What Is The “Truth” About Offshore Wind’s Economics?
“As we learn more about the problems operating the electricity grid with increasing amounts of renewable power, we are also seeing more data showing how uneconomic offshore wind is without huge subsidies.”
We continue to be told that renewable energy is now just as cheap as fossil fuel energy but without the costs associated with carbon emissions and their long-term impact on climate change. It is this mantra that drives the push for more wind and solar energy projects. Wind projects increasingly are focused on the offshore because the wind tends to be steadier and stronger, which boosts the output of the turbines, while also enabling their remote placement since people dislike looking at them. Still, the best output for an offshore wind turbine is about 50% of its nameplate capacity, although some say it could go higher with larger turbines in the future. This greater efficiency has yet to be confirmed on a long-term basis, and it still does not solve the intermittency issue. Eliminating the eyesore issue is a major attraction for offshore wind, especially on the East Coast, as turbines can be placed further from shore.
The prospect of greater offshore wind turbine efficiency is why developers are happy to build them, although the tax credits are the key incentive. The stronger winds and the ability to construct larger wind turbines to harvest more power translates into more kilowatt-hours of electricity, which earns more tax credits to boost profits. However, such an ideal situation could be upset. Not because of what the developer of the wind farm is doing, but rather what other electricity generators do. That reality was driven home to us in reading Gretchen Bakke’s book, The Grid: The Fraying Wires Between Americans And Our Energy Future. In it she outlines challenges for the grid, especially given the growing supply of renewable power. This is a challenge for those who operate the grid, as they struggle to manage it efficiently, while keeping power generators happy, but it is also a warning about why our grid is becoming more fragile and increasingly subject to blackouts.
At the start of her book, Ms. Bakke tells about attending the GridWeek 2009 Conference in Washington, D.C., where she, and 4,000 other attendees from dozens of utilities, companies, government agencies and organizations from 22 countries, listened to the opening talk by President Barack Obama’s Secretary of Energy Stephen Chu, a Nobel Prize-winning physicist. Dr. Chu wanted to talk to these grid operators about how important it was to integrate more renewable power into the nation’s electricity mix to address climate change – then known as global warming.
Ms. Bakke begins by retelling Dr. Chu’s tales. “’On September fourth, 2008, at just before five P.M. in Alamosa County, Colorado, a thick layer of clouds swept across the sky.’” He continued, “’Five minutes later, there was a jagged but rapid eighty-one-percent drop in the electricity output from the solar farm that served the community.’” As Ms. Bakke wrote, “The more solar there is in any given mix of ‘fuels’ used to generate electricity, the harder it is to cope with the sudden arrival of a cloud, especially at five in the afternoon when things on the demand side have just shot through the roof.” Oops, not a good time to lose power.
Dr. Chu continued his presentation. “’Four months later, on January fifth, 2009, in the Columbia River Gorge, the wind stopped blowing quite suddenly and didn’t start again for three weeks.’” After pausing to allow the audience to absorb the idea of the wind not blowing for three weeks, Dr. Chu went on. “’Meanwhile, all twenty-five of the Gorge’s wind farms lay still.’” Ms. Bakke wrote: “No wind means no generation, and no generation means no power.” How are people depending on this electricity supposed to survive for three weeks? Four hours of battery backup will not help for three weeks. Only fossil fuel-generated power will fill the void.
Both of Dr. Chu’s stories highlight the intermittency problem of renewables. But before we address what is suggested as the answer, Ms. Bakke tells another story that highlights not only the operational challenges for grid operators of intermittency, but also the policy problems coming from the incentives for renewables.
The story involves the wind farms in the Columbia River Gorge, which also has an extensive hydroelectric infrastructure that was built in the 1930s while trying to pull America out of the Great Depression. Prior to the arrival of wind farms, this hydroelectric system (Grand Coulee and Bonneville dams, along with other smaller dams) met 98% of the Pacific Northwest’s electricity needs. Now the region has all these wind farms, too. With Washington, Oregon and Idaho only using 15% of the power produced in the region, the rest is shipped downstream to other consumers. That is why the prospect of three weeks without wind was so frightening.
Ms. Bakke imagines Dr. Chu discussing the afternoon when a storm rolls out of the East and sends a thousand wind turbines into overdrive producing power. As she imagines Dr. Chu telling the audience, “’Suddenly, almost two nuclear plants’ worth of extra power was sizzling down the line – the largest hourly spike in wind power the Northwest has ever experienced.’” The problem is that this is happening in May, and in Oregon at that time, it is still raining, and that water is mixing with the snow runoff from the Cascades to set the rivers roaring. The reservoirs behind the dams are filling and the turbines are running at capacity. If they do not run, there are only two options: allow the reservoirs to overflow and flood homesteads, highways, and towns along the river, or let the water out through spillways.
