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CCC Claim Offshore Wind Will Cost £25/MWh!

January 29, 2022

By Paul Homewood

 

The CCC’s Sixth Carbon Budget also includes this gem:

 

 image

https://www.theccc.org.uk/publication/sixth-carbon-budget/

 

Do they really believe that offshore wind costs will drop to £25/MWh, well below even the cost of onshore wind at the moment?

It is only by this chicanery that the CCC were able to keep the costs of Net Zero down to just an odd trillion or two.

Assuming a more realistic cost of £100/MWh, which is consistent with known construction costs, the costs of Net Zero would be £18 billion a year higher.

55 Comments
  1. January 29, 2022 12:10 pm

    And the government still believes the charlatans of the “independent” CCC. It is unbelievable.

    • January 29, 2022 12:13 pm

      And nobody has told the CCC that due to climate change, wind speeds are falling and will continue to fall (according to the models, which we all know are totally reliable). This must be true as I heard it on the BBC yesterday from a professor of climate science at Reading University.

      • Gerry, England permalink
        January 30, 2022 2:29 pm

        Remembering that ‘professor’ is a job title and you missed some quotes such as ‘climate science’ and ‘University’.

    • Harry Passfield permalink
      January 29, 2022 9:25 pm

      They missed a ‘P’ off the end of there name.
      B’stewards.

  2. Penda100 permalink
    January 29, 2022 12:29 pm

    I am not an engineer and would be grateful if anyone could explain what this extract from the first scenario actually means “Offshore wind is able to meet a substantial share of demand with wind patterns correlated to seasonal demand, which supports the uptake of heat electrification.” I read it as saying that the CCC will control the wind so it blows at the right time. Clearly, that is abject rubbish but I can’t for the life of me see what else it might mean.

    • chriskshaw permalink
      January 29, 2022 12:33 pm

      Wind blows more and stronger during winter, and unwritten: except those days when it doesn’t

      • January 29, 2022 6:01 pm

        …which (low wind speeds) also happens to coincide with some notable unseasonably cold weather events in UK e.g. winter 2010 (vs 2018) especially if heat pumps become common as -18ºc could happen in southern England but as its rare so I doubt many systems would be design to have a COP much above 1 so we likely need to be able to meet a peak of 350+ GW similar to our current peak natural gas demand (ignoring the demand from the electrification of transport.) God help Britain when a winter like 1947, 1963 or even 1895 (high pressure system and cloudless) happens again.

        Has any government learnt anything from Feb 2021 in Texas electric space heating in climates with mild but infrequent extreme cold spells is not a good idea unless each home has a backup fuel based heating system for extreme cold spells.

    • Jordan permalink
      January 29, 2022 1:49 pm

      Heat electrification? That’ll be a power station. A proper power station, burning coal.

      • January 29, 2022 2:05 pm

        No, no, no. Not a power station.

        Heat electrification refers to replacing gas boilers, wood burners, coal fires and so on with electricity, primarily heat pumps.

        And that includes (presumably) shops, offices, industrial units and so forth.

        Paul has pointed out the potential costs in many posts. For your average pleb living in a smallish house, it will cost around £10,000 MINIMUM for installation and at least double ongoing energy costs. And you’ll also need to buy in long johns, thick socks and wooly jumpers to actually feel warm.

    • January 29, 2022 4:53 pm

      Yes I’d go with criskshaw. It means they expect more wind generation in winter when the demand is greatest. How justified this is I don’t know.

  3. PaulM permalink
    January 29, 2022 12:33 pm

    Now that the, long overdue, high rates of inflation are starting to appear (keep printing central banks, you’ve solved nowt) the new construction costs will be far, far higher in paper terms. Plus I see most raw materials required to electrify (terrify?) the UK are already rising ahead of inflation. I do believe Victor Meldrew was a optimist 😁

  4. It doesn't add up... permalink
    January 29, 2022 2:38 pm

    The whole thing is a worthless fantasy. None of it is grounded in reality. All Hopium.

  5. BLACK PEARL permalink
    January 29, 2022 3:23 pm

    By 2050 ?
    Wont all those Windy Millers be de-commissioned by then ?
    Where’s all the costs for this & replacing them … joke !

