Learning from history and from our own experience is usually reckoned a sign of wisdom. Strangely, that appears not to be the view of those employed at Carbon Brief. They have published a strikingly foolish prediction that renewable generation such as offshore wind will be vastly cheaper than gas generation in the late 2020s. That is a long way off. History tells us that price booms in oil and gas markets are invariably followed by price busts.
Carbon Brief’s argument is based on bids submitted by offshore wind farms in the latest round of the U.K. Government’s auction of Contracts for Difference (CfD), which were announced in July 2022. Carbon Brief claims that the average price of £48 per megawatt hour (MWh) in today’s money is “nine times cheaper” than the £446 per MWh current cost of running gas-fired power stations. For context, and so as not to mislead the naïve, including those who enthusiastically tweeted approval of Carbon Brief’s article, it might also have noted that the cost of running gas-fired power stations in April 2020 was less than £25 per MWh. That figure was, of course, inflated by the high cost of buying carbon dioxide permits.
In other words, the CfD bids were nearly double the recent cost of gas-fired generation, with every reason to suppose that the current prices are an exceptional not a permanent feature of the landscape. Experience tells us that extremely high prices often come down sharply when the crisis passes. Perhaps the Carbon Brief authors have never studied the charts of oil and gas prices since 1970. They should, and so should those who rely on their reports.
Such figures clearly demonstrate that oil and gas prices are highly cyclical. This is why learning from experience matters. Over the last 50 years there have been repeated periods when gas prices are high. At such junctures, doomsters, with U.K. politicians and civil servants prominent among them, declare that gas prices will remain high for the foreseeable future, only to go very quiet once prices start to fall again. One such episode was in the late 2000s and early 2010s when the Department of Energy and Climate Change (DECC), the predecessor to the Department of Business Energy and Industrial Strategy (BEIS), dogmatically persisted with forecasts of future gas prices that were between three and four times the actual prices.
The error made by DECC at that time – and its refusal to change course – is the fundamental reason why we are paying such a high price for electricity today. Rather than underwrite the replacement of older gas-fired power plants, to improve fleet efficiency and reduce costs, they pretended that onshore and offshore wind would fill the gap. Further, they resisted making a commitment to long term contracts to buy liquefied natural gas (LNG), and exposed the U.K. to the more volatile short term markets. As a result, generators are paying much higher prices for gas and using it in power plants that operate at much lower levels of efficiency – and much higher levels of carbon dioxide emissions than is necessary. But for DECC’s errors in the 2010s we would not be facing such a severe crisis this winter and the longer term cost of operating the U.K.’s gas-fired generation fleet would be much cheaper than it is today.
Carbon Brief’s approach is a classic case of bad analysis resulting from a narrow view of the data record. This matters because, prompted by the arguments presented by Carbon Brief, politicians and lobbyists for renewable energy would have us repeat all of the errors made by DECC, plus a few more into the bargain. Rather than cherry-picking odd weeks of data in the middle of a crisis we should consider what we can learn from the period up to the end of 2019. From 2015 to 2019 the average market price at 2020 prices in the Netherlands, weighted by wind generation, was €41.7 per MWh – equivalent to £35.3 per MWh. The Dutch price is a good benchmark since that system relies heavily on gas, and the European benchmark for gas prices is set in the Netherlands, so it is the best reference point for what gas-fired electricity generation actually costs in normal conditions. During this same period the U.K. was paying CfD prices in the range from £150 to £187 per MWh at today’s prices to offshore wind farms and from £96 to £105 per MWh to onshore wind farms. For the avoidance of doubt: in the period 2015 to 2019 the U.K. CfD prices for offshore wind were four to five times that of gas fired generation.
In this historical context it is clear that Carbon Brief are just speculating that onshore and offshore wind farms projected for completion between 2024 and 2027 will deliver power at either a third (for offshore wind) or a half (for onshore wind) of the prices that they were receiving as recently as 2015-2019. We confidently predict that large flocks of pigs will also be seen flying across the skyline.
But a further question arises: What is this promised low price actually worth?
The CfD is a ‘contract’, but are consumers guaranteed delivery of specified amounts of power? No. There is no obligation to deliver electrical energy, only an entitlement to a certain price should the wind farm choose to deliver.
Do we know whether the wind farms will actually be built by the dates promised? No. We have no idea when they will be completed, if at all.
Will the power be delivered at the times and places where we need it, as a proper commodities contract might require so much copper to be free on board in a particular port on a particular date? No. The ‘contracts’ make no such requirement of the offshore wind farms.
