hultquist permalink
    August 12, 2020 4:14 pm

    Companies have to plan and operate with the regulatory situation written by the government(s) where in they are. In this and many cases, the companies appear to hire smarter people than the governments.
    There would be only small contactual penalties for doing so.
    [? contactual → contractual ]

    Note the word small. Who decided this?
    ‘Not so small’ might have been a better idea.

  2. Lez permalink
    August 12, 2020 5:39 pm

    When I looked this morning, wind power’s contribution to the National Grid was a derisory 0.77%.

    • Ben Vorlich permalink
      August 13, 2020 9:27 am

      Good bews it’s now 8.41%

  3. Mad Mike permalink
    August 12, 2020 5:44 pm

    If these renewables provide cheap electricity and they’re building more and more of them, then why are my electricity bills going up?

    • Phoenix44 permalink
      August 12, 2020 5:50 pm

      Exactly the question I ask. It is undeniable that electricity prices have risen as we have built more renewables. If renewables are not more expensive, why should that be?

  4. jbw permalink
    August 12, 2020 5:53 pm

    Interesting history story about windmills on whatsupwiththat here…

    https://wattsupwiththat.com/2020/08/06/a-brief-tale-of-wind-and-steam/

    • Lez permalink
      August 12, 2020 7:58 pm

      Thanks jbw.
      The first time I’ve seen this. Very well written and informative.

    • jack broughton permalink
      August 13, 2020 11:55 am

      This link really catches the stupidity of reverting to wind. The Dutch museum at Cruquius is really great for a short visit and shows clearly that without steam and a Cornish beam engine the area would never have been drained without using hundreds of even-then expensive windmills.

  5. jack broughton permalink
    August 12, 2020 6:29 pm

    An excellent summary of the reality of wind power prices. Sadly, this will remain with those of us who do not accept the scientific drivel of Big Brother and his acolytes.

    Just heard on the BBC news, reporting a “Met office expert” stating that the hot nights are definite signs of global warming, which again you proved to be nonsense.

    • Bertie permalink
      August 12, 2020 6:43 pm

      Remember 1976. This summer has some way to go to be considered exceptional.

    • Lez permalink
      August 12, 2020 8:23 pm

      A bit off topic, but I saw an article by BBC’s Shukman on the Stonehaven train derailment. He doesn’t waste an opportunity to spout his rubbish:
      ‘…with rising global temperatures set to bring extremes of weather never anticipated by the Victorian engineers who built the lines…’

      Give me strength.

  6. Joe Public permalink
    August 12, 2020 7:42 pm

    “The BEIS do not publish projections of power prices (as far as I am aware). But their projections for gas prices give us a clue”

    The Committee on Climate Change – Analysis on abating direct emissions from ‘hard-to-decarbonise’ homes (Element Energy & UCL) July 2019 Fuels cost projections to 2033 gives us a clue:

  7. Phillip Bratby permalink
    August 12, 2020 9:35 pm

    Examination of the recent consultation on CfD showed that the contracts are non-binding (ie not genuine contracts) so the contracts for offshore wind at low prices do not materialise. It was suggested that bid bonds should be introduced as a disincentive. The government suggested £10k/MW, but in my response to the consultation I suggested at least £20k/MW. Offshore wind will never be competitive with gas or nuclear when all factors are taken into account.

  8. August 12, 2020 10:51 pm

    Back in April Paul wrote that: ” wind, solar and hydro combined still only account for a pitiful 4% of total energy consumption, despite the tens of billions of subsidies thrown at them “:
    https://notalotofpeopleknowthat.files.wordpress.com/2019/06/image_thumb-73.png?w=723&h=444
    https://notalotofpeopleknowthat.wordpress.com/2020/04/30/uk-energy-trends-2019/
    Only 22% of that 4% is of primary energy was supplied by wind:

    So if my shaky maths is right in 2019 less than 1% of the total primary energy consumed in UK came from wind and about half that was from off-shore.
    Never mind, whatever the cost and no matter how futile, parliament has passed legislation requiring the government to reduce the UK’s net emissions to ‘net zero’ in thirty years by 2050.