  6. January 29, 2022 4:34 pm

    Maintenance costs must be enormous for electrical equipment in the sea, and there is also the hidden cost of the transmission lines and connection sub-stations.

    • January 29, 2022 4:56 pm

      Yes but if the supplier quotes a price of £25/MWh, that is the price they will get under CfD. There projected maintenance costs must be low enough for them to be profitable at this price.

      • It doesn't add up... permalink
        January 30, 2022 9:39 pm

        Well, only if they send a Commencement Notice. Otherwise they get market price, plus the value of REGOs they can sell. Failure to send a Commencement Notice by the Longstop Date means that if they later decide to send a Commencement notice, the CFD will only run for 15 years after the Longstop Date, so they will lose the intervening period (during which it would presumably have been much more profitable to be getting market prices). There is the rather empty threat that the CFD contract might be terminated, with any ability to send a Commencement Date removed. But if market prices are consistently higher (aided by such rigging as high carbon prices) they aren’t going to lose any sleep over that. And the government are going to be so desperate for capacity that they will just let them get away with it.

  7. January 29, 2022 4:50 pm

    The problem is the so-called Levelized Cost. With intermittent wind and solar, this is not the price they should be allowed to quote.
    They should have to quote the price of keeping us supplied 24/7 and 365 days a year with a small number of planned outages for maintenance.
    That would include the price of energy storage to get us through the 60% of time the wind is not at the right speed for generation.
    Even the CCC say the price of compressed air storage is £160/MWh. Pumped hydro is lower at £100/MWh, but we have limited sites for this in the UK. Battery storage is just insanely expensive and hydrogen very inefficient as an electricity storage medium.
    It’s not clear to me what these prices actually mean either. Is this the price of the electricity after storage? Or does the generation cost have to be added onto these storage prices? Does the price include the energy losses (30% for compressed air and 20% for pumped storage)?
    Exactly what proportion of output needs to be stored is one of those interesting questions, depending on what risk of insufficient supply you are willing to tolerate. However it will inevitably be a considerable extra cost which the wind and solar industries don’t currently cost in to their quotes. This has surely got to be jumped on and soon.

    • January 29, 2022 5:39 pm

      What energy are they going to store if they haven’t got enough in the first place? They would need a huge amount of surplus-to-demand energy to cover all the gaps in power production, and the storage would be prohibitively expensive assuming it was even available to buy at the scale that would be needed.

      In short, it’s all nonsense.

      • January 30, 2022 12:59 am

        It’s not necessarily all nonsense. It could be done given a big enough budget. Give me an unlimited budget and I will land humans on Mars and bring them back alive. The question is how much will it cost the consumer.

      • Gerry, England permalink
        January 30, 2022 2:33 pm

        I think KB, the nail in the coffin – stake through the heart might be more appropriate – is that there are simply not enough minerals available on the planet. That might be where your trips to Mars come in.

  8. John Hultquist permalink
    January 29, 2022 4:58 pm

    “ four exploratory scenarios ”

    Bookstores and libraries should shelve this in the Fantasy Section.

  9. GeoffB permalink
    January 29, 2022 6:07 pm

    Something tells me…common sense (and a degree in electrical engineering and a masters in business administration) that this is not going to work.

    • Dick Goodwin permalink
      January 29, 2022 7:11 pm

      Hi Geoff, I only have to old ‘C’ Cert in electrical installation and haven’t been in the game for a few years now. I’m reliably informed by a friend who is still in the game that the grid cannot take more than around 30% unsyncronised power as will affect the frequency too much. Do you know if this is accurrate or not. Not much point having all these solar panels and wind turbines if it is. Thanks in advance.

      • GeoffB permalink
        January 29, 2022 8:18 pm

        yes the grid needs good old rotating mass to stabilise the frequency, the inverters, from wind, solar and interconnectors, basically semiconductors with low I squared t cannot do this. . they just trip out at the slightest overload,,, whilst a spinning coal/nuclear just shrugs this off, if the grid trips on frequency variations, which is going to happen soon, no power any where and at least a week to get it all running again.

      • Dick Goodwin permalink
        January 30, 2022 9:55 am

        Thanks Geoff.

      • January 30, 2022 1:01 am

        GeoffB: but could this problem be solved somehow?

