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The Costs of Offshore Wind Power: Blindness and Insight

September 23, 2020

By Paul Homewood

 

 

h/t Philip Bratby

 

 

Briefings for Britain has a long article by John Constable & Gordon Hughes, which demolishes the latest claims of how “cheap” renewable energy has become:

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In this important contribution to our series on post-Brexit Britain Professor Gordon Hughes and Dr John Constable take on the entire green energy movement in arguing that the widespread view about the falling costs of renewable energy is wrong. They view official government projections of energy costs and hence prices as disgracefully inaccurate. Energy costs will be an important element in the UK’s future economic competitiveness and, if the authors are correct, energy prices are in for huge price rises.

The dramatically falling costs of renewables are now a political, a media, and conversational cliché. However, the claim is demonstrably false. Audited accounts show that far from getting cheaper, wind power is actually becoming more expensive. The failure of the British civil service to detect this fact and, hence, to protect the consumer and taxpayer from the consequences of the looming failure of the renewables sector raises important questions about the analytic competence of the Whitehall machine.

If we asked a random sample of broadsheet newspaper readers about the economics of offshore wind, it is practically certain that a majority of those interviewed would say they believed it was now cheap. A similar survey of investment analysts and advisors might return the same answer. Politicians and journalists would be certain about the matter. However, if pressed for evidence none of these groups could do much more than point to secondary sources. Some might remember that the Greenpeace sponsored an extensive advertising campaign in 2017, with full page adverts in the press. Others might point out that official bodies present offshore wind as the cheapest source of electricity. Those in financial circles might also indicate that almost every report or lengthy article on the future role of offshore wind power is accompanied by a chart which claims to show the rapid decline of costs over the last one or two decades, perhaps with forward projections to 2030 or 2040.

Incredible though it may seem, none of this is true. Neither offshore nor onshore wind has become cheaper; indeed, both have become more expensive over the last two decades.

How do we know this? Because one of us, Gordon Hughes, has compiled data from audited accounts on the capital and operating costs of 350 onshore and offshore wind farms in the United Kingdom, a set which covers the majority of the larger wind farms (> 10 MW capacity) built and commissioned between 2002 and 2019. It is the largest study of its kind to date and will be published shortly by the charity Renewable Energy Foundation, which John Constable directs.

In summary, analysis of the data reveals unequivocal findings:

  1. The actual costs of onshore and offshore wind generation have not fallen significantly over the last two decades and there is little prospect that they will fall in the next five or even ten years.
  2. While some of the components which feed into the calculation of costs have fallen, the overall costs have not. For example, the weighted return for investors and lenders has declined sharply, especially for offshore wind, because of a fall in perceived In addition, the average output per MW of new capacity may have increased, particularly for offshore turbines. However, these gains have been offset by higher operating and maintenance costs (O&M).
  3. Far from falling, the actual capital costs per MW of capacity to build new wind farms increased substantially from 2002 to about 2015 and have, at best, remained constant since then. Reports of the costs of building new offshore wind farms in the early 2020s imply that their costs may fall by 2025, but such reports are consistently unreliable as well as being incomplete. Final costs tend to be significantly higher, so little weight can be attached to forecasts of future costs.
  4. Far from falling, the operating costs per MW of new capacity have increased significantly for both onshore and offshore wind farms over the last two decades. In addition, operating costs for existing wind farms tend to grow even more rapidly as they age. The increase for new capacity seems to be due to the shift to sites that are more remote or difficult to service. Much of the increase with age is due to the frequency of equipment failures and the need for preventative maintenance, both of which are strongly associated with the adoption of new generations of larger turbines – both onshore and offshore.
  5. Turbine manufacturers and wind operators appear to be relying on an increase in load factors (a measure of the generator’s energy productivity) via (i) an increase in hub heights to take advantage of higher wind speeds, and (ii) changes in the engineering balance between blade area and generator capacity. However, the inferior reliability of new turbine generations leads to a more rapid decline in performance with age, so that the ultimate effect on average performance over the lifetime of new turbines is not clear.
  6. The combination of increasing operating and maintenance costs with the decline in yields due to ageing means that at current market prices the expected revenues from electricity generation will be less than expected operating costs after the expiry of contracts guaranteeing above-market prices. The length of these contracts has been reduced, implying a need to recover capital costs over a shorter economic life which pushes up the effective capital charge.

