Photo by Andrew Aitchison

Gone with the wind

Renewable energy is cripplingly expensive

Artillery Row

Have you heard that wind energy is cheaper than gas? Politicians have. Newly enlightened, the Conservative Government rushed to announce that UK electricity generation will be carbon neutral by 2035. Labour, for its part, contends that this transition is not fast enough. It has promised to cut all fossil fuels from electricity generation by 2030. At a time of rampant political animosity, it seems a unifying ideal transcends the indignity and rancor of partisan politics: wind power is the future. 

Green fever is by no means quarantined to Westminster. Recently, I have noted a growing chorus of voices from pro-reform organisations I admire — such as Britain Remade and the YIMBY Alliance — urging policy makers to harness the potential of renewable energy. Even if intermittency means we will need some gas, the best advocates argue, running on renewables more often will reduce the annual cost of energy.

With our political leadership hurtling the country full throttle towards a renewable tomorrow, it sure would be alarming if their calculations were wrong. As in, really, catastrophically wrong.

So, what’s all this about wind energy costs coming down?

Twitterphilic politicians and thoughtful campaigners alike point to the strike price offered to budding wind producers via the Government’s Contracts for Difference (CfD), which has fallen two thirds since 2014. 

Indeed, the latest auction appears to show that offshore wind farms starting service in 2024-25 will sell wind at a stunning £48/MWh — roughly in-line with pre-crisis electricity prices and well below those seen in the last two years of gas shortages. 

Who’d have thought it: a political decision with no negative trade-offs? Case closed!

Not so fast. The last few weeks have seen the headline-grabbing CfD contract winners threatening non-delivery unless they’re offered more generous subsidies, with owners of the biggest-yet commissioned wind farm positing a halt to construction. Meanwhile, the world’s biggest wind turbine producer, Vesta, has raised it pricing per MW by 62 per cent, reported losses, and had its credit rating downgraded

Looking at the UK offshore projects which have activated their CfD contracts — all but one is selling above the current price of gas, at £151/MWh (with an unlucky late entry stuck at £95). The farms which came online last year wisely chose not to activate their £73.71/MWh government contracts and have been merrily milking the gas crisis to charge as much as £600/MWh. 

What’s going on here? 

A couple of years ago, Professor Gordon Hughes of Edinburgh University had the bright idea of comparing UK Government price modelling with the actual accounts of wind producers. He quickly discovered what I will gently term “surprising irregularities”

The Energy Department’s modelling assumed that capital expenditure per MW of offshore wind would fall by more than 50 per cent between 2018 and 2025, that operation and maintenance costs would fall by a factor of four, and average output would remain at 51 per cent installed capacity over the course of a turbine’s lifetime (modern turbines peak at 45 per cent in their first year). 

Civil servants fudging figures to meet statutory targets?

How does this optimism compare to reality? Prof. Hughes’s headline discovery was that the cost of installing and operating windfarms went up, not down, in the 2010s. Indeed, the unreliability and greater sea depth of new offshore turbines meant operation costs per MW quadrupled between 2008 and 2018, whilst capital expenditure doubled. Danish data also indicated that the larger, newer generation of wind turbines breakdown faster, meaning that their output is lower after a couple of years when compared to older models. The only falling cost Hughes found evidence for was that of borrowing, which halved due to a combination of low interest rates, supportive government policy and the fact that companies underreported their construction costs by an average of 18 per cent in press releases. These findings have since been broadly replicated by Andrew Montford. 

How did the Energy Department justify the difference between their projections and real-world trends? They didn’t. BEIS modelling contained not one reference to audited accounts — instead, “with the exception of a single reference to a National Grid ESO report, all of the sources cited for the data are BEIS publications”.

Civil servants fudging figures to meet statutory targets? This is beginning to feel like a familiar story … 

Unreliable officials aside, wind salesmen appear to have been kept on the road by that most treasured of eco-allies: the US shale industry. In 2021, US investment firm Goehring & Rozencwajg estimated that most of the fall in the price of renewable components — including solar panels and batteries — is owed to the 90 per cent decline in fossil fuel costs brought on by the US shale revolution. As renewables require a much higher ratio of energy invested (in the form of diesel for mining and transport, coal for steelmaking etc.) to energy produced than do fossil fuels, they argued, a rise in fossil fuel prices would rapidly increase the cost of renewables. The prediction was laughed out of town, until it came true

This ballad of shale gas-fuelled eco-optimism makes for a fantastic tragicomedy. It is not, however, the full story. Even if wind prices had fallen to their promised level, the costs they impose on the wider energy system would have remained uncompetitively high. 