      • January 30, 2022 9:15 am

        KB,

        technically called synchronous or asynchronous generation. The former has basically speed control and so maintains the frequency to close limits. (frequency is based on turbine speed) Frequency is the parameter that measures demand and supply balance. Renewables are asynchronous and cannot do this which is why an earlier post mentioned a limit of how much asynchronous generation can be connected.

        Can it be overcome, I don’t believe so.
        However, in theory, it is possible using the pitch control of the wind turbines to modulate output. Wind is variable and power output of wind turbines vary as a cube law which means that it would be fairly tricky to control to close limits, especially in blustery winds. It also would have the effect of reducing the already low overall output of wind generators.as they would have to run at a lower overall output than they do now. Low wind speeds of course mean very little power from them as now and that is far more difficult to overcome, certainly batteries cannot compensate for that.

        I believe that the powers that be and their advisors are seduced by the relative ease at which wind farms can be built, the apparent low cost and the mistaken idea that they are equivelant and so can replace conventional power plants. This is false.

        A simple fact is that for non CO2 emitting generation, nuclear, with it’s inherent problems, is the only reliable way. It’s Hobson’s choice and it seems that some in the E,U, hierarchy are beginning to realise this as they are now classifying nuclear, as with gas, as ‘green’.

      • January 30, 2022 11:52 am

        Iain Reid: thanks for the explanation. I think you are right, that this frequency problem is not widely known outside of the society of electrical engineers. However I have read that this is actually what battery storage is used for. Somehow they must be able to adjust the battery DC output to whatever AC frequency is required. That is what I assumed but I don’t really know this.
        Also, this would mean a large fraction of battery storage, which would be incredibly expensive.
        Anyhow, if there really is no reasonable-cost technical solution, this would seem to be a show-stopper for the CCC’s plans? Do they even mention it?

      • It doesn't add up... permalink
        January 30, 2022 10:46 pm

        We’ve certainly been seeing a lot of frequency wobbles outside the normal operating range of 49.8-50.2Hz, particularly with high wind, and with sudden trips on interconnectors. They will start panicking only if there are events outside the statutory limit of 49.5-50.5Hz with any kind of frequency. Batteries are certainly mainly used to provide ancillary services, with frequency control being a favourite. Much of the volume is under contracts for so called Dynamic Containment, which requires a rapid frequency related level of response. The contracts are paid by the hour of availability, and typically run to a few hundred MW when it is windy, and rather less when there is grid inertia from lots of CCGT in windless conditions. Grid batteries are almost exclusively fairly short duration, with 1 hour at maximum being typical. They are no way suited to providing any long term storage – long duration is counted as 4 hours, which is being installed at a handful of solar sites to store some of the midday summer peak to deliver in the evening. They might double down on windy nights, picking up surplus power cheaply like pumped storage to feed into teh morning rush hour. But the economics of these remains stretched, and for new grid batteries generally now that battery costs have about doubled over the past year.

  10. jimlemaistre permalink
    January 29, 2022 8:07 pm

    THIS is REALLY why the Wind Farms and Solar Farms and The Electric Car Industries are forging ahead . . . NOT because they are efficient . . . Not because they are saving the planet. Behind the scenes these companies sell their ‘Green Energy Credits’ at enormous PROFIT $$$$

    Carbon Trade Already Covering Equivalent of one Half of World Energy Emissions, $1 Trillion Value . . .

    Intercontinental Exchange Inc. (ICE) said that trading in carbon allowances reached a record volume in 2021 on its various markets — the volume of buying and selling reached the equivalent of about one half of ALL global energy emissions.

    A total of 18 billion tons of ‘Carbon Allowances’ was traded in 2021. Equivalent to an estimated $1 trillion in US dollars according to ICE. It trades by far the biggest market share in the global market, though other exchanges including the European Energy Exchange (EEX) brokers also handle sizable volumes, as well.

    Reflecting on how companies use these markets to manage and price ‘Climate Risk’, as well as meet their compliance obligations, the traded contracts included a record 15.2 billion tons of EU carbon allowances and a record 2.4 billion tons of California carbon allowances as well as 346 million tons of Regional Greenhouse Gas Initiative allowances. Then also, following its launch in May 2021, the 255-million-ton U.K. carbon allowances.