There is an important corollary to these findings. The current set of offshore projects being constructed and planned in North Western Europe are closely akin to speculative property development. They are high risk projects that will only be able to repay lenders and offer a return to equity investors if the average wholesale market prices of power rise to at least three to four times their current level throughout North West Europe. Such a price surge would require either a large and permanent increase in the market price of gas, which experience suggests is very unlikely, or carbon taxation at 8 to 10 times current levels, rising to at least €200 per tonne of carbon dioxide at 2018 prices in 2030. Such a tax would place a heavy burden on the rest of the economy.

This has consequences for financial regulation. To discharge their responsibilities financial regulators ought to impose a heavy risk weighting on loans to offshore wind farm operators, while also advising that green equity investments are too risky for pension funds and small investors. Instead, the chiefs of the European Central Bank (ECB), the Bank of England and other regulators have urged more investment in green assets without acknowledging the risks involved.

 

Full story here.

 

In my view, their comments about carbon taxation are key. You will recall only yesterday Ambrose Evans-Pritchard warning of an “explosive rise in carbon prices” in the EU. On current policy, UK carbon prices would follow those up.

The BEIS study of generating costs, which the article goes on to dissect, itself assumes that carbon tax will add £32/MWh over a 25-year life to the costs of a CCGT plant commissioning in 2025. The Committee on Climate Change used a figure of £43/MWh in their Fifth Carbon Budget, as what they described as the “Target Consistent Carbon Price” in 2030.

Under these scenarios, wholesale power prices could double to around £80/MWh by 2030. Further punitive rises in carbon taxes will inevitable continue after then.

It would appear that investors in offshore wind farms are banking on a rapid rise in electricity prices, both before and during their operational lives, in order to turn a profit. If that happens, of course, they will be allowed to renege on their Contracts for Difference at a small cost.

This leaves us with one further question – why has the BEIS published such an easily debunked set of figures?

The answer is apparent. Government strategy is centred around offshore wind, and the costings that go with it. The cost of going Net Zero is already known to be crippling. Admitting the true cost of offshore wind and renewable energy generally would not be politically acceptable.

32 Comments
  1. RICHARD WALKER permalink
    September 23, 2020 12:21 pm

    There is a typo in No. 2 line three with some text missing “offshore wind, because of a fall in perceived In addition……..”

  2. Mack permalink
    September 23, 2020 12:31 pm

    Wind farms – Ponzi schemes on stilts that benefit speculators, troughers and land owners whilst trashing the environment and plunging the great unwashed into fuel poverty. Marvellous. Without subsidies, they are totally unviable as a supplier of grid scale power. With subsidies, they are completely unreliable as a supplier of grid scale power. It’s a lose, lose situation that our kamikaze government continues to support. For how much longer is this farce sustainable though?

    • Chilli permalink
      September 23, 2020 12:44 pm

      Given Boris has chosen to double-down on his economy-wrecking lockdown strategy – despite hard evidence of its ineffectiveness – it’s clear that people’s money and livelihoods are expendable when there is political face to be saved and politician’s virtue to be signalled.

      • Gerry, England permalink
        September 23, 2020 2:20 pm

        And from 1 January we will have the full effects of the Buffoon’s Brexit to drag us further down the plughole. In fact some of this might start earlier with supply contracts not being renewed either because products can’t be supplied (animals and animal based products) or because of the uncertainty of supply.

    • CheshireRed permalink
      September 23, 2020 3:16 pm

      Unsustainable sustainable energy. Straight out of Yes, Minister.

    • Thomas Carr permalink
      September 23, 2020 6:05 pm

      The Gaderene swine.
      We accuse MPs of being illiterate when it comes to understanding the electricity market but yesterday a group who barely conceal their real purpose took a whole page in The Times urging the PM to embrace a clean future.
      ‘ Heavies’ like Unilever have got into bed with Greenpeace for this ad. About 25 household names appear to be in support.
      I suspect that such is the eloquence of people like Paul that communication is at a level such advertisers have difficulty to comprehend.
      At the very least a letter should be sent to Dominic Cummings with a copy to the Chancellor of the Exch. setting out the cost of power to industry -per MwH or otherwise- in ,say, 2000, the cost today and the projected cost based on so-called renewables viz 100% nil Co2 and what nuclear and the inter-connectors can deliver. this is the capacity of the green agenda for destroying jobs.

  3. Albion Ken permalink
    September 23, 2020 12:34 pm

    I have, this morning, received a tariff renewal letter from Scottish Power. In it, they say “All our new fixed price tariffs provide 100% green electricity made by our windfarms right here in the UK”. I have written back to ask them to explain how they arrive at this figure, and how they can give me 100% wind energy when the wind doesn’t blow!

