HC 517 The Economics of Wind Power


Submission from E.ON UK plc


We are investing in a range of renewable energy projects in the UK, including both onshore and offshore wind, and have committed to around £1bn of investment over the last nine months. This is at the heart of E.ON’s strategy for the UK market. However, we recognise that if renewable investments are going to be sustainable for the long term, will need to be competitive with other low carbon technologies if we are to meet our carbon reduction targets at least cost to customers.

Onshore wind is now one of the cheapest forms of renewable energy. It is not a silver bullet but we believe it is an important part of the low carbon mix, tapping into our natural resources. Once consented, projects are relatively quick to construct and, as a responsible developer, we always look to develop projects in the right location both in terms of performance and community impact.

Offshore wind can be constructed at large scale and increased wind speeds can be available offshore. There is great potential to harness this natural resource and we have a number of successful projects both in operation and in development and construction. We are also committed to the reduction of the cost of offshore wind and to tackling some of the challenges we face when constructing in deeper waters.

What do the latest assessments tell us about the costs of generating electricity from wind power compared to other methods of generating electricity?

1. In its Renewable Energy Review [1] , the Committee on Climate Change (CCC) compared the levelised cost of producing electricity (LCOE) from renewables with other forms of generation.

2. Whilst unabated coal and gas are some of the cheapest forms of generating electricity, the report identified onshore wind as one of the cheapest forms of renewable electricity at between £80/MWh and £95/MWh, a range not too dissimilar to nuclear, and considerably cheaper than coal and gas fitted with CCS in its current state of development.

3. Whilst the current cost of offshore wind is around £140/MWh, the industry is committed to reducing the LCOE to £100/MWh by 2020, broadly comparable with the onshore wind sector which is a more mature technology. By 2030, the CCC report estimated onshore wind would still be a lower cost technology compared with offshore wind, but both would be within a range broadly comparable with nuclear or coal and gas with CCS, with ranges of costs overlapping. This is consistent with our own view.

4. It is important that we continue to focus on driving down the costs of all renewable technologies and that we continue as a country to promote a diverse mix that includes both onshore and offshore wind, recognising that this represents the best value solution for customers of moving to a lower carbon energy mix.

What are the costs associated with providing back up capacity for when the wind isn’t blowing, and how are these accounted for in cost assessments of wind power?

5. The amount of time wind turbines are capable of generating any electricity over the course of a year is over 80%. There will be some periods where a wind farm is operating at its maximum rated capacity, while at other times when the amount of wind that can be utilised and transferred into electricity is low, other plant will be dispatched to back-up the system. In its 2011 Renewable Energy Review, the CCC estimated that the costs of providing back-up are currently small but will rise as the volume of intermittent generation on the system rises. The CCC felt that the cost implications of intermittency were unlikely to be prohibitive until very high levels are reached. For example, even for renewables shares up to 65% in 2030 and 80% in 2050, its analysis suggested that the cost associated with intermittency is only up to around 1p per kWh of additional intermittent renewable generation. We agree with this analysis. Intermittency system costs are additional to the cost estimates given above.

6. The cost of intermittency will vary both in relation to the total volume of intermittent plant on the system, and the cost of maintaining security of supply from alternative sources of power or reductions in demand. More flexible demand response is a key priority in reducing the cost of intermittency. Intermittency costs will also be lower, if back-up gas-fired plant operating at low load factors is not required to fit CCS. Costs will also be affected by the extent to which the UK is interconnected with other countries and the types of generation on their systems. Our analysis suggested that additional interconnection would have less value if adjacent systems were also exposed to intermittent sources of power because low wind conditions often cover much of North-West Europe. Overall this suggests very high levels of intermittent wind generation should be avoided. However, the optimum level of wind will vary in relation to other costs. This is consistent with the UK continuing to adopt a balanced mix of low carbon technologies.

How much support does wind power receive compared with other forms of renewable energy?

7. If we assume that the long term value of a ROC is £40/MWh in 2012 prices, the new banding proposals that come into effect from April 2013 will see onshore wind receive £36/MWh and offshore wind £80/MWh on top of the market price. This compares with £40/MWh for enhanced co-firing and conversion, £60/MWh for dedicated biomass and £200/MWh for wave and tidal.

Is it possible to estimate how much consumers pay towards supporting wind power in the UK?

8. If we look at the renewables obligation (RO) in 2010/11 the cost of supporting the RO on a per household basis was £15.15. In this year, wind (onshore and offshore) accounted for 51.1% of ROCs produced, effectively putting the annual cost of wind per domestic household at £7.74. [2]

What methods could be used to make onshore wind more acceptable to communities that host them?

9. Community engagement has to be at the heart of what we do and we always consult from the earliest stage possible. Onshore wind in particular can lead to concern in communities and the challenge for us as the developer is to build a better dialogue.

10. First we need to be clear about the benefits of onshore wind and that it is part of a balanced low carbon energy mix which will help mitigate climate change. When we develop an onshore wind farm, we also want local people to benefit so we create a Community Benefits Fund.

11. Even more importantly it is important that the community makes its own decisions on how the fund is spent as they know their own community best. The money can be used to fund a variety of activities such as environmental education programmes, community building refurbishments and energy efficiency schemes, and also to support local groups and organisations.

12. This helps but we believe we also need to look at more innovative ways to involve the community – through perhaps some form of ownership. This is something Ministers have recognised has to be addressed but more still needs to be done to provide leadership and direction to communities.

June 2012

[1] http://www.theccc.org.uk/reports/renewable-energy-review



[2] Figures calculated based on Ofgem's Renewables Obligation Annual Report 2010-11

Prepared 10th July 2012