U.K. Embraces Offshore Wind, But Will Citizens Be Happy?
“Prime Minister Boris Johnson announced a significant expansion of the country’s effort to generate all electricity from offshore wind. The problem is expense and intermittency. We look at the issue and the role of subsidies. ”
On October 6, U.K. Prime Minister Boris Johnson delivered his keynote speech at the virtual Conservative Party Conference. In the speech, the Prime Minister discussed both his and the nation’s recovery from Covid-19, and the need to not just return to pre-Covid-19 conditions, but to build a better economy and society. From building 48 new hospitals, recruiting 50,000 new nurses and 20,000 new police officers, while also beefing up the country’s ports by 2030, the most dramatic announcement was about plans to convert the nation’s power system to electricity generated from offshore wind. As pointed out by some critics, the pledge for offshore wind generation was firmly imbedded in the Party’s election platform of last year.
In laying out the plan, the Prime Minister referenced British nautical history, and he had other wind-related references. He said:
“And there is one area where we are progressing with gale force speed; and that is the green economy, the green industrial revolution that in the next ten years will create hundreds of thousands if not millions of jobs.
“I can today announce that the UK government has decided to become the world leader in low cost clean power generation – cheaper than coal, cheaper than gas; and we believe that in ten years-time offshore wind will be powering every home in the country, with our target rising from 30 gigawatts to 40 gigawatts.
“You heard me right. Your kettle, your washing machine, your cooker, your heating, your plug-in electric vehicle – the whole lot of them will get their juice cleanly and without guilt from the breezes that blow around these islands.
“We will invest £160m in ports and factories across the country, to manufacture the next generation of turbines.
“And we will not only build fixed arrays in the sea; we will build windmills that float on the sea – enough to deliver one gigawatt of energy by 2030, 15 times floating windmills, fifteen times as much as the rest of the world put together.
“Far out in the deepest waters we will harvest the gusts, and by upgrading infrastructure in such places as Teesside and Humber and Scotland and Wales we will increase an offshore wind capacity that is already the biggest in the world.
“As Saudi Arabia is to oil, the UK is to wind – a place of almost limitless resource, but in the case of wind without the carbon emissions, without the damage to the environment.
“I remember how some people used to sneer at wind power, twenty years ago, and say that it wouldn’t pull the skin off a rice pudding.
“They forgot the history of this country. It was offshore wind that puffed the sails of Drake and Raleigh and Nelson, and propelled this country to commercial greatness.
“This investment in offshore wind alone will help to create 60,000 jobs in this country – and help us to get to net zero carbon emissions by 2050.
“Imagine that future – with high-skilled, green-collar jobs in wind, in solar, in nuclear, in hydrogen and in carbon capture and storage. Retrofitting homes, ground source heat pumps.”
In mentioning the clean energy industries that would power job creation, the Prime Minister cited one energy source that is not receiving much, if any, attention ‒ nuclear. There is actually a lot happening with nuclear that is worthy of study, but that’s for another day. In the meantime, we will focus on offshore wind and what Mr. Johnson’s plan may mean for U.K. ratepayers, and it may not be good.
Professor Gordon Hughes, professor of economics at the University of Edinburgh, advised the World Bank on energy and environmental policy and has spent the last 18 months looking at the audited accounts of the capital and operating costs for 350 of the larger onshore and offshore wind farms (> 10 megawatts of generating capacity) built in the U.K. 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. The study will be in two volumes with the first dedicated to analyzing the wind farms of Denmark, and the second to U.K. wind farms.
Preliminary results of the U.K. analysis were presented in a paper Prof. Hughes published in August and demonstrated that offshore wind farm costs had not declined as much as claimed. The study’s conclusions were used to refute the analysis that the low power costs for the most recent U.K. offshore wind license awards were really speculative bets placed by developers that future wind power prices would rise, allowing them to reject the current price agreements with little financial repercussion, in order to capitalize on the higher-priced electricity deals. This strategy is further supported by the realization of there being virtually no penalty for failing to build the licensed wind farms.
Prof. Hughes told a reporter for The Telegraph newspaper that based on his data, the average capital costs per megawatt (MW) of capacity have doubled since 2008. His analysis of accounts also found that the typical operating costs per MW have quadrupled over the same period. As a result of increasing costs and lower yields as the turbines age, the revenues earned may be less than the operating costs after the expiration of contracts guaranteeing above-market prices.
What Prof. Hughes says his data shows is that actual capital costs per MW of generating capacity to build new offshore wind farms increased substantially from 2002 to about 2015, after which they appear to have remained fairly constant. Capital costs will rise if, and when, wind farms require turbines to be located on floating structures. Prof. Hughes cautions that reports of falling costs for building new offshore wind farms by the mid-2020s are likely unreliable, as well as being incomplete. Final costs tend to be significantly higher, so he gives little credence to forecasts of lower future costs.
Wind turbine manufacturers and wind farm developers 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 to improve financial projections. However, the reliability of new turbine generations has led 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. This trend has boosted the maintenance cost, while also leading to reduced performance. When the wind farms are all floating and located further from shore, maintenance will become much more challenging, potentially leading to reduced output, while also becoming more expensive.
Exhibit 1. Wind Turbine Performance Helped By Size SOURCE: The Telegraph
The Telegraph article referenced figures suggesting that U.K. taxpayers may be facing an incremental £27 ($34.9) billion per year in costs for this offshore wind effort in the form of subsidies to operators of standby power generating plants to provide electricity when the wind doesn’t blow and to wind farm operators when they produce too much wind that is not needed. There also will be costs to bailout failed offshore wind projects and potentially to protect electricity buyers from escalating power prices.