    • September 23, 2020 3:19 pm

      because Ken we have left the Enlightenment behind and just “saying something” is the new science based truth.

      • Ben Vorlich permalink
        September 23, 2020 4:33 pm

        just “saying something”
        This is how Boris’ government works. They just say something and magically it happens. £50 bike repair vouchers, world class track and trace, world class testing and all the rest. Unfortunately things have happened so quickly this year some people remember the claims. How many people remember that local elections were postponed for a year?

  4. Harry Passfield permalink
    September 23, 2020 12:47 pm

    Net Zero will make the effects of Covid seem like the loss of loose change down the back of the sofa. Today’s illiterate MPs will have to face an ever-beligerant populace if they think they’re going to get away with it.

    • spetzer86 permalink
      September 23, 2020 1:34 pm

      ever-belligerent, but basically unarmed populace. See? They took care of the important bit a long time ago.

    • September 23, 2020 7:39 pm

      When the smart meter cuts off the central heating and the EV can’t be charged because the wind isn’t blowing, it will be too late to start complaining to the inglorious leader.

      Too many of the old power stations will have gone, and only a smattering of nuclear or gas replacements will be operating. The message will be: bad luck, grin and bear it.

  5. Phillip Bratby permalink
    September 23, 2020 12:50 pm

    I wonder whether the politicians understand this, or whether it is the civil servants in BEIS that are misleading the politicians. The swamp that is BEIS needs draining – just like the swamp that is MHCLG that needs draining.

    • Harry Passfield permalink
      September 23, 2020 1:59 pm

      Agree so much with what you say, Philip. It was especially galling to watch Leadsome on Politics Today telling the egregious Barry Gardiner that they both agreed on the Net Zero ambition. Ye Gods!! He’s a bloated liar (as proven by Andrew Neil) and she’s one MP I thought had more sense. I was wrong.

    • Adam Gallon permalink
      September 23, 2020 10:04 pm

      Seen much evidence of politicians understanding anything?

  6. JimW permalink
    September 23, 2020 12:58 pm

    So-called renewable energy and all its add-ons, such as EVs etc and coronavirus/covid-19 have common themes. One of the main one being obfuscation by governments at every level; used to be called ‘telling lies’.
    But as I have said many times, in today’s world its the ‘persuaders’ that matter. If they do their ’emotional’ job on 90% of the population there is nothing we can do. Facts no longer matter.

    • Broadlands permalink
      September 23, 2020 2:17 pm

      It is worth adding that renewables are actually replaceables… and do nothing to lower atmospheric CO2 to lower global temperatures.

  7. Geoff B permalink
    September 23, 2020 1:41 pm

    I cannot believe that the contracts for difference can be torn up once the wholesale price of electricity reaches the contracted price, then the wind farm operator should pay the excess back. With wholesale prices now around £40 per MWh and wind farms like Hornsea getting around £160 per MWh, it looks like a licence to print money.

    • September 23, 2020 2:11 pm

      I don’t know the details, but John Constable reckons the penalty is smallfry

      • Phillip Bratby permalink
        September 23, 2020 3:43 pm

        The consultation on changes to the CfD gives the details of the proposed penalty. I believe that it is £10k per MW, in the form of a bid bond. I suggested it should be at least twice this amount.

  8. Frosty Oz permalink
    September 23, 2020 2:09 pm

    Falls in interest rates and decreases in the cost of capital have contributed largely to the perception of a reduction in the LCoE. Those are financing improvements, not technology or scale benefits, but proponents will tell you they are due to the “learning curve”.

  9. September 23, 2020 3:21 pm

    It is stil bizarre that all of this is being done on the back of only a claim about CO2, not on the back of a statistically significant empirical data based fact!

    • Phillip Bratby permalink
      September 23, 2020 3:45 pm

      I put all this lack of evidence about the CO2 savings down in my response to the CfD consultation. I know it will be ignored.

      • jack broughton permalink
        September 24, 2020 11:37 am

        Not sure if I’ve grasped this right, maybe you can clarify? If the price of electricity increased by £ 10/MWh the extra revenue is £87.6k / y for 1 MWe dispatchable, so say £ 27k / y for a 1 MWe windmill. Cancellation even at £5/MWh increase pays back in less than a year: chickenfeed indeed???

        As you say, the bond is insignificant if the carbon price increases are as predicted.

  10. Colin Megson permalink
    September 23, 2020 4:10 pm

    Just put this on this. Can anybody explain how they come up with these strike prices and then, as they undoubtedly will, make a profit?
    —————//—————

    The Wind And Solar Power (WASP) industry gets away with lies and obfuscation that bleeds a nation dry. This windfarm will cost £5.7 billion over its lifetime and when you work out the MWh of electricity it will sell, it’s costing £48.47/MWh.

