The UK Department of Energy & Climate Change (DECC) published new âstrike pricesâ for renewable energy on 4 December, claiming these will lead to additional investment of ÂŁ40 billion in renewable electricity generation up to 2020. But according to Michael Knowles, Member of the Institution of Mechanical Engineers, the support scheme is too generous for suppliers and DECC should do much more to drive costs of renewables down.
In the UK there is a heated political debate going on about energy prices. Critics say the UKâs ambitious climate targets and renewable energy subsidies are driving up prices. At the same time, with old coal-fired power plants having to close and domestic gas production declining, the government has little choice but to attract investment in renewable energy. It has done so over the last 11 years via the Renewables Obligation (RO) and before that through the Non- fossil Fuel Obligation (NFFO) borne out of the Nuclear Obligation of the 1980s.
The UK Government is now trying to attract a broader range of low carbon power generation via the Electricity Market Reform (EMR) with Contracts for Differences (CfDs) based on strike prices for renewable electricity. For nuclear electricity it has set a strike price through the recently announced contract with EDF Energy, the UK subsidiary of the French electricity giant EDF, for building two new nuclear reactors at Hinkley Point C.
The EMR strike prices offer even more generous support to producers than the latest values of subsidy set under the RO, although the latter last for 20 years and the former for a shorter 15 year period. The EDF contract lasts for 35 years but there is no upfront payment by consumers until the plant has been built in 10 yearsâ time, according to Vincent de Rivaz, the CEO of EDF Energy.
Energy and Climate Change Secretary Edward Davey said on 4 December, when the 15-year guaranteed prices for producers of renewable electricity were announced: âOur reforms are succeeding in attracting investors from around the world so Britain can replace our ageing power stations and keep the lights on. Investors are queuing up to express their interest in these contracts. This shows that we are providing the certainty they need, our reforms are working and we are delivering ahead of schedule and to plan.â
Investors are well aware that the UK government is desperate to attract investment in new energy production so naturally demand as high a rate of return as they can get
According to DECC, âthere is currently over 20GW (of which 2GW already in 1998) of renewables capacity operational in the UK â a figure that could double by 2020 as a result of the Governmentâs reforms.â. The amount of electricity generated from renewables will grow from 15 per cent to over 30 per cent by 2020, DECC expects. In offshore wind, DECC says that deployment of 10 GW by 2020 is âachievableâ. Another 20 GW is quite a lot to expect in the next 7 years when it has taken 11 years to achieve 18GW!
Carbon price floor
The question is, though, whether UK energy consumers are not paying far too high a price for the renewable energy they are getting. Investors are well aware that the UK government is desperate to attract investment in new energy production so naturally demand as high a rate of return as they can get. Developers/financiers were reported recently to have turned down a Government proposal to share cost reductions under contracts for differences (CFDs). The Government is âover a barrelâ as some commentators have said.
Letâs take a look at what this means in practice. In July 2012, DECC âre-bandedâ the old RO (Renewable Obligations) scheme, under which suppliers had to meet renewable energy obligations by presenting Renewables Obligation Certificates (ROCs) to regulator OFGEM, reducing subsidies by 10% in the process. However, this reduction in subsidies was more than offset by the introduction of a Carbon Price Floor (CPF). The CPF is a carbon tax set by HM Treasury that DECC agrees will add ÂŁ11/MWh to the wholesale cost of generation by 2020. The Institution of Mechanical Engineers (IMechE) estimates it will be ÂŁ12/MWh. Since the wholesale cost is added tothe RO cost, this will give in excess of ÂŁ500 million a year windfall to the RO generators up to 2037. Some commentators, such as the Renewable Energy Foundation, put it even higher.
Then there is the strike price for onshore wind, by far the most economic route to more renewable energy production (other than co-firing biomass on coal-fired power stations such as at Drax and Eggborough). This has been set at ÂŁ95/MWh in the new scheme (to be lowered to ÂŁ90 for new projects from 2017 onward). This compares to a price of ÂŁ86/MWh under the old RO scheme that closes in 2017. Although the subsidy period has been reduced from 20 to 15 years, right now the consumer is facing higher costs. No apparent effort has been made in the new scheme to reduce the costs of onshore wind.
For offshore wind the strike price has been set at £155/MWh for 15 years (later it will be reduced first to £150 and then to 140/MWh), when under the old Renewables Obligation (RO) it should only have cost £135/MWh for 20 years. The offshore wind industry should be doing much better than that after building 3.3 GWs of windfarms, much of which is probably already making a good return of about 12%.
