Swedish developer Vattenfall spent years developing plans for almost 140 turbines across a 725km-squared patch [of the North Sea off East Angkia], each one up to 350 metres high and with blades spanning up to 300 metres wide. Last month, it stopped the project. Surging costs of everything from turbines to labour and financing rendered it unviable given the low price locked in for its electricity, the company said.
I have heard some suggest that this means renewables are now dead. Maybe that is what the government would like us to think. But it is not true. The same article notes that the cost of renewables is still falling:
Nothing else matches those costs. So what is happening?
At the core of the problem is the price guarantee that the government provides to those developing offshore. To reduce their risk they sell their energy to a U.K. nationalised entity called the Low Carbon Contracts Company. The idea was pretty straightforward. To reduce risk a company could sell its renewable power on a long term contract and so effectively guarantee itself a rate of return on an investment in the North Sea if it could build the installation to budget and keep it running efficiently thereafter.
And now the theory has gone wrong for three reasons. First, inflation on build costs for projects not yet on stream was not properly allowed for.
Second, the contracts did not allow for massive increases in interest costs.
Third, the price has not increased to reflect new market rates.
What has failed then is the contracting process, and not renewables themselves.
Or to put it another way, whilst Sunak stuffs money in the direction of nuclear and carbon -based fuel the financing that permits renewables has mysteriously been ground to a halt for no good reason.
I wonder why that might be?
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“I wonder why that might be?”
Because we don’t live in a proper democracy where voters understand how the monetary system works. Lazily they defer this understanding to politicians who on the whole don’t understand either or do but use their political post to enrich themselves and their chums. In other words it’s a vicious circle of decline where serious problems facing the country don’t get faced. All that can be done is to plug away trying to turn the country into a proper democracy.
We have no energy security strategy. We have a neoliberal rigged ‘market’ to guarantee that a monopoly industry looks like a free market to the consumer – and they can’t even conduct that con without falling on their face: which allows the monopoly producers to make obscene profits in the middle of a cost of living crisis. Led by a government peddling a line that the tough times are nothing to do with them. We can’t wait until next year to remove these pestilential parasites from power. Parliament requires to remove them now. Of course it will not; and the consequences are therefore bad.
I agree with this “What has failed then is the contracting process, and not renewables themselves”.
The rest needs a bit more nuance. In most countries, large-scale renewables are built using a combination of auctions (companies bid on the basis of the price of a given MWh from the proposed renewable project to get the right to build the project) coupled to CfDs (usually symmetric). This worked well when interest rates were stable because most large projects have a debt/equity balance of 80/20. Given this stability, the timing difference between win auction and build plant (often a couple of years) did not matter. It does now. A combo of the imbeciles in the ECB raising interest rates, coupled to the impact of raising energy prices on raw materials (an off-shore wind turbine uses many hundreds of tonnes of steel) leads to the disparity mentioned by Richard. Yes, the contracting system has failed.
However, there is another problem specifically with the CfD. CfDs are a crude attempt to integrate a fixed price/capital intensive generation system with an electricity market that uses marginal pricing to arrive at an electricity price. Marginal pricing depends on generation having an input cost (i.e. fuel). Provided most generation uses fuel, marginal pricing works well. However, generation is transitioning from fossil-based systems to renewable-based systems, that have no input cost.
One key assumption with respect to CfDs is that wholesale prices, set by marginal pricing, oscillate around the auction strike price/CfD price (they are the same). The problem is that as renewables account for more electricity in any system (regional, national, supra-national) surpluses start to occur (roughly at the point when renewable account for about 30% of absorbed electricity). These surpluses drive down wholesale electricity prices. Furthermore, the surpluses grow in a non-linear fashion, 7% @ 40% (RES absorbed), 40% @ 80% (RES absorbed into a given electrical system). For the avoidance of doubt, I’m not making assertions, this has been and can be easily modelled.
This means that as RES grows, wholesale prices on a regular basis fall below auction strike price/CfD price. Which means that the Low Carbon Contract Company goes into deficit. The people that cover the deficit are … UK serfs. In crude terms, Uk serfs pay for the same renewable electricity twice: once for the energy, a second time to cover the LCCC deficit.
