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UK shows offshore wind more costly than solar

Thu Jun 27, 2013 11:49am EDT

(The author is a Reuters market analyst. The views expressed
are his own.)

By Gerard Wynn

LONDON, June 27 (Reuters) – Britain’s new support plans for
renewable energy confirm that offshore wind is the most
expensive green power technology, raising the question why the
country is placing so much faith in it.

Offshore wind is even more expensive than solar power, which
is not an energy technology where Britain has a competitive
advantage, as a northern country whose climate is dominated by
wet Atlantic weather.

The country has one of the best wind resources in Europe,
which has led to a belief by some that it makes more sense to
invest in offshore wind.

Such thinking is muddled because solar power is cheaper,
even in Britain, and will probably remain so.

Britain announced support rates on Thursday for the second
half of the decade which would provide offshore wind with a
20-25 percent premium to solar power.

The premium was even greater compared with other low-carbon
technologies including onshore wind, biomass, waste-to-energy
and hydropower.

That is before accounting for the astronomical grid
connection cost for offshore wind – by sub-sea cable. This cost,
about 10 times that for rival electricity generation
technologies, is subsidised separately and is far from
transparent.

The evidence for higher costs is a concern for Britain’s
plans, confirmed on Thursday, to install more offshore wind
capacity than any other renewable power technology by 2020.

The government says it supports offshore wind because of its
potential to help generate thousands of jobs, and to improve
Britain’s security of energy supply with low-carbon power.

NEW SCHEME

The plans were laid out in a shift from one form of
renewable power subsidy to another.

Until now, the country has supported large-scale renewables
(onshore and offshore wind, utility-scale solar and biomass)
through a tradable certificate system.

Under that scheme, renewable power generators get a certain
number of renewable obligation certificates (ROCs) per megawatt
hour of power generation, plus the wholesale power price.

The value of the ROCs is set by an administratively
determined purchase price (40.71 pounds for 2012/13) plus the
amount of redistributed penalty payments for non-compliance,
which adds roughly an extra 5-10 percent, making for a total ROC
value at present of about 42 pounds.

That scheme has sometimes been described as too complicated,
since there are various cogs in the support which make a
calculation of exactly how much generators earn less
transparent.

From 2014/2015 the Department of Energy and Climate Change
(DECC) starts to switch to a new scheme which is closer to the
feed-in tariff model credited with boosting renewable power in
other European countries like Germany.

That “contract for difference” scheme approach will see
generators get a subsidy equal to the difference between the
wholesale power price (which they get as well) and a so-called
strike price.

The strike price represents the total amount the renewable
energy generator earns, which is therefore made more clear.

 

WIND VS SOLAR

Under the new system of support, offshore wind will qualify
for a strike price of 155 pounds per megawatt hour (MWh), from
2014/2015, while large-scale solar photovoltaics will get 125
pounds, and onshore wind 100 pounds.

The rate for offshore wind is higher than any other
technology, with the exception of an experimental
waste-to-energy process called pyrolysis, and marine wave and
tidal projects.

Offshore wind will continue to earn the highest level of
subsidy – with the exception of wave and tidal – through
2018/2019. (See Chart 1)

The difference with pyrolysis, wave and tidal power is that
these are unproven and experimental, and will therefore see
negligible capacity installed by 2020 – an aggregate of about
0.4 gigawatts, according to the DECC figures.

By contrast, offshore wind will see the most capacity
installed of any renewable technology, at 8-16 GW.

The logic of selecting the most expensive technology for the
largest deployment is unclear.

It may be that DECC expects the costs of offshore wind to
plummet shortly thereafter, but that expectation is not
demonstrated.

Another argument may be that offshore wind can be installed
at scale; but there are utility-scale, low-carbon alternatives
including solar and biomass, while nuclear power is probably
cheaper after taking into account connection costs.

Perhaps the clinching argument is that offshore wind does
not obstruct people’s views – where nuclear and onshore wind are
subject to planning objections in a crowded country.

 

CONNECTION COST

Grid connection is not usually included in consultancy
estimates comparing the cost of electricity technologies.

That is probably because the grid connection is paid for
through a different mechanism from electricity, which is sold
directly by the power plant operator.

One study by Arup, however, has calculated the capital cost
of grid connection, although only for low-carbon generation, and
excluding offshore wind (whose grid connection is paid for
through a unique scheme).

The capital cost of offshore wind grid connection is shown
by data from the watchdog Ofgem.

Ofgem revealed last October that the expected, upfront
capital cost for connecting four offshore wind farms averaged
689,000 pounds per megawatt (MW).

That compares with the Arup report’s estimate for the grid
connection cost of onshore wind at 76,200 pounds per MW.
(“Review of the generation costs and deployment potential of
renewable electricity technologies in the UK”, Oct 2011)

It can be assumed that onshore wind grid connection costs
are more expensive than fossil fuels, given these projects are
often at more remote, windy sites.

Once these higher offshore wind grid connection costs are
accounted for it becomes clear that the technology is not
economic yet.

That does not mean that it will never work, only that it is
not worth massive investment today.

In its efforts to cut carbon, Britain can follow Germany
down the road of solar, or it can try to appease locals with
pay-offs for onshore wind, or it can invest in nuclear, biomass
or waste-to-energy.

(Reporting by Gerard Wynn; editing by Stephen Nisbet)

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