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Renewables: ‘an expensive disaster’

By Dave Elliott

We are spending too much on renewables and undermining competitiveness, so says a report Central Planning with Market Features: how renewable subsidies destroyed the UK electricity market, published by the Centre for Policy Studies. In it Rupert Darwall  says that recent energy policy represents the biggest expansion of state power since the nationalisations of the 1940s and 1950s, and is on course to be the most expensive domestic policy disaster in modern British history.

Darwall claims that ‘the electricity sector is being transformed into a vast, ramshackle Public Private Partnership, an outcome that promises the worst of both worlds – state control of investment funded by high cost private sector capital, with energy companies being set up as the fall guys to take the rap for higher electricity bills’. He says there are two choices: if renewables are a must-have – although no government has made a reasoned policy case for them – then nationalisation is the answer.

‘Nationalisation removes political risk thereby cutting the sector’s cost of capital. Together with the savings from abolishing retail competition, it would cut average bills by around £72 a year now, and £92 from 2020’. The other choice is that the state cedes control, ditches the renewables target and returns the sector to the market: ‘Ditching the renewables target and returning the sector to the market would save households around £214 a year, assuming gas replaces renewable power. The saving would be greater using coal, which is now around 45 per cent cheaper than gas. This option would depend on securing a permanent opt-out from the EU renewables directive and any successor policy imposing targets on individual member states’.

It’s pretty clear which Darwall favours. He lambasts renewables as expensive and unworkable. He says ‘the costs of intermittent renewables are massively understated. In addition to their higher plant-level costs, renewables require massive amounts of extra generating capacity to provide cover for intermittent generation when the wind doesn’t blow and the sun doesn’t shine’. That’s a bit odd: we don’t need new capacity to balance renewables, we already have it in the existing system, although some new (better) plants may have to be built as old plants retire and other balancing services added as renewables expand. However he says ‘without renewables, the UK market would require 22 GW of new capacity to replace old coal and nuclear. With renewables, 50 GW is required, i.e. 28 GW more to deal with the intermittency problem’.

The 50 GW figure seem to be the target for the new Capacity Market, but that is mostly to come from existing plants, signed up to provide balancing if needed. Indeed that has been something some Greens have objected to – they say there ought to be more new projects including more on the demand side, not just backdoor support for gas, coal and nuclear. However Darwall sees renewables as not worth the effort and expensive to balance in the current system: ‘Massively subsidised wind and solar capacity flood the market with near random amounts of zero marginal cost electricity. It is therefore impossible to integrate large amounts of intermittent renewables into a private sector system and still expect it to function as such’. As a result, the State has stepped in with ‘a patchwork of interventions’ to maintain security of supply. ‘Because prices and therefore revenues are dependent on continued government interventions, private investors end up having to price and manage political risk, imparting a further upwards twist to electricity bills’.

It is true that providing balancing adds to the cost, but not much. Indeed DECC says that the first contracts under the UK’s 50GW Capacity Market should only lead to a £11 increase in average annual domestic electricity bills and earlier it had put the total likely rise up to 2030 at £13. Darwall however just sees more and more costs, including: £8 billion for grid upgrades for on land wind and £15 bn for offshore wind ‘a near trebling of grid costs’. Overall he puts the net annual capital cost of renewables, including grid links and balancing, but less the £3 bn it saves in fossil fuel costs, at £6bn. He doesn’t see that as value for money…

Interestingly, as I reported in an earlier blog, the Citizens Advice Bureau did not think the proposed 320 MW Swansea Tidal lagoon was cost effective either. Strangely that project, small though it is, and far from yet agreed, featured heavily in the last Budget announcement. Perhaps the idea was to appear green while keeping the focus off the government’s massive subsidy for the £24 bn Hinkley nuclear plant – a project with a much higher capital cost/MW than the lagoon (although also a higher load factor). If that was the plan, it didn’t work! With Austria and Luxembourg, amongst others, objecting to the EC’s acceptance of the UK’s nuclear subsidy, the Hinkley saga continues…

However so do claims that renewables are costing too much, with the Office for Budget Responsibility reporting that the cost of environmental levies to support projects such as wind farms, solar panels and biomass plants will rise from £3.1 billion in 2014 to £9.4 billion by the end of the decade. The Telegraph recycled estimates from 2014 which claimed that the policies then accounted for 5% of energy bills – equivalent to £68 a year – and that this would rise to 15% of an annual energy bill by 2020, equivalent to £226. By contrast, the government had presented figures showing that, while its green energy programme (including the RO, FiTs, EMR, energy efficiency and smart meters) would add £286 to typical annual bills by 2020, they would save £452, a net saving of £166, or 11%:

With a renewed Tory government in power might we expect change? Cost will inevitably remain a key issue. On that basis renewables are looking good. Three PV projects were offered a £79/MWh CfD strike price (two hopefuls even got contracts at £50/MWh but are unlikely to proceed ), some on-land wind schemes came in at under £80/MWh, and the tidal lagoon developer has claimed that their proposed next, larger, project (a 2.8 GW lagoon off Cardiff), could deliver at maybe £90/MWh.

By comparison the Hinkley £92.5/MWh CfD, for power, with luck (if they manage to forge the pressure vessel right this time), sometime in the late 2020s, is beginning to look like a bad deal. Maybe time for a Britexit on this.

Certainly it’s odd, or at least premature, to be cutting support for offshore wind and solar farms just when they are nearing market competitiveness, while subsidizing nuclear heavily, when its costs seem to be rising. We ought to be able to do better than this and develop effective and consistent support systems for moving to a sustainable future. I will look at some of the options in my next post.

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