House of Lords - Economic Affairs

The Economics of Renewable Energy - Economic Affairs Committee - Contents

CHAPTER 3: TECHNOLOGIES FOR RENEWABLE ELECTRICITY GENERATION

25. This chapter focuses on renewable technologies for electricity generation, considering each of those technologies in isolation. The following chapter deals with the costs of connecting renewable generators to the electrical system as a whole, and operating them in a coordinated way to meet demand.

26. Electricity can be generated from five groups of renewable sources which are used to varying degrees in Britain. These are briefly outlined below[14] with more details about their potential in Appendix 4.

Wind

27. Wind is likely soon to become Britain's largest source of renewable electricity generation. There were 179 onshore wind farms in October 2008 which can generate up to 2.3 GW—the equivalent of nearly 3% of Britain's electricity capacity. Another 424 farms are under construction or going through the planning approval process, which would give a total capacity of 13.8 GW.

28. So far there are only eight offshore wind farms in operation, with 0.6 GW of capacity.[15] But offshore wind is seen as a major source of growth of renewable energy. The Government has awarded leases to developers with proposed projects that could generate up to 8.2 GW of power—just over 10% of current generating capacity.[16] It has announced plans to allow the development of a further 25 GW of capacity.

29. Both onshore and offshore wind generation, by their very nature, are intermittent—when the wind does not blow or is too strong, electricity is not generated. It is therefore particularly important to consider the load factor achieved by a wind generator when calculating its costs and its value to the system. The load factor is the actual electricity generated expressed as a percentage of the potential amount had the turbines been operating at full capacity all the time. An indicative figure of 30% is often used but in practice the average load factor for onshore wind farms in 2007 was 27.5%.[17] Professor Michael Jefferson used Ofgem data to show that only 13.6% of 81 onshore wind farms examined in England achieved load factors of 30% or over in 2007. In other words, the vast majority—86.4%—were generating less than 30% of their capacity. In Scotland one third of wind farms achieved a load factor of 30%, in Northern Ireland 26% but in Wales the figure was less than 20% (Jefferson p 376).

30. Offshore wind generators are expected to have a higher load factor than those onshore, but those in operation achieved only 28.3% in 2007. Other types of generator have suffered teething problems which have reduced their load factors in their early years of operation. Dr Simon Watson told us that the output from offshore turbines was likely to be less variable (Q 22).

31. Dr Watson told us that micro-generation from wind suffered because small turbines were less efficient. Large turbines were able to extract energy from the wind close to the theoretical maximum of 59%, whereas small turbines could only extract half as much. Furthermore, in urban areas, low and variable wind speeds meant that a typical wind turbine would have a load factor of only 1 or 2%. (QQ 26, 30)

32. Wind accounted for 43% of renewable generation electricity capacity in Britain at the end of 2007—37% onshore and 7% offshore. But the low load factor of wind farms means the proportion of electricity actually generated from renewables was much lower. Wind contributed about one quarter of the UK's renewable electricity generation—23% onshore and 4% offshore.

Wave and tidal generation

33. Wave and tidal generation come in three broad forms: tidal ranges or barrages trap water during high tide using barrages and lagoons before releasing it to turn turbines to generate electricity; tidal stream devices harness the energy from fast-flowing tidal currents; and wave power converts the energy contained in the movement of the waves into electricity. Professor Abubakr Bahaj told us that most tidal stream devices were based on the kind of turbines (with a horizontal axis) used in wind farms. Three technologies were competing in wave power. An oscillating water column allowed a wave to come into a chamber where it compressed air to drive a generator—the Limpet shore-based generator has been operating on Islay since 2000 (p 493). Pelamis Wave Power Limited, based in Edinburgh, is testing a series of articulated cylinders which will move up and down with the waves, compressing air to power a generator. The third technology is a power point absorber which moves with the waves, capturing energy for generation (Q 39). Currently, there is next to no generation in Britain from these sources. Professor Bahaj told us that the majority of the devices were on hold waiting for investment in order to deploy prototypes. The Government's view is that these technologies are relatively undeveloped and unlikely to generate much electricity by 2020. Ignoring cost, in the longer term the UK has the potential for wave energy to generate about 15% of its current electricity consumption, and tidal stream energy to provide about 5%, according to the UK Energy Research Centre.[18]

34. Like wind, tidal power is intermittent. The key difference is that tidal power is as predictable as the tides while windspeeds cannot easily be foreseen.