Are we sure that we will only pay the strike price of £48 per MWh for the power? No. The wind farms have the choice of either taking up the price they are entitled to under the ‘contract’ or of taking a market price, through a bilateral Power Purchase Agreement with a greenwash thirsty corporate for example.
Obviously, the ‘Contracts for Difference’ are not contracts in any sense that a layman would recognise as a commitment to meet our future need for power. In any other business, professionals would see them as ludicrously one-sided and open-ended.
Furthermore, comparing the delivered cost of power from gas power stations with the strike prices for wind power in CfD contracts is not even like comparing apples and pears. Those are both fruits. Instead the comparison is more like that between apples and elephants, which have no practical similarity in any respect.
Carbon Brief also claims that the renewable generators with CfD contracts for delivery from 2024 onwards will pay large amounts of money back to the Treasury, because their ‘contract’ price will be so much lower than the market price. That is pure delusion. Anybody with commercial experience will see that the CfD contracts are ‘put options’ – they give the right but not the obligation to sell power at the strike price. We have seen in the last year that some wind farms have started to generate power but have not exercised their CfD contracts because the market prices that they expect to earn are so much higher than the CfD strike price. This is entirely up to them: the ‘contracts’ allow them to defer the start date or, indeed, to simply abrogate the agreement. One wonders who drafted these ‘contracts’ – the office cat?
Obviously, if market prices in 2024 and after are higher than the strike prices, then no wind farms will actually exercise their option by commencing their contracts. It seems reasonable to conclude that the wind farms regard their CfDs as nothing more than an insurance option, a guaranteed price if they can’t find a better one.
Consequently, the CfD auction results tell us almost nothing about what it will really cost to build and operate wind farms in the second half of the 2020s. And as audited financial statements accounts show, there is strong evidence to suggest that the capital and operating costs of wind farms have not in fact fallen by anything like the magnitude that would be needed to make economic a price of £48/MWh as bid in the latest auctions.
There is another important though less obvious point. Everyone knows that both wind and solar power are intermittent, which means that they are often not available when demand is high. In contrast, the output of gas-fired generation can be adjusted to meet such variations in demand; gas-fired generation is said to be dispatchable. At the moment, and for at least another 10 or 15 years, perhaps for the foreseeable future, the U.K. system will have to rely upon gas generation to offset the intermittency of wind and solar output. Flexing a generator in this way costs money – a lot of money!
Some of these additional costs are reported as they form part of the overall cost of balancing the electricity system and keeping the lights on. Our analysis shows that the extra cost of system balancing to manage the intermittency of renewable generation may be as high as £40-50 per MWh at high levels of wind and solar generation. This cost could be reduced by altering the system of constraint payments but there seems to be little will to do this in the near future. And even if constraint payments were reduced to zero, balancing costs would remain high.
Furthermore, a larger part of the system costs of managing intermittency is hidden and arises as a consequence of treating gas generation as a second-class citizen. There is no long term incentive to invest in more efficient plants. On top of this, plants incur significant operational and maintenance costs for starting up and stopping frequently. At a minimum these hidden costs add 25-30% to operating costs for gas generation. The hidden cost is probably at least £20-25 per MWh of wind and solar generation but could be substantially more than that.
Together the balancing and other system costs that result from higher levels of wind and solar generation mean that the full cost of any power provided by the new CfD contracts will be at least double the notional price of £48 per MWh, even assuming that this price is viable, which we doubt.
It is difficult to avoid concluding that the whole story of the falling costs of renewable generation is sheer fantasy, a sort of energy industry Game of Thrones taking place in a parallel universe that bears an accidental similarity to our own world.
There is a better way of managing contracts for renewable generation. Ask generators to bid for fixed amounts of dispatchable or firm power with specific deadlines, delivery requirements and performance guarantees, backed up by severe penalties to protect the consumer from non-delivery. It would be the renewable generator’s responsibility to organise storage and whatever else is necessary to convert intermittent renewable generation into the equivalent of gas generation.
Until we have robust performance-based contracts for the dispatchable delivery of renewable electricity we have no way of assessing the real cost of reliance on renewable generation. Fantasies based on the current ‘contracts for difference’ auctions, such as those of Carbon Brief, are not a sound basis for evaluating the current policies.
Professor Gordon Hughes teaches Economics at the University of Edinburgh, and was a senior adviser on energy and environmental policy at the World Bank until 2001. He is the author of Wind Power Economics: Rhetoric & Reality (Renewable Energy Foundation: 2020), amongst many other publications in this sector.
