HC 517 The Economics of Wind Power

Memorandum submitted by Energy UK (WIND 79)

1. Energy UK has been formed by merging the Association of Electricity Producers, the Energy Retail Association and the UK Business Council for Sustainable Energy. With over 70 members we cover the broad spectrum of the energy industry and include companies of all sizes working in electricity generation, energy networks and gas and electricity supply, as well as a number of businesses that provide equipment and services to the industry. Our members generate more than 90% of UK electricity, supply up to 26 million homes and last year invested £11 billion into the economy.

What do cost benefit analyses tell us about onshore and offshore wind compared with other measures to cut carbon?

2. A full range of carbon reduction measures will need to be deployed to meet the UK’s long-term carbon targets. The deployment of renewable energy technologies will be a key part of decarbonising the electricity sector. Wind energy, although more expensive than some other generating technologies at present, not only has no direct carbon emissions, but also reduces reliance on imported fuels, exploits the UK’s abundant wind resource and helps ensure diversity in the energy mix. The renewables sector brings wide economic benefits to the UK. For example, RenewableUK estimates that the direct and the supply chain impacts of onshore wind currently amounts to 8,600 jobs and £548 million in GVA across the UK [1] .

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

3. Energy UK does not maintain its own data on the costs of generating electricity from different technologies. Estimates of the levelised costs of different technologies are available from a number of sources, including analysis undertaken by DECC [2] and the Committee on Climate Change [3] . However, it is important to note that the economics of every project are different and that these analyses rely on a number of assumptions and some of the underlying data used may be out of date. Furthermore, levelised costs do not necessarily allow for a fair comparison of the true economics of different technologies as they do not take into account the balancing costs faced by wind generators or the actual power price that wind farms are able to capture at the times they are generating.

4. The available studies suggest that onshore wind is currently one of the lower cost low carbon generation options that can be deployed at scale. However, the economics of onshore wind developments in the UK remain challenging. Maximising deployment of onshore wind is likely to be key to meeting the UK’s 2020 renewable energy targets and longer term carbon reduction ambitions and it is therefore important that support for onshore wind is sufficient to achieve this.

5. The costs of offshore wind are currently considerably higher than onshore, reflecting the fact that this technology is relatively immature and subject to additional technology, construction and servicing challenges in a marine environment. However, the industry is committed to cutting substantially the costs of offshore wind and a recent study has established a number of actions that could credibly reduce the costs of the technology by a third over the next decade, from £149-191/MWh today to £100/MWh for projects commissioned in 2020 [4] . Further cost reductions can be expected in the following decade.

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?

6. Cost assessments for wind power often include the direct costs of connection to the transmission or distribution network. The increase in renewable and other low carbon generation will also require significant reinforcements to the electricity transmission network to ensure that it can accommodate new sources of generation in different places. The Electricity Networks Strategy Group has estimated that the cost of these potential reinforcements could amount to £8.8 billion. The resulting network would be able to accommodate a further 38.5 GW of new generation, of which 23 GW could be a combination of onshore and offshore wind [5] .

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?

7. At present, levels of wind penetration are sufficiently low that the system is able to cope with low wind periods. As the amount of variable wind generation on the system increases, it is likely that conventional generation plant will have to operate more flexibly. Back up generation capacity is, however, not the only tool available to ensure that the system has sufficient flexibility to cope with variable wind output – demand side response, interconnection and storage could also have a role to play in future. Analysis by the Committee on Climate Change suggests that the additional cost of managing wind variability could be low, potentially 1 p/kWh to incorporate large volumes of renewable generation in 2030 and 2050 [6] .

How much support does wind power receive compared with other forms of renewable energy? Is it possible to estimate how much consumers pay towards supporting wind power in the UK? (i.e. separating out from other renewables)

8. Under the Renewables Obligation, support is differentiated by technology. A larger number of Renewables Obligation certificates is issued per unit of output to more expensive technologies. The exact value that a renewable generator receives for selling these certificates is determined by the market. Offshore wind currently receives twice as many certificates as onshore wind - a table comparing the number of certificates given to each renewable technology can be found on the DECC website [7] . These bands are currently being reviewed, with the outcome expected shortly.

9. In 2010-11, onshore wind received some 30% of the certificates issued under the Renewables Obligation, offshore wind 20%, biomass technologies 20%, landfill gas 20%, and hydropower some 7% [8] . DECC estimates that the Renewables Obligation currently adds £20 to the average household electricity bill [9] . It is predicted that this figure will rise over the next decade as renewables deployment increases.

What lessons can be learned from other countries?

10. A number of countries in Europe already operate their markets with significant levels of wind generation. The UK electricity industry engages in dialogue with these countries, including through the European association, EURELECTRIC, to share lessons learnt.

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

11. Companies involved in onshore wind already undertake a number of programmes to ensure that communities that might be affected by wind farms can have their say on proposals and receive appropriate benefits for hosting wind developments [10] .

June 2012

[1] RenewableUK, Onshore Wind: Direct & Wider Economic Impacts , May 2012

[2] http://www.decc.gov.uk/en/co n tent/cms/about/ec_social_res/analytic_projs/gen_costs/gen_costs.aspx

[3] Committee on Climate Change, Renewable Energy Review , May 2011

[4] RenewableUK, Offshore Wind Cost Reduction Task Force Report , June 2012; Crown Estate, Offshore Wind Cost Reduction Pathways Study , June 2012

[5] ENSG, Our Electricity Transmission Network: A Vision for 2020 , February 2012

[6] Committee on Climate Change, Renewable Energy Review , May 2011

[7] http://www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/renew_obs/ro_support/ro_support.aspx

[8] Data from Ofgem, Renewables Obligation Annual Report 2010-11 , March 2012

[9] http://www.decc.gov.uk/en/content/cms/meeting _ energy/renewable_ener/renew_obs/ro_funding/ro_funding.aspx

[10] See, for example, RenewableUK’s Community Benefit Protocol .

Prepared 10th July 2012