The announcement this week of far cheaper deals for offshore wind farms than any analysts predicted was well-received inside and outside the energy industry.
Newspapers that had historically slated wind and solar power as “subsidy monkeys” joined clean energy supporters in celebrating what are by any standards remarkable cost reductions. A leader in The Times noted: “The cost of building offshore turbines has fallen by nearly two thirds [in five years], and the Government’s targets for expanding wind power output, originally set with a deadline of 2020, have been met four years early.”
The Telegraph said: “The auction marks another remarkable leap forward for renewable energy as advances in technology and private sector investment combine to reduce the subsidies that once propped up the industry.”
That Telegraph leader poses a question that should now fundamentally reshape debate on energy policy: are subsidies still propping up the industry, or does Monday’s announcement mean those days are over?
The contracts announced on Monday are often referred to as “subsidies”, but actually they are not. They are fixed prices. Basically, for every megawatt-hour (MWh) that the Hornsea 2 and Moray East wind farms generate, their owners will receive £57.50 (this was priced at £117.14 Mhr only two years ago, in the last energy auction).
Every other source of power, be it a gas turbine, a nuclear reactor or a hydroelectric dam, also receives payment (of course) for the electricity it generates. These payments vary according to the market, with contracts agreed sometimes years in advance, sometimes hours. To make an analogy with mortgages, conventional generators receive a variable rate, the wind farms a fixed rate – and we know that either can work out cheaper, depending on how things pan out.
So the essential question is: will electricity from Hornsea 2 and Moray East cost more, on average, than electricity produced by other means?
The two wind farms are due to come online in 2022, and their fixed-price contracts last for 15 years, until 2037. Government forecasts for average annual wholesale electricity prices go out to 2035, covering the first 13 years of the wind farms’ contracts. And the average price it expects for those 13 years is £53.50 per MWh.
So, if Government has got its predictions right, the true subsidy will be no more than £4 per MWh – less than 7 per cent of revenue. And if the market price ends up being just a tiny bit higher than the Government expects, power from Hornsea 2 and Moray East will cost no more on average than from any other generating station.
Two more things. Monday’s auction isn’t the end of the road. First, the Government may hold two further auctions before 2020 – the Budget should give clarity – and if it does, it is entirely reasonable to expect that these will result in even cheaper contracts.
Secondly, the Conservative manifesto left the door open to a very limited re-boot for onshore wind farms, initially on Scottish islands. With onshore installations being inherently cheaper than offshore ones, any such projects will almost certainly result in fixed prices being agreed below the expected market rate. The politics of onshore wind farms are always tricky but Monday’s news suggests that one of the main arguments against them – cost – has disappeared.
By any normal definitions, then, one must conclude that we are now at the point where wind power (and indeed large-scale solar power) is very nearly subsidy-free. Indeed, it is not too fanciful to imagine contracts being agreed before too long that will result in the generating companies paying money back to the Exchequer more often than they receive it. Which begins to look a little bit like taxation.
A couple of cautions need to be applied. First, wind and solar generation incurs additional costs to the grid – costs for balancing a fluctuating source of electricity. Anti-renewable campaigners bandy around outlandishly high numbers for this but the real ones, as calculated by proper academics, lie around £10 per MWh. This is likely to become less of a problem in future, as research shows that adding battery storage to the system reduces this cost – and it is also true that coal, gas and nuclear generation incur system costs – but nevertheless, it cannot be imagined away.
The second caution is that because wind farms and solar panels generate at near-zero marginal cost (because they need no fuel), adding more and more of them lowers the average wholesale market price. This is known in the trade as “cannibalisation”, and makes it become more and more difficult to know what a market price would be in the absence of fixed-price contracts. This issue will disappear in the long run, as the UK electricity system (alongside those in China, Australia, Germany and many other countries) becomes increasingly able to use “spare” electricity for charging electric vehicles, making hydrogen, and other non-time-critical processes – though that’s a little way off.
To what, then, do we owe the end of subsidies for renewable energy? We have to acknowledge here the cross-party consensus that has seen political and financial capital consistently invested in offshore wind under Labour, LibDem and Conservative ministers.
The Coalition made a crucial step in switching away from awarding blanket returns across entire sectors to the auction-based model that produced real competition between suppliers, with all the benefits one would expect. Since the last offshore wind auction, the closing price has fallen by around 50 per cent – raising questions around non-competitive deals offered to nuclear and biomass plants.
A third factor is UK expertise in offshore operations developed during the golden age of North Sea oil and gas – and there is of course a double economic boon here in that as the latter industry contemplates its end, offshore wind grows.
The only losers here are those commentators who make a living by grumbling about UK energy policy being a mess and warning of doom ahead if the nation continues to develop renewable energy. The reality is that the UK power network is now more reliable than when it ran on coal, gas, and nuclear power alone. Carbon emissions have fallen faster than in any other G7 nation even as the economy has grown faster than in any other G7 nation.
Britain’s clean energy transition is not costing the Earth. Monday’s news suggests that from here on in, it won’t cost much at all.