The second option sounds like the ideal solution, but it happened to be illegal. In May, the fishlings are running. These are the baby fish that mature in two to three years into beautiful salmon. Opening the spillways would decimate the future salmon population, ravishing the commercial fishing industry and potentially wiping out a fish species.
The grid operator was left with few options. This was exactly the predicament facing the Bonneville Power Administration (BPA) that operates the grid in this region. They needed to get rid of the extra power. They called up the owner of the wind farms – Iberdrola, the Spanish company that at the time was the second largest wind company in the world – and asked them to shut down their turbines. The problem is that as a public company, Iberdrola’s job is to earn a profit. Stopping producing power would defeat that objective. If the grid cannot handle the power, that is the grid operator’s problem. If the regulators have a problem balancing power supplies, that is the regulator’s problem. If the interregional systems operator (ISO) cannot handle so much power, that is the ISO’s problem. Everything is always somebody else’s problem.
As Ms. Bakke pointed out, the federal subsidies drafted by Dr. Chu’s department that had helped Iberdrola build its 3,000+ U.S. wind turbines are only earned when the turbines are producing power. Moreover, the federal guidelines require the operator to pay back the money if their turbines are ever turned off. And many times, the optimal solution for the grid is to turn off wind turbines or solar panels. That is just not a viable solution, further highlighting the challenge of integrating renewables into the electricity grid.
Which brings us back to the economics of offshore wind. After the Biden administration’s recent announcement of a goal to install 30,000 megawatts (MW) of offshore wind, Robert Bryce, who has written extensively about renewables and wind energy, authored a column in The New York Post in which he highlighted the cost to the middle- and lower-income families of this expensive offshore wind power being foisted on them. As Mr. Bryce pointed out, the Energy Information Administration (EIA) put out its latest assessment of the levelized cost of energy (LCOE) that showed new offshore wind will cost $121/MW in 2026 with government subsidies, or $150/MW without, compared to electricity produced from a natural gas combined cycle power plant at $37 or $45/MW, depending on whether it benefits from subsidies or not. Power produced from an “expensive” source, nuclear, would cost half that of offshore wind.
When one reads the EIA report Mr. Bryce references, there are two interesting commentaries in the discussion of LCOE that are germane to this discussion. They reference the danger in comparing the LCOE of different power supplies, especially those that are dispatchable versus those that are not.
“The duty cycle for intermittent resources is not operator controlled, but rather, it depends on the weather, which does not necessarily correspond to operator-dispatched duty cycles. As a result, LCOE values for wind and solar technologies are not directly comparable with the LCOE values for other technologies that may have a similar average annual capacity factor.”
Later the EIA made a point about the difference in value to electricity grids from different sources of power. Dispatchable power is of greater value than intermittent power.
“Because load must be continuously balanced, generating units with the capability to vary output to follow demand (dispatchable technologies) generally have more value to a system than less flexible units (non-dispatchable technologies) that use intermittent resources to operate. The LCOE values for dispatchable and non-dispatchable technologies are listed separately in the following tables because comparing them must be done carefully.”
We know that many environmentalists and supporters of renewable energy ignore these realities when they argue how cheap renewable power has become. If power is so cheap, why are the states leading in the amount of mandated renewables seeing rising electricity bills? It is because the cost of backup power and the expense to integrate and manage intermittent power on the grid is never factored into the cost of renewable power. Promoting the fallacy of cheap renewable power is critical for those arguing for a revamping of our power system. Those promoters also ignore the cost of expensive power, as Mr. Bryce points out about East Coast offshore wind, because it overcomes other objections. Maybe if people understood the actual cost data for renewables, we might avoid serious economic damage as we work to develop a cleaner grid.
In December 2018, two United Nations Development Programme officials blogged about climate change and poverty. The opening of their blog stated:
“Today over 2 billion people - one third of the global population - are poor or near-poor and face persistent threats to their livelihoods, including from climate change. Estimates indicate that by 2030 more than 100 million people could fall back into extreme poverty due to climate change, while over 200 million people could be displaced due to more frequent and severe climatic disasters.”
How many of them will be Americans pressured by soaring electricity bills?