Why? As you are most likely aware, the wind does not always blow. Solar energy is likewise constrained by a well-known astronomical phenomenon. To bridge this gap, then, something must back them up. 

The Government has bet the house on undersea cables with other countries solving the intermittency problem — with periods of high wind in Denmark compensating for periods of low wind in the UK, for example. A similarly inspired German team recently looked into this idea, only to conclude that “even at a European level, dispatchable backup capacity of almost 100 per cent of the nominal capacity of all European wind turbines has to be maintained”. 

In other words, for every 1 MW of wind energy capacity you build, you need to build another 1 MW of reliable generation to back it up. That means twice the power stations and many more transmission cables for the same amount of electricity. 

Currently, renewables do not have to pay for the cost of backing themselves up — you do. This happens in two ways. Firstly, two network charges on your energy bill (which have grown around 158 per cent since 2012) cover the cost of National Grid ESO paying various energy producers to turn on and off with the weather, as well as the cost of new cables. 

Subsidies can only mask their fundamental flaws for so long

More painfully, you pay a much higher price for gas-generated electricity. Power stations must charge a price which covers their capital and operation costs. If they spend half of their operational lifetime switched off to make way for wind, they must charge more per unit of electricity to break even. This off-and-on-again routine has a secondary impact on modern combined cycle gas turbines (CCGTs), because these take 90 minutes of warming-up to reach their peak thermal efficiency. Constant interruption means our CCGTs currently waste 20-25 per cent more fuel per MWh than they would if they were allowed to run consistently. No surprises, then, that pre-crisis Britain’s CCGT-generated electricity was the most expensive in Europe, with prices 73.4 per cent above the EU average, according to a 2020 EU-commissioned report — a finding the authors attribute to the stations’ “very low utilisation rate”. 

Official modelling appears rather in denial on this point. The most recent report by the Climate Change Committee (CCC), for example, models the backup CCGTs meeting just 2 per cent of annual electricity output whilst somehow managing to be 15 per cent more efficient than they are today, when they supply 40 per cent. 

These problems can only get worse. The more wind in the system, the more time backup power plants spend idle (to give the devil his due, the UK Government has somewhat mitigated this problem by not building enough backups). Worse, because wind farms produce electricity at random, growing capacity increasingly means surplus power is generated at times of low demand — forcing National Grid to pay producers to dump it.

What does the total bill come to? A German team tallying these wider system costs found that they added €86/MWh to the price of wind once the technology approached 40 per cent of total energy generation (assuming gas backup). Costs continued to grow with output. 

Batteries are no panacea. Data from New England suggests lithium batteries would add over £250/MWh on top of the cost of generation, if used to back up the grid (even the eco-optimist CCC puts the price at £342-1,290/MWh). That price will continue to rise. A recent study by the Geological Survey of Finland concludes that global mineral reserves only amount to 23 per cent the lithium, 21 per cent the nickel, 9 per cent the cobalt required for the first 8-10 years of decarbonisation. 

An easy fix here would be to force wind producers to pay for the cost of backing themselves up, and then have them compete against regular generators (with a carbon tax to incentivise low-carbon innovation, if need be). This suggestion was put forward by Professor Dieter Helm when he was invited to conduct the Cost of Energy Review for the UK Government in 2017. The key flaw in the plan, however, is that it would wipe out the UK wind industry — a politically terrifying prospect which explains why the learned professor hasn’t been invited back. 

The same rationale probably explains why companies took up CfDs they didn’t intend to fulfil — they calculated that the threat of a collapsing UK wind industry is sufficient to spook the Government into re-negotiation. 

Where does that leave us?

The most obvious implication is that energy is going to become increasingly expensive. Including system costs, the price to consumers of UK offshore wind is likely in excess of £200/MWh, whilst onshore is likely over £160 — respectively 400 per cent and 320 per cent higher than pre-crisis norms. Energy prices normalised anywhere near this level would be death knell to UK manufacturing and make households poorer. 

Perhaps just as concerning is what appears to be an “eco-bubble”, encouraged by false assurances and fuelled by a decade of cheap money and fossil fuels. The global “green bond market” reached £2tn last autumn, with Britain one of the leading issuers. With the price of renewables rising, subsidies can only mask their fundamental flaws for so long.

At some point, politicians are going to have to choose between propping up an industry which makes everyone worse off, and riding out the financial storm of writing-off decades of public and private investment. The sooner policymakers face up to this, the more damage can be averted. 

Responding to climate change is no simple business, but one thing is clear: the answer, my friends, is not blowing in the wind. 

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