Offshore cost reduction
Where has the Government’s Offshore Cost Reduction programme proposed in 2012 gone to? The DECC was aiming to reduce electricity cost to ÂŁ100/MWh by 2020 on the RO subsidy route. The last report of the Offshore Cost Reduction Task Force (experienced industry practitioners), which came out in June 2012, said âproducers would consider ways in which costs could be reduced, with a ÂŁ100/MWh target cost of energy by 2020.” Has this now been forgotten?
There is little competition once sites are bought and strike prices set
When it comes to load factors for offshore wind turbines, very little progress appears to have been made. The DECC Digest of UK Energy Statistics 2012 gave an average of 31.67% between 2006 to 2010 when GWs increased from 0.9 to 1.34. The average from 2006 to 2012 had only increased that to 32.25% for 3 GW at 2012. So new turbines did not seem to add much increase in average annual load factors. DECC reports generally claim that a load factor of 38% is possible on average. DECCâs 2050 Pathways exercise has even made claims of 35-45% load factors.
Meanwhile, Centrica has abandoned its £2 billion planned investment in the Race offshore wind farm apparently due to even £155/MWh not being a high enough subsidy and more recently RWE has abandoned the Atlantic Array project. Centrica still seems to believe it can persuade Government to give a higher than £155/MWh subsidy.
This is symptomatic of the underlying problem of DECCâs support scheme. There is little competition once sites are bought and strike prices set. Investors seem to be demanding too high a rate of return even in an era of low interest rates with consumers having to foot the bill. At the same time, as the load factors of offshore wind turbines show, no guarantees are given on performance and no penalties applied for underperformance.
The foregoing applies not just to renewable energy, but also of course to the price offered to EDF with its captive sites for building two new nuclear reactors. EDF is getting ÂŁ92.50/MWh for 35 years. We have been told by a reliable source that the Hitachi Advanced Boiling Water reactor proposed for another site, Wylfa, in North Wales, a strike price of ÂŁ75/MWh should be possible.
Healthy competition
Already in April 2011, ImechE advised the government to review the effectiveness of renewables incentives with a view to keeping costs to consumers as low as possible. To reduce the cost burden on consumers, âmeasures should be introduced that result in a strong element of competition in renewables and make private investments in deployment easierâ, said IMechE. âThis should be done alongside continued support for a range of low carbon generation technologies, including nuclear and clean coal, to encourage a balanced power generation portfolio.â
Clearly, what the current system lacks above all is healthy competition
Unfortunately, the Government has largely failed to do this with the RO scheme and now with the new Electricity Market Reform strike prices. The renewables industry is demanding even higher subsidies. The developers and financiers are calling the shots. They are helped by an EU overall renewable energy target of 15% by 2020 of which electricity generation is being asked to take the largest share, now 31%. Developers, among them the so-called Big 6 electricity producers, have captive sites, especially for offshore wind farms. So once strike prices are set, only developers and financiers benefit from driving the costs down. Note that the then-CEO of Dong Energy, Anders Eldrup, explained in an interview with European Energy Review in 2011 the strategy of his company in this way: “We are working towards an industrialisation of the sector. With one goal: to bring costs down.”
Clearly, what the current system lacks above all is healthy competition. This is admitted implicitly by DECC in its statement of 4 December, in which it says that âit is expected that the new state aid guidelines [from the European Commission] will require the UK to move to competition for more established technologies.â Under EU law, member states are allowed to subsidise âimmatureâ technologies, but not âestablishedâ technologies. DECC expects that some of the strike prices will be judged as illegal state aid by Brussels. So much for âcompetitionâ in the UK energy sector. No wonder those investors are âqueuing up to express their interest in these contractsâ.