    This year ICE will be expanding their carbon credit markets to value and support the preservation of ‘natural assets’, as well as launching their first carbon futures index on contract to provide access to the global cost of emissions in one instrument.
    Gordon Bennett, Managing Director of Utility Markets at ICE.

    Most of these trades and exchanges are based on The Electric Car ‘Zero Emissions’ Fraud and the Zero emissions Fraud of Wind Turbines and Solar Panels. They just neglect to look at what goes into producing these technologies or the Environmental damage done there . . .

    https://www.academia.edu/52039545/All_Electricity_Poisons_Planet_Earth

    https://www.academia.edu/49057069/Electric_Cars_Burn_31_More_Energy_than_Gas_Cars

    My Thoughts . . .

  11. Sobaken permalink
    January 30, 2022 8:57 am

    Their scenario clearly has insufficient standby capacity. 125 GW wind and 85 GW solar providing 80% of electricity, 10 GW nuclear providing another 13%, that leaves gas peakers to provide the remaining 7%. They plan for 65 GW, that would have them working at 6% capacity. But electrification should result in peak demands of over 120 GW. They foresee no large expansion of storage, only 10 GW of PH and 18 GW of batteries (unclear for how many hours, but probably not more than 4). So you would need at least 110 GW of gas for the cold windless sunless days. This drops the capacity factor further to just 4%.

    • January 30, 2022 10:24 am

      “Their scenario clearly has insufficient standby capacity. 125 GW wind and 85 GW solar providing 80% of electricity …”

      The reality is:

      Throughout July 2021, Britain’s entire fleet of wind turbines generated at an average of 10% Capacity Factor.

      We can have a similar week in January when Britain’s entire fleet of solar generates at an average of 3% Capacity Factor.

  12. January 30, 2022 9:18 am

    Sobaken,

    pie in the sky thinking!

  13. Gamecock permalink
    January 30, 2022 11:53 am

    CCC Claim Offshore Wind Will Cost £10/MWh!

    Fixed it.

    If you are going to tell a whopper, may as well make it a BIG ONE!

    “Electricity will be too cheap to meter.”

    “They will pay you to take their electricity.”

    • Dave Gardner permalink
      January 31, 2022 1:06 pm

      Actually the original “too cheap to meter” quote could potentially be applied to offshore wind energy. Nobody can be sure what the author of the quote, Lewis Strauss, was actually talking about. This is the full original quote from a speech given by Strauss in 1954:

      “It is not too much to expect that our children will enjoy in their homes electrical energy too cheap to meter, will know of great periodic regional famines in the world only as matters of history, will travel effortlessly over the seas and under them and through the air with a minimum of danger and at great speeds, and will experience a lifespan far longer than ours, as disease yields and man comes to understand what causes him to age.”

      The Greenies assume that Strauss must have been talking about nuclear power because he was chairman of the USAEC (US Atomic Energy Commission), but they didn’t start using the snippet from Strauss’s speech until after he died (Strauss died in 1974), so nobody could ask Strauss what he had been talking about. Strauss’s son, when asked about it in the late 1970s, thought that his father had been talking about nuclear fusion. Nuclear fusion would cover both hot and cold fusion, as both were investigated in the USAEC’s 1950s project “Project Sherwood”.

      To me, the most interesting thing in the original quote is the bit about travelling effortlessly under the seas and above them at great speeds. It sound like he’s talking about something like the UFO craft in the ‘Tic Tac’ videos recorded by US Navy pilots. These mysterious craft, or whatever they are, observed by the pilots were also travelling underwater (the underwater version of a UFO is known as a USO). But again nobody knows what Strauss was talking about.

      • Gamecock permalink
        January 31, 2022 3:19 pm

        Mr Gardner, I use the phrase tongue-in-cheek.

        I first heard the phrase in a church sermon in the 1950s. St. John’s Methodist Church in Aiken, South Carolina. Many in the congregation, including my father, were employees of the Savannah River Plant, the AEC’s sprawling nuclear facility south of Aiken. I was a kid, but I was enthralled by the idea, so I remembered it.

        What Lewis Strauss was talking about is quite clear. He was chairman of the AEC in the 1950s. 60 years later, I lament what could have been.