There is a simple solution to this: run auctions as now (with a adjustment mech’ to cover changes in interest rates/equipment costs) and have all RES selling into the market at the strike price. Split the market (fixed price/RES and marginal price/fossil). In terms of the UK, there is a low-level argument going about electricity market reform. At the moment most participants are still worshipping at the marginal-pricing altar. Within the European Commission a number of senior people agree with the split the market approach, but only privately. Pathetic.
Thus I agree, the process, auction-to-project-commissioning, needs to have an adaption mechanism to cover interest rate changes and equipment cost increases changes. The bigger econometric/political problem is elec market reform, without which UK serfs will pay twice for the same electricity with the vile-tories shouting from the wings that RES is too expensive. Remind me who concocted the idea (& need) for “electricity markets” in the first place?
I knew I was pushing at the boundaries of simplification.
Thanks for adding that.
Yes, CfDs are a big issue, with big flaws in the system, exacerbated by the energy price crisis I recall (I do not have ready access to the background, but it will be in your archive Richard), and that has been discussed here before. It is all part of the utter mess the Government has made, not just of renewable financing, but our whole energy security policy: as I argued here separately. This bubbling has to stop now. Domestic energy isn’t a market, it isn’t a marketplace, it can’t be faked. Period.
Bubbling? Bungling! I bubbled the bungle.
Greatly Bungling or Greater Bungling is a more apt description for Great Britain. Where I would ask are the economic professors in the UK advising on the best means to increase Britain’s reliance on the use of renewables? Of course all this abomination of a government can come up is with excuse after excuse. Here’s Michael Gove, for example:-
“I think the people of this country have had enough of experts with organisations with acronyms saying that they know what is best and getting it consistently wrong.”
https://www.london.edu/think/who-needs-experts
Well very obviously Michael Gove your cabinet of experts will be getting the old heave-ho soon for being totally useless from voters who now recognise you had minimal expertise in anything in the first instance!
One of the elements largely missing from the new energy infrastructure is the ability to store excess capacity. There are so many options: in batteries, manufacturing green hydrogen, in pumped storage or lifted weights, or even as heat stores. Adequate storage would have the dual wins of stabilising the price to some extent, and covering periods where demand exceeds generating capacity.
I may be wrong, but I suspect there could also be mileage in converting our domestic gas supply back from natural gas to hydrogen. Whilst not a particularly efficient option, it does have the advantage of leveraging a lot of the existing infrastructure, and perhaps not meeting much consumer resistance. I’m old enough to remember the switch from coal gas to natural gas, so I know such a project is possible.
Storage is vital and I suggest we need a national co-ordinated plan. The investment in plant will be expensive but the fuel -if solar, wind or tidal-is free.
I don’t know about hydrogen but I don’t think it is easy to use domestically. Others may know better.
Responding to Mr Kim and Mr Stevenson, in my comment I noted:
“Furthermore, the surpluses (due to renewables) grow in a non-linear fashion, 7% @ 40% (RES absorbed), 40% @ 80% (RES absorbed into a given electrical system).”
Both of your comments are correct. Intra-day storage can use a mix of batteries, pump storage and other tech. The problem is when (the operative word) there are massive intra-day and multi-day surpluses. These are most likely to occur in spring and autumn (sunny, windy days – June this year?). The only system (at the monent) that scales is electrolysers and hydrogen. The existing gas grid can be repurposed and the UK has no shortage of salt caverns. Sadly, it does have a shortage of people in gov’ that are able to initiate planning and stick with the plan that is developed. Furthermore, thinking about energy (note that word) is usually done in silos – the elec silo, the gas silo, the H2 silo. We proposed back in 2019 a converged elec and gas system(the latter migrating to H2) – that would be operated in an intergated fashion, each vector providing support to the other. Seemed obvious at the time, but apparently the pointy heads in gov (Uk and EU) seem to be a bit slow on the uptake. Funny that.
I, for one, will be avoiding having hydrogen within my household. The molecules of the gas are small enough that embrittlement of fittings and pipework is a real issue, so leaks will be a much bigger risk and problem than with methane which we have used for so many decades. Hydrogen burns with a flame which is almost colourless in daylight and is extremely explosive which increases the risk factor.
