The Economics of Wind Power in Future – Blindness and Insight

In one of a series of articles entitled Briefings for Britain, John Constable and Professor Gordon Hughes provided their recent findings with respect to the capital and operating costs of onshore and offshore wind generation in the United Kingdom. They then used this data as a basis for assessing the latest set of future electricity cost estimates published by the U.K. Department of Business, Energy and Industrial Strategy (BEIS). The full text of an article on this subject can be found here:

The purpose of those note is to provide a short summary of the article.

Based on reports in the mainstream media and statements by governments in the U.K (as well as in Canada), the average person has been repeatedly told that the costs of electricity generation by offshore and onshore industrial wind turbines are falling “dramatically”. This claim is demonstrably false. Instead, wind power over the last two decades has become more expensive. This finding is based on a detailed review of the audited accounts of the capital and operating costs of 350 onshore and offshore wind farms in the United Kingdom, a set that includes the majority of the larger wind farms (i.e. with capacities exceeding 10 megawatts) built and commissioned between 2002 and 2019. It is the largest study of its kind to date.

The main findings of this study are that:

• The actual costs of onshore and offshore wind generation have not fallen significantly over the last two decades and there is little prospect that they will fall in the next five or even ten years.
• The weighted return for investors and lenders has declined sharply, especially for offshore wind. These “gains” in cost have been offset by higher operating and maintenance costs.
• The actual capital costs per megawatt (MW) of capacity to build new wind farms increased substantially from 2002 to 2015 and have, at best, remained constant since then.
• The operating costs per MW of new capacity have increased significantly for both onshore and offshore wind farms over the last two decades. Operating costs for existing wind farms tend to increase more rapidly as they age, due to the frequency of equipment failures and the need for preventative maintenance.
• The combination of increasing operating and maintenance costs with the decline in investor yields due to aging means that at current market prices the expected revenues from electricity generation will be less than expected operating costs after the expiry of contracts, guaranteeing above-market prices.

Based on these findings, the article forecasts that the offshore projects now being constructed and planned in North Western Europe will only be able to repay lenders and offer a return to equity investors if the average wholesale market prices of power rise to at least three to four times their current level throughout western Europe. That would only happen if the market price of natural gas (i.e. the competing source of fuel for generation) were much, much higher (highly unlikely) or carbon taxes were raised to at least 200 Euros per tonne (about Cdn $300 per tonne).

The article compares the BEIS projected costs for onshore and offshore wind plants entering service in 2025 with actual recent experience.

Based on BEIS assumptions, the capital costs will be 1.30 million pounds per MW of onshore wind and 2.16 million pounds per MW for offshore wind. This compares to actual reported capital costs of 1.61 million pounds per MW for onshore wind and 4.49 million pounds per MW for offshore wind. In essence, BEIS is projecting offshore wind costs about half of what it costs today, even though most future projects will necessarily be at greater depths and distance from shore, thus incurring much higher capital costs for both turbines and transmissions.

Based on BEIS assumptions, the operating costs for an onshore wind turbine commissioned in 2025 will be 47,000 pounds per MW and for an offshore wind turbine will be 109,000 pounds per MW and, in both cases, the costs are projected to be constant over their full operating lives. Actual operating costs for a recently commissioned onshore wind turbine were 77,000 pounds per MW in the first year and projected to increase to 114,000 pounds per MW 15 years later. Audited accounts of recently completed offshore wind turbines indicate actual initial operating costs of 184,000 pounds per MW in the first year, with the expectation that this will rise to 426,000 pounds per MW at age 15. Over the lives of the projects, experience indicates that total operating costs for new turbines commissioned in 2025 will be several times higher than what the British government is estimating.

The BEIS analysis assumes constant load factors of 34% over long periods for onshore wind projects and 51% for offshore projects. Actual experience with onshore wind turbines in Denmark indicates that the current generation of onshore turbines of greater than 2 MW capacity declines at the rate of about 3% per year. The average load factors for offshore wind farms less than five years old in Northwest Europe fall into the range of 40-45% and are expected to decline.

Constable and Hughes ask an interesting question, i.e. “Why are large companies committing substantial capital to very large projects that are almost certain to make a loss under anything like current market conditions?” They offer three possible answers. First, the offshore wind sector is dominated by large, often state-controlled, companies that are under little pressure to cut costs for their customers or to return cash to their shareholders. Second, operators expect to be able to sell a large portion of the shares in their projects to over-optimistic investors with little appreciation of the risks involved. (Also, projects rely heavily on debt provided by naïve or “socially-committed” lenders.) Third, operators and financial investors are aware of the risk but expect to be bailed out.

“Once economic reality becomes undeniable, there will be a huge lobby to pass on the full costs of offshore wind to either electricity consumers or taxpayers. The obvious instrument is carbon taxation, but the increase required would be very large, and the economic harm would be politically contentious to say the least… A government trapped between intense political opposition and the ever-widening ramifications of the financial collapse of the offshore wind sector will behave in ways that cannot be predicted confidently, but investors in renewables should be very nervous.”

So should electricity consumers and taxpayers.

About the Author: Robert Lyman is an economist with 27 years’ experience as an analyst, policy advisor and manager in the Canadian federal government, primarily in the areas of energy, transportation, and environmental policy. He was also a diplomat for 10 years. Subsequently he has worked as a private consultant conducting policy research and analysis on energy and transportation issues as a principal for Entrans Policy Research Group. He is a frequent contributor of articles and reports for Friends of Science, a Calgary-based independent organization concerned about climate change-related issues. He resides in Ottawa, Canada. Full bio.