        And, no, it wasn’t about fusion. In the 1950s, the interest in fusion was for weapons. It was inconceivable then that fusion could be controlled for energy production. Indeed, we still can’t do it.

  14. Gordon Hughes permalink
    January 30, 2022 6:21 pm

    Since I have done more work on the actual costs of offshore wind than anyone else, can I point out that the assumption isn’t as stupid as the bald statement implies. The overriding dilemma is how to reconcile the large difference what a number of large companies appear to be promising (large projects at CfD strike prices of less than £40 per MWh at 2012 prices) and the costs that those projects are actually incurring (implying breakeven prices in excess of £120 per MWh).

    Clearly the CCC has chosen to believe that CfD bidders really mean what they are saying because it is very convenient for them. On the other side either the bidders are willing to lose vast amounts of money or they reckon that the contracts have enough wiggle room to enable them to get out of their apparent obligations. I am more inclined to the second explanation but who can be certain.

    Since the contracts lie at the core of the government’s strategy, it is odd, to say the least, that the CfD contracts do not specify huge penalties for non-performance. If you are going to bet a country’s future on the future cost of offshore wind, then any prudent administration should demand that failure to deliver on promises means bankruptcy for the bidders with strict joint and several liability.

    We should extend that to all of the personnel of the CCC as well as politicians and civil servants if they want to be taken seriously. At the moment what we are offered is grand – or fantastical – promises with no corresponding liability in the event of non-delivery.

    • It doesn't add up... permalink
      January 31, 2022 12:05 am

      I have read the CFD contracts very thoroughly, and I would agree that there is lots of wiggle room. See my comment above about the effects of delaying a Commencement Notice or Start Date Notice. Having checked the CFD payment data I see I have been wrong in suggesting that Triton Knoll have been producing before commencing their CFDs. They did so in May and June for the two phases last year. Things may have been difficult for them from mid September onwards, when their CFDs started requiring them to pay LCCC, depending on how they set up their sales. Inaccurate hedging could get very costly, as also inaccurate nominations at gate closure with sky high balancing prices.

    • January 31, 2022 12:14 pm

      Yes the low CfD strike prices are a bit of a mystery, at least if the cost analysis by GWP is anywhere near correct.
      In fact I am wondering if GWP is labouring under a false premise, and that is they seem to think that under CfD, suppliers will get the wholesale price, if the wholesale price is higher than the strike price. This appears to be incorrect; the strike price is a fixed price not a minimum price. So it is all puzzling to me.
      As you point out they are are not actually under obligation to supply us with electricity. So maybe they are looking forward to holding us to ransom over the contract in the future?
      Also, as I’ve said before, the contracted price should have been the price for supplying us 24/7 and 365 days per year, apart from some agreed outages. That price would include energy storage and would be significantly more expensive.

      • Gordon Hughes permalink
        January 31, 2022 2:26 pm

        No mistake – I/we understand that the strike price is a fixed price adjusted annually by inflation for a period of 15 years.

        Confusion can arise because the equivalent subsidy arrangements in NW Europe offer a minimum price.

        Your point about contracting for firm power on demand rather than power delivered at the option of the supplier is fair enough – after all it is the basis of most power purchase agreements (PPAs) in the rest of the world. Of course, that wouldn’t results in prices which politicians and renewables lobbyists could boast about. Technically it would not have been too difficult to design or deliver such contracts, but civil servants et al are misled by the fake calculations that go into levelised costs.

      • February 1, 2022 12:58 am

        Much of the GWPF (now Net Zero Watch) case rests on wind power being much more expensive than the strike prices agreed for offshore wind under construction, or planned for the future.
        But it seems to me the strike price is the price. They can’t receive a higher price for their electricity than that. SO where is the fatal flaw that we are not seeing?

      • jimlemaistre permalink
        February 1, 2022 3:22 am

        This is your Fatal Flaw . . . It was the launch in May 2021 of 255 million tons of U.K. carbon allowances.

        This will lead to the downfall of the economy . . . $$$$$

      • jimlemaistre permalink
        February 1, 2022 3:29 am

        Carbon Credits, also known as Carbon Allowances, work like ‘Permission Slips’ for Excess Pollution. When a company buys a carbon credit, usually from the GOVERNMENT, they gain permission to generate one ton of CO2 emissions. With carbon credits, carbon revenue flows vertically from companies to REGULATORS. Companies who end up with ‘Excess Credits’ like Electric Car companies and Wind Farms or Solar Farms can sell them to excess polluters for a profit.

