HC 517 The Economics of Wind Power

Memorandum submitted by National Grid (WIND 56)

1. Introduction

1.1. National Grid owns and manages the grids to which many different energy sources are connected. In Britain we run systems that deliver gas and electricity across the entire country. In the North East US, we provide power directly to millions of customers. We hold a vital position at the centre of the energy system. We join everything up.

1.2. That puts National Grid at the heart of one of the greatest challenges facing our society; supporting the creation of new sustainable energy solutions for the future and developing an energy system that can underpin our economic prosperity in the 21st century. First and foremost this is a scientific and engineering challenge. Decisions around the future of our energy infrastructure – its cost, local impacts, objectives and risks – will of course involve most of society.

1.3. National Grid publishes energy scenario analysis that incorporates assumptions on the costs of different forms of power generation. These assumptions are based on estimated cost ranges from publically available data including from the Arup 2010 [1] review of costs for potential renewable technology (carried out for DECC), the Mott MacDonald 2011 [2] electricity generation costs update (carried out for DECC), and from the 2010 US Department of Energy report. These costs show us that on a capital cost basis (£/kW) onshore wind is the cheapest form of new low carbon generation. Offshore wind, nuclear and dedicated biomass are all in a broadly similar, but higher cost range. On a breakeven price basis (£/MWh), onshore wind and nuclear are broadly comparable, offshore wind is at a higher cost range.

1.4. However, there is significant uncertainty around the costs of different generating technologies. The offshore wind industry, as it continues to grow, has been able to identify opportunities for efficiency, for example, The Crown Estate recently published it’s offshore wind cost reduction study which, following industry collaboration identified a number of steps to reduce the cost of offshore wind to £100/MWh.

1.5. National Grid’s 2011 Gone Green scenario includes 9GW of onshore and 17GW of offshore wind power generation connected to the transmission system in 2020

2. Questions Posed by this Inquiry

What are the costs of building new transmission links to wind farms in remote areas and how are these accounted for in cost assessments of wind power?

2.1. The UK energy landscape is changing, and more onshore and offshore wind, larger nuclear power stations, and increased interconnection are all driving the need to reinforce and extend our transmission network. Offshore wind generation is a significant driver for network extension as it is constructed where no transmission network currently exists. National Grid, together with The Crown Estate have published an Offshore Transmission Network Feasibility Study (similar work has been carried out by DECC and Ofgem). This study found that significant savings can be made through an integrated transmission network, by co-ordinating connection across multiple wind farms, and optimising for onshore constraint boundary reinforcement. Similar to onshore network reinforcements, this type of network serves multiple connecting customers, and so the costs should not be solely targeted at connecting wind power. Both onshore and offshore, where dedicated links are constructed to serve wind connections (or any other power generation) the costs are transparent and are targeted at that developer.

2.2. When considering new transmission network extension or reinforcement, we have to balance a number of key issues. We have no preference for overhead lines, undergrounding or offshore solutions for any of our projects. Our approach is always to work with all of our stakeholders and local communities to find the right balance between keeping costs down for consumers with the need to minimise the visual impact of these new lines. Each assessment is done on a case by case basis to ensure that local considerations are fully understood and accounted for [3] .

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

2.3. As we continually work to balance the system, we can ask generators of all kinds – not just wind farms – to come on or off the grid to help us balance supply and demand, or to manage ‘constraints’ – effectively bottlenecks – in the network. This is something we do many times every day, and have done for years. It is a normal part of our day job, and we have a number of well-proven tools to help us do it, including buying generation onto or off the network one or two days ahead of real time, and bids on the balancing mechanism within one or two hours of when the energy is needed.

2.4. Different types of generation plant regularly come on and off the system or otherwise vary their output, be it due to operating faults or for commercial reasons. In the case of wind generation operating faults and wind variability are the primary drivers. Acceptable operating limits are controlled at an industry level through connection agreements and connection codes that all developers are signed up to. Within those codes and limits, variable operation of any power station has no impact on the safe operation of the transmission network; it is simply another variable in system balancing.

2.5. Our demand forecasting team is always planning ahead, so we can make sure there is enough back-up power available to any potential shortfall, whether that is due to a power station breakdown or an unexpected event. For instance, in very high winds, many wind farms will shut down their turbines for their own protection, often automatically. When this happens, we can use backup generation to balance the system.

Is it possible to estimate how much consumers pay towards supporting wind power in the UK? (i.e. separating out from other renewables)

2.6. There is a cost in the balancing activity; however this is very low for consumers – no more than a few pence a year on a typical bill, although National Grid recognises that it is important to keep costs to minimum, even more so in times of austerity. Ofgem regulates these balancing costs and provides incentives to keep them down.

2.7. As part of a ‘balancing mechanism’, each power station makes a ‘bid’ that reflects what they are willing to be paid – or to pay – to be taken off or moved on to the network.

2.8. The total constraint costs from January to December 2011 for generation of all types were about £250 million. The overall cost for balancing the network in 2010/11 was £708 million, which makes up around 1% of a consumers bill.

June 2012

[1] http://www.decc.gov.uk/assets/decc/What%20we%20do/UK%20energy%20supply/Energy%20mix/Renewable%20energy/policy/renew_obs/1834-review-costs-potential-renewable-tech.pdf


[2] http://www.decc.gov.uk/assets/decc/statistics/projections/71-uk-electricity-generation-costs-update-.pdf

[3] Deciding where and how to build new high voltage electricity transmission lines is a complex issue. Most of the existing network takes the form of overhead lines, as these provide the most economic solution to the energy transmission challenge, and therefore the least impact on consumer bills. As we build the country’s new network, we need to balance the need for secure and reliable energy supplies with affordability for bill-payers and the visual impact of the network. Further details are at National Grid approach to the design and routeing of new electricity transmission lines

Prepared 10th July 2012