    • Bertie permalink
      August 13, 2020 8:21 am

      Nobody has ever adequately explained to me how biomass can be considered ‘renewable’.

  9. Nancy & John Hultquist permalink
    August 13, 2020 5:16 am

    The comment by not_a_robot . . .

    and no matter how futile

    . . . reminds me of the Indiana Pi Bill.

    It sort of required that ∏ would be set by the law as 3.2.
    A mathematician (C. S. Waldo) explained to the members of the Indiana State Senate that such a law would be futile.

    To invoke artistic expression, one can write:

    “Parliament has passed legislation requiring the government” to square the circle.

  10. Stuart Brown permalink
    August 13, 2020 8:58 am

    But, but… this morning from Reuters:

    “Wind turbines and solar panels produced a record 10% of the world’s electricity in the first half of 2020 as coal-power declined”

    https://uk.reuters.com/article/uk-global-renewables/wind-and-solar-produced-10-of-global-electricity-in-first-half-2020-report-idUKKCN25832D

    “Scientist say huge cuts to greenhouse gas emissions from the power sector are required over the next decade to limit global warming and curb the worst impacts of climate change such as floods, droughts and loss of species. ”

    So just keep quiet and cough up, OK?

    (from a report by independent climate think tank Ember whoever they are)

    • Ben Vorlich permalink
      August 13, 2020 9:32 am

      >(from a report by independent climate think tank Ember whoever they are)

      Ember the last glow in the ashes of the UK economy?

  11. jack broughton permalink
    August 13, 2020 12:06 pm

    Looking at Stuart Brown’s note: A similarity between Covid and Global Warming is that “experts”, “scientists”, “epidemiologists” and professors (there are now about 30,000 of these in the UK), can be wheeled out to say whatever the paying party wants to hear.

    Maybe we should all look at the role of experts a bit more. In justice, experts are called for each side in the case and the judge has to weigh-up which experts make the more credible case: neither sides’ experts are treated as inherently superior.

    A lot of the media believe that if an accredited “expert or scientist” says something it is incontrovertible. This actually does a disservice to the good work of the many unseen scientists and is costing the UK vast sums of money on vanity projects.

  12. Bertie permalink
    August 14, 2020 7:30 am

    Expert: “Someone from out of town” – Samuel Longhorn Clemens (Mark Twain)

  13. It doesn't add up... permalink
    August 14, 2020 4:07 pm

    Of course the current wholesale price for gas is under 0.5p/kWh, or £5/MWh. Way below the low side projections. No wonder we have MPs talking about ramping up carbon taxes.

    As to the wind farms, I am not sure about costs. Triton Knoll is claiming £2bn cost for 900MW, which is substantially less than the cost for Moray, whose spending to date may include on turbines and supports that await installation, and therefore run ahead of the installed capacity.

    CCGT plant on the other hand has been getting cheaper. I factor in a capital charge of 6% of the investment, which is of the order of £1/W of capacity. So a 1GW plant bears a charge of £60m per year, with variable cost at roughly twice the gas price. The cost is then down to plant utilisation. If they manage 85%, then the capital charge is 60/0.85/8.76 or around £8/MWh, but if they are reduced to 25%, then the cost rises to £27.40/MWh. Of course you have to add in carbon taxes, and variations in maintenance costs that rise per MWh with lower utilisation. The current fuel cost is just £10/MWhe.

    • jack broughton permalink
      August 17, 2020 7:19 pm

      As a “back of envelope” estimate the wind / solar generation is about 100 TWh / y at about £ 140 / MWh while this could be generated at £ 40/MWh from gas. This amounts to £10b/year that could be used in other parts of the economy, this would be even more if coal were used of course. We are stuck with this massive penalty for many years, which is even worse.

      Global warming dogma is an expensive religion, and the rest of the world is not following our stupid lead!

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