Some recent data from the financial results of several wind farms are eye-opening. Kincardine Floating Windfarm, the largest offshore floating wind farm in the world, and located off the coast of Scotland, has just announced its annual results. With a capacity of 50 MW, the windfarm is tiny, but when it was first announced in 2013, it came with a £250 ($323) million price tag, making its generating capacity eight times the price of a gas plant, while potentially running only half as much.
The wind farm is hopeful of being finished and will start up before the end of 2020. It has been delayed by Covid-19 issues. Unfortunately, its cost has risen. First to £350 ($452) million, and it is now reported that management thinks the final bill could end up at £500 ($646) million. That would amount to £10 ($13) million/MW, or nearly seventeen times the cost of a gas turbine MW.
Looking at the financial performance of the U.K.’s most efficient offshore wind farm, Kentish Flats, located just outside the Thames estuary, north of Whitstable, one is troubled by the implications for consumers. The wind farm is owned by Swedish conglomerate Vattenfall, and has low operating costs because it is situated in shallow waters.
Kentish Flats is not a new wind farm. In fact, it was one of the U.K.’s first offshore wind farms, commissioned in 2005. Management estimated that the useful life of their wind turbines is 20 years, so the wind farm may close within the next few years. It is probably no coincidence that 20 years is also the period for which the operators can claim subsidies. Just how generous subsidies are is seen from the wind farm’s 2017 results. In that year, it made a profit before tax of £11 ($14) million, but as the notes to the accounts reveal, it also received £11.4 ($14.7) million in subsidies. A further £0.5 ($0.65) million of grants from the U.K. government are being written off each year. In other words, without the subsidies and grants, Kentish Flats would have lost £1 ($1.29) million. Remember, this is the U.K.’s lowest-cost offshore windfarm.
We learn from its 2018 financial results that Kentish Flats is selling electricity at prices well above market. Between 2017 and 2018, electricity prices rose from £95 ($123) to £122 ($158)/MWh. One would have thought that the wind farm would have been quite profitable. According the researcher Andrew Montford, that change was largely reversed last year, and the wind farm only managed to break even before subsidies.
Since the wind farm was built 15 years ago, the cost of building and operating an offshore wind farm in the U.K. has soared, as reported by Prof. Hughes. Reportedly, all wind farms commissioned since 2010 have cost more than double the cost of Kentish Flats. Yet, without its subsidies, Kentish Flats is marginally profitable at best. If it were unable to sell its power output at above market prices, it would be a money-loser.
To better assess the offshore wind challenge, we looked to the most recent levelized cost of electricity (LCOE) prepared by the investment bank Lazard. We have compared the figures for gas combined cycle (GCC) generation versus offshore wind. We have also scaled the offshore wind up to the same power output as the GCC, by assuming a linear relationship.
Exhibit 2. Offshore Wind Is A Very Expensive Option SOURCE: Lazard, PPHB
On that basis, the LCOE for offshore wind would be $164/MW, or nearly 2.5 times the high LCOE for GCC, or 3.7 times the low LCOE figure. Will ratepayers be willing to pay that much more for their clean power, or will they demand a different solution? The problem is that by the time this cost increase becomes evident to ratepayers, or possibly to taxpayers who could be footing the bill, it may be too late to correct the policy course. Failure to prepare a true cost-benefit analysis before embarking on this path could be devastating for U.K. citizens and the country’s economy. Digging out of this policy hole may be impossible. On the other hand, if a mandate to follow this clean energy path is inflicted on every other country, all countries will be equally disadvantaged. Under such a scenario, those countries that are early adaptors may come out better-off by having a competitive advantage, at least for a short while. Those countries that don’t go down the offshore wind power path may wind up with lower energy costs, giving them a true competitive advantage. They may be the ultimate winners. Is this why climate change has become a crisis?
No sooner had we finished this article that we learned National Grid, the U.K.’s primary power provider, announced that there was a risk of blackouts due to a drop in wind-generated power and outages at a couple of nuclear and natural gas plants. National Grid is estimating that wind’s share of power may drop as low as 9% on Saturday and 10.5% on Sunday (last weekend), before climbing back up to 51% on Monday. At peak, wind has supplied as much as 60% of total power. This variability demonstrates how challenging it will be for managing the grid, and why back-up power sources and storage will become much more important.
On Friday, the National Grid Electricity System Operator tweeted: “Unusually low wind output coinciding with a number of generator outages means the cushion of space capacity we operate the system with has been reduced. We're exploring measures and actions to make sure there is enough generation available to increase our buffer capacity.”
This is the second warning from the grid operator in a month. In mid-September it warned that its power reserve buffer had fallen below 500MW and that it might need to call on more power plants to help prevent a blackout. This notice was later withdrawn.
On the other side of the equation, earlier this year during the national lockdown, the grid was inundated with extra power. That forced National Grid to pay £50 ($65) million on the second May Bank Holiday weekend (May 25th) to get power producers to switch off their wind and solar farms. The company spent almost £1 ($1.3) billion for emergency back-up power to prevent blackouts during the first half of the year. It also paid EDF Energy to cut by 50% the amount of power generated at its Sizewell B nuclear plant.
The National Grid warning prompted Tom Greatrex, chief executive of the Nuclear Industry Association in the U.K., to say that the latest warning “underscores the urgency of investing in new nuclear capacity, to secure reliable, always-on, emissions-free power, alongside other zero-carbon sources.” We suspect his plea landed on deaf ears. With the agenda laid out by Prime Minister Johnson, ignoring increased nuclear power investment may be a classic missed opportunity for a stable, low-cost energy future for the U.K.