      • February 1, 2022 3:29 pm

        Jim le M

        “Companies who end up with ‘Excess Credits’ like Electric Car companies …. can sell them to excess polluters for a profit.”

        “Fiat Chrysler spent over $300 million on green credits in Europe last year — mostly from Tesla …

        … Tesla generated about $1.58 billion in revenue from sales of regulatory credits last year and has never been profitable on an annual basis without credit sales to bolster its automotive margins.”

        https://www.cnbc.com/2021/03/03/fiat-chrysler-spent-eur-300-million-on-green-credits-mostly-from-tesla.html

      • jimlemaistre permalink
        February 1, 2022 4:40 pm

        Quite right KB, But when you look BEHIND the surface of ‘Emissions Free’ you find that Electric Cars cause an INCREASE in the burning of fossil fuels . . . OHM’S LAW . . . Resistance ! At least 12% of the electricity produced is Lost as HEAT during transmission. At least 16% of what is left is lost as HEAT charging the Lithium Ion battery . . . 28% . . . Lost as HEAT !!! BEFORE you ever put your foot on the accelerator . . . These FACTS are NEVER looked at by government . . . Certainly NOT by ‘The Big Green Propaganda Machine’.
        Regulatory credits ARE the biggest ‘Fraud’ the financial world has ever seen !
        It is based on semi truths, wishful thinking and outright LIES . . .

        https://www.academia.edu/62574334/Tesla_Versus_Toyota_Camry

        https://www.academia.edu/49057069/Electric_Cars_Burn_31_More_Energy_than_Gas_Cars

        Propaganda . . . Propaganda . . . Propaganda . . . NOT Science . . .

  15. tygrus permalink
    January 30, 2022 11:49 pm

    Can someone please explain “…Despite higher system costs…” ? Future price predictions may not be achieved. What subsidies will still be required for funding projects & transmission upgrades to handle the variability & requirements for storage/backup?
    Wind requires a peak transmission capacity 3x the average, when some times has <5% utilisation. You can't turn Wind generators up when you need it, you can only turn them off.
    We used to have coal vary 55% to 99% of their capacity, average 75% with the rest coming from gas peaking plants so transmission wires had greater average utilisation than those connecting to wind. UK offshore wind up North has a longer way to get to London (in the South) having greater losses.
    Colocating Wind+Solar+BESS/storage together to use the same transmission lines can decrease the peak, boost the minimum & better utilisation the transmission lines throughout the day. But this would not save much of the inter-season peak/lows.

  16. January 31, 2022 2:41 am

    Reblogged this on Gds44's Blog.

  17. January 31, 2022 2:07 pm

    Reblogged this on boudica.us and commented:
    H/T gds44

  18. Mikehig permalink
    February 5, 2022 9:49 am

    According to a report from Reuters, the increasing size of wind turbines may be outpacing the capabilites of the specialist vessels needed to install them:
    https://gcaptain.com/offshore-wind-sector-could-face-bottlenecks-as-size-of-turbines-outpace-installation-ships/?subscriber=true&goal=0_f50174ef03-83aa0a803f-170410014&mc_cid=83aa0a803f&mc_eid=9275323244

  19. Mikehig permalink
    February 5, 2022 11:20 am

    Gordon Hughes: good to see you posting here!

    Wrt to your comment: “No mistake – I/we understand that the strike price is a fixed price adjusted annually by inflation for a period of 15 years.”

    Why are the strike prices 100% escalatable?

    The majority of wind farms’ cost is repayment of the capital and the financing cost thereof. Both are fixed for the contract life: the capital has been spent and the financing set up at a fixed rate (opting for variable rates seems very unlikely).
    I used to work in a business which installed and ran plants for customers. The contracts usually comprised a fixed facility charge to pay for the investment, etc together with an operating charge which was adjustable in line with the costs of labour, materials, etc..

    I do not understand why the whole strike price is escalatable given that a large part of the underlying costs are fixed.