Exhibit 1. Beatrice Wind Farm Off Scotland’s Coast SOURCE: energyvoice.com
Since offshore wind is destined to be the East Coast’s new power supply, we figured we better understand the economics since our summer home’s electricity bills will be impacted – and we doubt they will go down. With guidance from a blog in Europe, we were directed to the financials for the U.K.’s Beatrice Offshore Windfarm Limited for the fiscal year ending March 31, 2020. The last of the 84 turbines in the wind farm became operational in May 2019, so the 2020 full-year financials are reflective of a fully operational offshore wind farm. Full year revenues were £372 ($513) million, of which £281 ($387) million was government subsidies from the Contracts for Difference (CfD) fund, details for which are contained in the Revenue note to the financials and are addressed later.
Exhibit 2. Where Beatrice’s Revenues Come From SOURCE: Beatrice Offshore Windfarm financials
With 2,382 gigawatt-hours (GWh) of power, the sale price works out to £38 ($52) per megawatt-hour (MWh) along with a subsidy of £118 ($163)/MWh. The cost of goods sold plus operating and other expenses, excluding depreciation of £89 ($123) million, total £62 ($85) million, or £26 ($36)/MWh. This cost profile raises serious questions about the claims by the U.K. wind industry that offshore wind farms are viable at below £50 ($69)/MWh. We have not accounted for the cost of financing the wind farm’s construction and taxes on its profits, nor the fact that it employs zero people, thereby reducing operating costs.
Another key consideration is the cost of constructing the wind farm. The total investment in property, plant and equipment was £2.2 ($3.0) billion. With a capacity of 588 megawatts (MW), based on each of the 84 turbines having a nameplate generating capacity of 7 MW, this means Beatrice had a capital cost of £3.7 ($5.1) million/MW. Currently, the U.K. Department for Business, Energy & Industrial Strategy (BEIS) estimates offshore wind farm capital costs are £1.6 ($2.2) million/MW. It is questionable if capital costs have fallen 57% since Beatrice began being built in 2016.
In fact, these financials support the conclusions of Professor Gordon Hughes’ study of the offshore wind farm economics for projects in the U.K. and Denmark. He concluded that capital costs have not declined as claimed by promoters and that these farms are unprofitable without subsidies. In one paper he published, he showed that the Kentish Flats wind farm, at the time one of the largest and oldest offshore wind farms in the U.K., was barely profitable with its subsidy. Without subsidies, it would have lost £1 ($1.2) million in 2017. As Professor Hughes and others in the U.K. have pointed out, BEIS would have a serious problem if it published realistic cost estimates, as it would destroy the myth of cheap offshore wind power on which the renewable energy push is based.
Very recent data shows the madness of these offshore wind farm subsidies on U.K. power customers. A recent compilation of the CfD payments from 2016 through 2021 to date show the explosion in payments, the bulk of which are going to offshore wind generators. In 2020, CfD payments increased by £0.7 ($0.97) billion to £2.3 ($3.0) billion. That is in addition to the £6.0 ($8.3) billion in Renewable Obligation Certificates (ROCs) that generators of approved renewable power earn that can be traded to companies desiring to show that they have met their clean power commitments. U.K. electricity customers are also paying £1.0 ($1.4) billion in annual capacity market fees ensuring that they have power when it is needed. These renewable power subsidies are costing the typical customer £350 ($483) a year in additional electricity costs, a figure that is rising at the rate of £25 ($34) per year.
Exhibit 3. How Renewable Subsidies Grew In U.K. SOURCE: GWPF
The research by the Global Warming Policy Foundation (GWPF) shows that six offshore wind farms are earning £1.6 ($2.2) billion annually in subsidies. One of the six is the Beatrice Offshore Windfarm that we highlighted above. For calendar 2020, it received £288.5 ($398.2) million in subsidies, slightly more than it reported in its financials reviewed above.
Exhibit 4. Subsidies For Six Leading Offshore Wind Farms SOURCE: GWPF
Another perverse development for offshore wind is the impact of ESG (environmental, social, and governance) pressures on international oil companies, pushing them to invest in green energy. A skill set for these companies is offshore wind, which has many similarities to offshore oil and gas. To demonstrate their “green” credentials, the international oil companies were the big bidders and winners of the most recent offshore U.K. wind leases. The traditional wind developers lost out as bid prices soared to two or more times the average bidding prices from earlier leases, making the projects uneconomic according to the traditional wind developers. Is this the result of “virtue signaling” by the international oil companies? Who wins and who loses? Shareholders are probably looking at very low returns on investment projects, while electricity customers brace for higher power bills.
The U.K. offshore wind farm financials help explain why the Biden administration is demanding extended and enhanced subsidies for renewables at a time when we are told they are cost-competitive with fossil fuels. The secret is they are not. Without healthy subsidies, offshore wind farms will not be built.