Michael Knowles was a Member of the IMechE energy and power committees variously from 1980 to 2006. After 50+ years of experience in the UK energy industry, including as Energy Sales and Marketing Manager at Babcock, he is now as an energy consumer trying to make sure performance and cost of the UKâs electricity system is giving more value to UK taxpayers for the ÂŁ110 billion investment. Michael is co-author with Robert Beith, FIMechE, of the publications listed below.Â
LiteratureÂ
(1)Â Â Â Â Â Â Â Â Â IMechE Energy Policy Statement 11/02 â UK Electricity Generation â Cost effective management http://www.imeche.org/docs/default-source/public-affairs/IMechE_Electricity_Generation_PS_Feb_2012.pdf?sfvrsn=0 April 2011
(2)Â Â Â Â Â Â Â Â Â IMechE response to DECC consultation on RO banding levels for 2013 to 2017 http://www.imeche.org/docs/default-source/public-affairs/3236-consultation-ro-banding-response-form.doc?sfvrsn=0Â Â 19 January 2012
(3)         IMechE Response to DECC consultation on the draft Electricity Market Reform Delivery Plan September 25th 2013 ——–not published yet  ———
Mark Johnston says
If the Wylfa project is less costly than the Hinkley project, why has there not so far been a tender process to establish the best price (as required by Article 8 of the EU electricity market common rules 2009/72)?
Mike Parr says
The article lacks concrete numbers (from outside the UK) and thus lacks rigour and a wider view.
Starting with off-shore, we have (multi-year) evidence of capacity factors from Denmark and Germany for their North sea sectors. Taking Alpha Ventus (2011 and 2012) capacity factors were 51 and 55% respectively. In the case of Horns Rev II life time is 48% and 2012 gave 52%. capacity factors for Alpha Ventus were underestimated (pre-build) by around 14%. it is likely that this was due to a failure to take into account Atmospheric turbulence and its impact on the reduction of wake effects (estimated in the range 10 to 20%).
Capacity factors define energy costs once an off-shore farm is built. On the basis of the capacity factors above & given that the Germans are in the process of completing a number of large farms in their sector of the North & given we know the capital cost then prices (without financing but including O&M) indicate something in the range 4.5 to 6eurocents/kwhr. This stands in stark contrast to the money on offer in the UK sector. R1 & R2 farms were located in easy to get at shallow water (learning curve etc). In many cases this predicated low cap factors (the London Array is in a daft place – shadowed as it is by Kent). Focus for future development should be Dogger Bank and locations that can generate good capacity factors in the range 45 to 55%. These capacity factors would lead to the prices mentioned above (but without transmission connection). Even if Tx costs were included plus financing, cost should not exceed 10pence NOW.
At the moment the Brits are engaged in synchronised whining with respect to connection costs for R3 farms (all that HVDC). The Germans just got on with it – & yes Dogger Bank is further out – but the only impact this has is on cable length – not on end stations.
In the case of nuclear – the situation is pathetic. Looking at capital costs the generation rolls in at 2p/kWhr – quite how they got to 9.2pence beats me & there has NEVER been any breakdown of this. The UK government has submitted it 60 page dossier to the EC – where opinion is heavily divided on “to reject or not”.
In fairness this is the kind of situation I would expect in a place run by ex-Bullingdons and know-nothing rich boys. The Brits get the politicians/dolts they deserve and they have a fine crew this time round.
Michael Knowles CEng says
Mike Parr’s comments on German and Danish capaciity factors (DECC uses load factors on unchanged configuration) whilst informative, I am concerned about UK wind energy and cost to the consumer so that data is irrelevant – lucky Germans and Danes!
Mike seems to agree ith the reasoning for the UK anyway.
Nuclear at 2p/kWh is surely from sweated old CEGB assets of the nuclear pwoer stations run now by EDF or Magnox. I agree EDF’s 9.25p/kWh is daft and due to over-designed poorly-contructed EPR FOAK plants still under construction in Finland and France on cost overrun 10 year contracts. As Sam Laidlaw Centrica’s CEO said when it withdrew from the EDF Hinkley C project – “10 years is a long time to write a cheque fo ÂŁ16billion”! !
Michael Knowles CEng says
Mark – as far as I know the Wyllfa consortium, now Hitachi AWR with Rolls Royce and Babcock, has not yet receieved Generic Design Approval (GDA) by the UK Nuclear Inspectorate. The sooner that is done the better and then a bid would be possible. It shoul surely be possible to build that in under 5 years rather than 10 years for EDF’s ÂŁ16billion Hinkley C?
Re the other options like Westinghouse Nugen at Sellafield as CEO Westinghouse said in an article in IMechE PE “Anything EDF can walk under we can!” Then he would say that wouldn’t he?
Let’s hopethe EU investigations into the EDF Hinkley C deal will shed more light on Article 8 of the EU electricity market common rules 2009/72).
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