If technology is developed such that hydrogen becomes economical enough to work out well for longer-term energy storage (it is a pretty crappy storage medium), then fair enough, but let’s keep it outside our houses!
Ammonia probably a better energy storage medium as it has such greater density, but we certainly don’t want that in houses, either! All-electricity is the way to go, however it is generated.
Unlike Richard, I’m a big advocate of nuclear power (and think we will ultimately come to rely on it if the climate enters a particularly chaotic state as seems almost inevitable). I’d be happy with renewables if we could resolve the storage problem but we certainly need something other than burning carbon-based fuels as a standby.
As it stands, we’re left with fingers-crossed, hoping for a few technological breakthroughs which isn’t a proper plan.
Mike Parr you should be an adviser to OFGEM, maybe then we’d get fair pricing for all energy.
However I suspect many in OFGEM either cannot or won’t listen to good advice or even other viewpoints
Replying to Mr Mariner ref H2.
Town gas, used extensively throughout Europe in the period 1850 through to circa 1970 was 50% H2, most of the pipes were cast iron, which is highly susceptible to embrittlement. However gas pressures in the home are circa 75 millibars. If your bicycle tyres are at that pressure they are… flat. I appreciate your concerns, but H2 fuel cells and indeed H2 boilers fit for home use already exist. If you look at modern gas fittings in the home, most are copper with compression fittings. I would not claim that all problems have been ironed out – but most have.
At the level of infrastructure, 40% of high pressure gas pipes in the North Sea are ready to carry H2 from off-shore wind farms (a recent Gov report on the subject). Embrittlement is a problem at high pressures, but depends on the grade of steel – oddly lower grade steels are quite resistant (and the 40% is mostly lower grade steels).
A couple of good articles on CFD auctions from Jérome GUILLET – Green Giraffe who help finance wind projects :
– Dear governments – stop listening to whining utilities
https://jeromeaparis.substack.com/p/dear-governments-stop-listening-to?utm_source=post-email-title&publication_id=583570&post_id=135515788&isFreemail=true&utm_medium=email
– The cost of wind, the price of wind, the value of wind
https://jeromeaparis.substack.com/p/the-cost-of-wind-the-price-of-wind?utm_source=post-email-title&publication_id=583570&post_id=135827419&isFreemail=true&utm_medium=email
I am slowly disentangling from over 40 years working in project controls in the energy industries, mostly in the UK. Throughout this time, the UK government has not had a plan. Need I remind everyone that the last cabinet minister with a STEM degree was, Hume help us, Margaret Thatcher. That got us the Hadley centre (thank you, Margaret. A first there I think) and Mr. Whippy ice cream (I kid you not). The whole ‘carbon capture’ fiasco started with Gordon Brown, who gave the money set aside for it to build sulphur dioxide scrubbers for the coal-fired Longannet power station. Possibly the government project with the quickest write-off in history.
All we can be sure of is that government ‘thinking’ in this matter has no input from anyone who knows anything about anything, except making their chums richer.
Back in the 1980’s when I was reading around energy efficiency & renewables what struck me as interesting was the use of ‘Hook Up’ tariffs in the US, basically if a developer builds a new building they have to pay a fee to contribute towards the energy the building would use (clearly this could be expanded to include water, sewage produced etc etc)
The obvious attraction is that it encourages the construction of energy and water efficient buildings.
It seems to me like an obvious source of funding for renewables and the associated infrastructure.
I might suggest that there could be similar levies on ‘high energy’ consumer goods eg hot tubs, patio heaters, swimming pools etc. And/or a levy on the sale of ‘energy inefficient’ homes
For simple minds like mine. Most people want energy back in public ownership.
https://weownit.org.uk/blog/top-5-ways-great-british-energy-could-improve-your-life
The Swedish government owns 100% of Vattenfall.
9 out of the top 10 countries in the world have something in common, a publicly owned renewable generation company. The only one that doesn’t is the UK.
Answers?
1. Sunak is looking after those who will fund his party – and the Tories will need a lot of money to even compete at the next election, let alone win it. Carbon is a rich donor.