    Recently Paul put up figures for the Achlachan wind farm which show that the strike price has increased by nearly 12% in a bit over 3 years – call it 4% pa, roughly. However Opex accounts for only 30 – 40% of their electricity cost, from what I have read, so an increase of only 1.2 – 1.5% on the whole price would be enough to cover it.
    This does make it look as if the headline price has been artificially lowered by a bit of financial jiggery-pokery. Even if this was done on an NPV-neutral basis it would cost more overall due to “back-loading” the capital recovery. I very much doubt any such altruism on the part of the promoters.
    My suspicion is that this format looks better while being more lucrative compared to a more logical approach of a fixed charge to cover the investment etc and an escalatable charge for Opex costs.

    Please can you shed some light on this?

    • Gordon Hughes permalink
      February 5, 2022 12:30 pm

      The indexation condition is a central part of the standard CfD contract but it is standard for all regulated industries. There is an advantage. Guaranteeing the ability to recover the real value of capital considerably reduces the risk of any investment and thus the cost of capital – partly by reducing the cost of equity and partly by allowing projects to operate with higher levels of debt to equity. Some might question the second effect because it encourages over-leveraged projects but it certainly brings down the headline price.

      There is a larger point that most commentators – including most people in the renewables sector – don’t understand. In as far as the cost of wind generation has actually fallen over the last decade this is almost entirely a consequence of a fall in the cost of capital for new projects. Real capex and opex costs have only fallen (if at all) by small amounts. However, the reduction in the real cost of capital from 8-10% to 3-5% for wind projects due to (a) less perceived risk, and (b) the general fall in rates of return has been far more important. Neither of these elements can go any further down and I believe that both trends will tend to reverse in future. That is why the tendency to extrapolate past trends in prices is all wrong.

      You are correct that indexing prices has the effect of backloading the effective burden of paying for wind projects. But that is not a bad thing. Why should consumers today pay more heavily – in real terms – for electricity from, say, Hornsea than consumers in 10 years time? What you can reasonably object to is the prevalent tendency of referring to strike prices at their original value rather than at their current cost. This is a symptom of the complete ignorance of both journalists, politicians and most policymakers. That is clearly true of the CCC because their £40 per MWh for Dogger Bank will actually be over £50 per MWh once the 2022-23 adjustment is applied.

      • Mikehig permalink
        February 5, 2022 10:47 pm

        Thanks for the explanation: I was thinking in terms of something like an old-fashioned mortgage for the capital element. Indeed it is reasonable for payments to stay constant in real terms rather than declining over time.

  20. Gordon Hughes permalink
    February 5, 2022 1:06 pm

    I would like to pick up the query by KB asking what is the fatal flaw if operators are tied to a fixed (indexed) price for their output. The issue lies in the aphorism “what cannot be sustained will not be sustained”. If the actual costs of building and operating wind farms, as recorded in company accounts, are much higher than the assumed costs, then somebody is eventually going to incur heavy losses on projects operating under the recent CfD contracts. That will affect both lenders and equity investors. So maybe we don’t care about SSE, Equinor, Orsted at al but the losses will affect pension and investment funds, individual shareholders, etc and could be big enough to have wider financial ramifications.

    But it is the wider ramifications that matter more. Faced with the prospect of large ongoing losses – i.e. opex costs that exceed revenues – projects will either cease operations or will seek to renegotiate the contract terms. A government faced with the prospect of the failure of a flagship program will inevitably offer more or less hidden bail-outs. The claims made by the CCC will prove to be pure snake oil but too late to avoid a huge burden falling on either taxpayers or electricity customers.

    I don’t mind if the operators want to incur large losses as a consequence of their foolishness – in most cases that is a transfer from foreign taxpayers (who own the companies) to the UK public. However, the issue is liability for failure. The contracts should ensure that the operators face really large penalties – in the many billions of pounds – if they fail to deliver minimum quantities of power on the terms specified.

    The overriding issue with NetZero policy is the complete absence of liability or consequence for those who make claims or promises about what will happen in future. If the CCC wishes to promise unlimited amounts of power at £40 per MWh (or whatever), that is fine provided that everyone associated with the CCC signs up to strict joint and several personal liability if that promise is not met. If they are not willing to do that, then their claims are nothing more than hot air.

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