    And the awfulness is that SSE have negotiated a strike price, to a fanfare of trumpets, of (currently) £48.09. Now how do you think, but more pointedly, who do you think are going to make sure those pseudo-green, investment fund managers get their regular annual profits (dividends).

    So it’s a double whammy for the Scottish people – a few pathetic ‘green jobs’ and forking out a massive subsidy in energy bills and taxation. SSE – Gold Medallists in suckering all of the people all of the time.
    —————–//—————-

    https://www.thenational.scot/news/18740307.wind-turbine-row-shows-must-act-like-scotland-aspire/?action=success#comments-feedback-anchor

  11. Nancy & John Hultquist permalink
    September 23, 2020 8:12 pm

    They are not farms; and this is part of the problem.
    The term “farms” sounds nice and green. That’s bs.
    A proper term is “facility” or grid-scale power facility.

  12. Gamecock permalink
    September 23, 2020 10:54 pm

    Move your business to South Carolina, while you still can.

  13. It doesn't add up... permalink
    September 24, 2020 3:01 am

    National Grid is touting for input to its future energy scenarios: short deadline for the end of the week.

    https://www.nationalgrideso.com/future-energy/future-energy-scenarios/get-involved

    Last year, GWPF produced a lengthy critique. I’ve not enough time to do a full job before the deadline, but I am considering commenting along the following lines:

    The 2020 scenarios were far too dependent on Hopium, assuming lots of developments that are low probability: in particular

    a) High energy cost will drive remaining industry offshore, leaving a much more seasonal rump of demand, and perhaps leaving assets stranded from the lower demand;
    b) Insulating the housing stock is too expensive to be affordable: the Prof Kelly estimates suggest at least £2 trillion, and a high probability of much lower than forecast energy savings; this will also result in highly seasonal demand which will make hydrogen storage a non starter as a solution – the amounts needed will be far higher than any previous estimates.
    c) Low demand revealed aspects of a future high renewables grid: Europe wide surpluses that result in low or negative prices on a spot basis persisting for long periods and the need for extensive curtailment and costly grid stabilisation solutions;
    d) We also saw the effects of increased renewables dependence on periods of higher demand, with spot prices soaring to over £2,000/MWh, and a bidding war across Europe. Interconnectors threaten to import Europe wide problems to the UK, not solve them.
    e) Green hydrogen production is a very high cost option when you properly account for all the facilities required to produce it – you have to build surplus generation capacity whose output has a very low market value, yet the limited availability of surpluses due to intermittency will limit average plant utilisation to no more than 25%. Transmission capacity has to be able to route power to the electrolysers which will need to be close to any storage and any plant used to convert hydrogen back to electricity, and in turn to centres of demand. There also needs to be an adequate water supply. The cost is unaffordable.
    f) Net zero is a completely unrealistic basis for scenarios
    g) V2G is not going to provide storage to the grid. Consumers will want to guard against grid shortages, will not make their vehicles available during demand peaks, and will not tolerate battery use at their expense.
    h) It does to seem to be appropriate to trawl for legal measures designed to support non-market outcomes

    Any other ideas welcome: you can contribute anonymously to their survey if you like.

    • jack broughton permalink
      September 24, 2020 11:44 am

      I read the report and gave up on trying to respond as it is so dreadful and as you say all based on speculation and hope. DSR is one of their prime factors, they seem to think that this is a long term answer. However, you have stimulated me into making a short response on the poor technical quality of the proposal, as silence is worse than a poor reply.

  14. September 24, 2020 6:38 pm

    When comparative capital and long-term costs sourced from the US EIA are combined with their measured productivity this table gives the true costs of the Gigawatts generated by Weather Dependent Renewables in the UK.

    Effective comparative cost / GW generated
    productivity % Capital Cost Long-term Cost
    Onshore Wind 22.9% 4.8 £bn/GW 17.3 £bn/GW
    Offshore Wind 31.7% 11.5 £bn/GW 51.7 £bn/GW
    Solar PV on grid 10.5% 10.5 £bn/GW 42.4 £bn/GW

    Advanced Nuclear 90.0% 5.6 £bn/GW 13.4 £bn/GW
    Gas-fired CCGT 90.0% 0.9 £bn/GW 2.9 £bn/GW

    For details see:
    https://edmhdotme.wordpress.com/excess-costs-of-uk-weather-dependent-renewable-energy-2019/

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