2. Unfortunately carbon use is locked in at the moment because everyone knows how it works and the supply chains are mature and delivering vfm/profit margins and known performance whether for cars or central heating. You’d be surprised (but maybe not) at how many current private new build schemes are completing with gas central heating? One in my town with 800 new units is completing with not a PV panel in sight and all GCH. And there are others. Conservatism with a small ‘c’ will always benefit conservatism with a big ‘c’.
3. The more non-technical answer is that the Tories are desperate to secure support, so the only thing they can do is do what Nixon did during the Vietnam war and appeal to the opposing sentiments in society – pivot towards the naysayers, sceptics, lunatics and self -interested of which there are always unfortunately enough amongst us. It’s negative campaigning – just like with BREXIT.
Tory donors/friends building the brick wall instead of housing, perhaps?
Also, Sweden is an EU Member State. I expect that if a state belonging to ANZUK (or other distant economic associations of which the UK is now a member) were to bid they would leap on it!
They hate the EU and have been scrambling to find an equivalent: there isn’t one!
I think you are wrong there. In Sweden support for leaving the EU has fallen to 19.3% since Brexit, one good thing that Brexit has done. It’s the same in all other EU countries. I know people in Sweden, Denmark and Germany who are all asking why we did it.
“What have you done to your country?” is the usual question.
It is, and has been for some time.
Because Europeans have never understood just how much vanity, exceptionalism and hubris fills the overinflated balloon of British self esteem; just to keep it in the air, blowing pointlessly in whatever winds are sent by fate.
We continue to misunderstand each other, Jen. But no matter, as I do know that leaving the EU has been a disaster and that no other EU member state will make the same disastrous mistake.
I was referring to the UK’s desperation to find another trading bloc in place of the EU and I repeat: there ‘isn’t one. I knew that before I voted to remain, and it has become even clearer since 2016.
I only mentioned Sweden because Richard did and in no way would I think that Sweden or any of the other EU member states would want to be involved with another trading bloc. That’s the UK’s problem brought upon themselves, virtually since they came to power under Cameron’s post-coalition government.
Thanks for the clarification, John Hughes.
When you said “They hate the EU” I assumed it was following on from the previous subject, Sweden.
Surely this is a chicken and egg scenario, which I’m sure any government will have an understanding?
Firstly, what is the environmental impact of such a contract.
What is the cost?
What is the longevity in it’s cost and resources?
What technologies will be available in the future?
Personally I believe the population and resources is the elephant in the room. Regardless of what we throw in monies or technology!
Seems quite scary and and sad, but I did witness the last first generation forest in WA sold to a Japanese pulp company for paper…until the people marched to Perth. It was the size of Hampshire.
I’m sure any government will have an understanding?
Firstly, what is the environmental impact of such a contract.
What is the cost?
What is the longevity in it’s cost and resources?
What technologies will be available in the future?
Personally I believe the population and resources is the elephant in the room. Regardless of what we throw in monies or technology!
Seems quite scary and and sad, but I did witness the last first generation forest in WA sold to a Japanese pulp company for paper…until the people marched to Perth. It was the size of Hampshire.
https://www.abc.net.au/news/2022-02-16/the-decades-long-fight-to-save-wa-old-growth-native-forest/100822968
There in the 90’s and also witnessed the largest open cut mine in the world. 26 years of age and thoughts were wtf!
The reality is imo, we can not sustain the existing population and the elephant in the room is how we depopulate without governance?
Unless you are advocating culling what else are you saying?
Cull will come from nature and it will be horrible. I’m far from a neo fascist. What I do see is markets outstripping the earth. It’s a quite a simple mathematical equation in my lifetime.
Population, growth and an ability to be a part of a humanistic approach. This is quite simply not rocket science!
Is there an element in all of this that is designed to commit/hobble any future Labour government?
Ed Miliband seems to have some reasonable ideas but I’m not sure these are shared with Labour’s top table.
It seems to me that his ideas are not welcome.
I fear his future in a reshuffle.
Not hard to imagine “Old Codger” Starmer sitting brooding over what to do about “trouble-maker” Miliband! Which is just a way of saying how uninspiring Starmer is when you step back and think about it!
I can already imagine the usual suspects in the media praising Starmer for being brave and making a tough choice which helps make Labour ‘more electable’.
Nothing to do with Sunaks wife’s firm taking a $1.5b contract with BP mere months before the new North Sea licenses were announced, I’m sure….