Dr. John Constable is the Director of the U.K. charity Renewable Energy Foundation, and the author of Europe’s Green Experiment (GWPF, 2022).
Stop Press: A wind turbine in Wales was toppled by too much wind after 50mph gusts caused it to “overspeed”. The Telegraph has more.
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It’s really disheartening that reality no longer seems to matter, either to politicians or the media who are supposed to hold them to account. Anecdotally I feel like a majority of people now believe many of these complete falsehoods, as a consequence of media and political stupidity / wilful ignorance:
Wind and solar are the cheapest form of energy and can supply all of our electricity needs;
The oil and gas industry benefits from billions of dollars of government subsidies, paid for by the hard-working tax payer;
Battery technology is following some kind of Moore’s Law in terms of cost and performance;
Nuclear is not a viable option.
At some point we have to ask how did we get to a point where literal fiction is mainstream opinion and policy.
I don’t understand this comment: Wind and solar are the cheapest form of energy and can supply all of our electricity needs.
To supply the need for reliable electrical power from wind and solar, we’d have to figure out how to fan-in and fan-out it from a mass of unreliable sources, over an unreliable network, and feed power reliably where we want it to go. Trust me, we don’t have, and never have had those smarts beyond a few power-stations and pylons and substations. That’s sheer hubris.
I’m listing this as one of the things that is ridiculous/ impossible, not saying it’s true.
It appears that Watermelons author James Delingpole’s Twitter account has been nuked.
Does anybody have any idea why?
That’s a great shame but actually think he’ll be fine his following mostly will have been long weened off tw@tter.
As an ex power pricing analyst electricity is sold in the commercial market not just the amount but also the shape of the consumption curve. Very few industries have a constant demand it varies throughout the day, so value in energy comes from being able to meet peak demands/deal with variability. In the old days we would buy green energy strip it if it’s green credential then sell it on for buttons because it was fundamentally useless due to the intermittency issue. This is how large companies were/are able to claim they use only renewable energy.
These are all very legitimate points. The problem is much of this is based on old normal political systems.
This is the new normal where a cadre of power brokers are artificially increasing energy prices through regulation, carbon credit systems, carbon taxation, decommissioning of old petrochemical and in some cases nuclear infrastructure, and I would argue conflict creation with Russia and self-damaging sanctions.
As long as these evil swine keep attempting to increase energy prices through supply shocks, the viability of these crony green slush projects like wind and solar will attract capital, capital that those closest to the gravy trains have already started equity funds to siphon money into.
Until this scam is seriously brought to the front of the publics consciousness and there are viable political actors willing to take them on, perhaps after civil disorder and riots, I think these ‘schemes” will indeed be viewed as the future.
They probably missed a trick when they renamed a department that had “climate change” in it’s name! When it comes to the physical availability of LNG, it appears that the UK is in a better position than some. I think there has been a fair bit of investment in the facilities to store it and churn out gas, such as in Pembrokeshire, west Wales.
The real cost of “renewable energy” was the reason Government deliberately prevented exploration for gas through fracking and the Bank of England discourage investing in both oil and gas projects, in order to force up the price of gas and oil.
“Renewables” is a lie. “Unreliables” is more accurate.
Electricity generation used to be based on a sensible heirarchy of technologies from baseload to peak. The recent insertion of unreliables into the mix has disrupted that. Disruptive technology is part of the plot. So is the perversion of language.
“Renewables” would be more accurately described as “Unreliables”
The authors were right to point out that previous spikes in oil and gas prices were temporary. This is because an increase in price would give fossil fuel companies more money plus an incentive to invest in increased production which would sooner or later lead to more supply and lower prices.
Unfortunately current policies don’t do this. Windfall taxes on oil and gas firms reduce the amount that can be invested in new wells or developing new oil/gas fields.
More importantly governments in Europe and the U.S. are generally becoming more hostile to fossil fuels. Even if there is a temporary reduction in hostility due to worries of short term supply, the long term trend is obvious to fossil fuel companies. This makes them reluctant to invest large sums of money in developing new fields that may be in production for decades, as they can’t be sure these fields will be allowed to stay in production long enough to pay back the initial investment.
This makes me think that the past, i.e. price spikes being fairly short lived, may not be a reliable guide to the future as the market has been fundamentally changed by government intervention.
This doesn’t mean I think that renewables are now a good idea, instead it seems obvious that governments such stop interfering in the market.
Don’t tell Greta, but I hear there’s still a lot of coal under Britain. Just saying.