New Thinking: Energy economics up in air

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on Sep 12, 17 • posted by

New Thinking: Energy economics up in air

Failure to Forecast the Falling Costs of Offshore Wind and Rising Costs of Nuclear Need to be Investigated in Helm Review

Antony Froggatt, IGov Team, 12th September 2017

There can be no doubt that the Government’s announcement of the results of the 2nd round of auctions for allocating financial support scheme for renewables is a major boost for offshore-wind.  The Contracts for Difference (CfD), which is the fixed price that the developer will get paid regardless of the market price of electricity, for offshore wind was agreed at between £57.40-74.75/MWh,  which is a remarkable 50% below the similar auction in 2015, which itself was a significant fall from the contract prices of £140-150/MWh awarded in April 2014.  This fall in costs has come much faster than the Government and its advisors envisaged. For example, as recently as 2011, the Committee on Climate Change estimated that offshore wind, by 2030, would cost in the range of £85-135/MWh (with a 10% discount rate).

The rapid decline in UK offshore-wind costs is not unique and has been seen in other renewable energy and associated technologies.  An April 2017 analysis by the Institute for Energy Economics and Financial Analysis showed that off-shore wind contracts were awarded in Germany at €4.4 per MWh on top of the wholesale price, implying an all-in price of around €50/MWh, this is 70% cheaper than the last offshore feed-in tariffs awarded in Germany at €190/MWh.  Also in Germany, the results of the August auctions for onshore wind saw contracts agreed with an average price of €42.8/MWh, a more than 10% drop on the previous auction in May. While Europe is at the heart of the developments for offshore wind, India has seen tremendous falls in in its solar costs.  In the 2nd quarter of this year, the winning bid for an auction in Bhadla Solar Park, was US$24.4/MWh, making it now India’s cheapest source of new power.

The falling costs of renewables is a result of falling technology production costs, improvements in installation times and subsequently economic efficiencies and more recently changes in the way in which projects are ordered. In June the International Renewable Energy Agency, published an assessment of renewable energy auctions.  The report notes that auctions can set an expectation for future prices helping to drive down the price, which is likely to have been part of the cause of the drop in UK offshore-wind prices. However, it also cautions that there is ‘a risk associated with the fierce competition in the market and it is important to consider whether the drop-in prices is sustainable from an industry point of view’.

As many commentators are right to point out, the latest auction results clearly show that offshore-wind production costs are now well below that of nuclear power, as Hinkley Point C was awarded a CfD price of £92.5 (index linked) in 2013. Furthermore, the price guarantee for nuclear power is for 35 years, compared to 15 years for off-shore wind, so UK consumers will be paying even more for Hinkley’s electricity than wind power in the 2040s and 2050s. In fact, over the last decade the Government’s own estimated costs of nuclear power have increased almost as fast as the costs of wind have fallen.  In the 2008 White Paper on Nuclear Power the Government estimated that using a 10% discount rate the cost of nuclear produced electricity would be £38/MWh. As the latest version of the World Nuclear Industry Status Report shows, rising costs of nucleawallr new build is a global trend, with increases seen amongst others in China, France, Finland and the United States.  Therefore, there is little prospect that construction costs will start to level off, never mind begin to fall.

In August the Government announced an independent review of the cost of energy, headed by Professor Dieter Helm, whose remit it is make recommendations about how the decarbonisation objectives can be met, ‘in the power sector at minimum cost and without imposing further costs on the exchequer”. It will be vital that the review considers how and why energy cost forecasters have consistently got it so wrong in the case of offshore wind (and renewables in general) and nuclear power. Only then, can there be any confidence in its recommendations.

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