35. With tidal range systems, however, water can be released to turn the turbine when electricity is needed, not just in response to tidal movements. This in effect means electricity can be stored for use when demand is high, whereas storage is very limited with wind and most other forms of renewable generation. Despite these advantages wave and tidal technologies are still mostly at an early stage of development and are much more expensive than wind generation.

Hydroelectric

36. Hydroelectric power is the most developed source of renewable energy and makes up 27% of renewable generation capacity in Britain. Most (24% of the renewable capacity) consists of large-scale schemes with dams and reservoirs in mountainous areas. Because the water is stored, the generator has some flexibility over when to produce power, although there may be limits on the minimum and maximum quantities of water that can be released at any one time. Small-scale hydro generation schemes (those with a generation capacity below 5 MW, which make up 3% of the UK's renewable capacity) are often sited on rivers, with little water storage and hence less flexibility over when to generate.

37. In the Government's view the scope for further large-scale hydro-electric schemes is very limited for lack of suitable sites.[19] The British Hydropower Association say that another 3.2 GW of hydroelectric capacity could be built—the equivalent of 4% of the UK's current generating capacity (British Hydropower Association p 246). But the Institution of Engineering and Technology sees scope for only 1 GW of extra capacity (IET p 365 and in the table in Appendix 4).

Biomass

38. Biomass covers a range of renewable fuel sources derived from organic matter. In 2006, about 2.3% of electricity generated in Britain came from biomass sources such as landfill gas from the decomposition of organic material in landfills, sewage gas from biodegradable waste, wood from virgin timber, forestry management wastes and recovered waste wood, and specially grown energy crops. Sometimes these materials are burned with fossil fuels in power plants. Professor Tony Bridgwater told us that this was a very effective way of using renewable energy, since almost all the capital investment was already there (Q 33). With co-firing, a small amount of biomass could be used in a large, efficient, power station, whereas dedicated biomass plants were often small because they drew on limited nearby supplies of biomass fuel (Q 33). The most popular energy crops were willow and miscanthus grass. Willow could produce ten tonnes of biomass per hectare per year, miscanthus up to twenty (Q 31). Land available in the UK for growing biomass was limited, and farmers might be reluctant to commit themselves to a crop (like willow) that can only be harvested after several years: on one occasion, the power station that was to have bought the crop went bankrupt in the interval (Q 35).

39. Biomass is a versatile source of renewable energy, since it can be used, in solid form or as a gas (sometimes after conversion) for generating power and for heat. Professor Bridgwater also pointed out that biomass has unique advantages compared to other renewable energy sources as a source of carbon which can be converted into transport fuels[20] (Q 31). Other renewable sources mostly provide electricity, not yet widely used for transport. Professor Bridgwater also told us, however, that the crops grown in the UK for transport biofuels produce only about one tonne of biomass per hectare per year.

40. Landfill gas is currently the largest source of biomass generation in Britain. But there is little scope for growth in the short term as most large landfill sites are already being exploited. The use of landfill gas may even decline as existing sites are depleted. Any growth in biomass generation will likely come from burning more waste and/or energy crops. Energy produced from non-biodegradable materials such as plastics is not counted as renewable, although burning them may relieve the pressure on landfill sites.

41. Dedicated biomass power stations made up 29% of Britain's renewable generation capacity in 2007. Biomass, unlike wind, wave or tide, does not suffer the handicap of being intermittent. For this reason, biomass generators are used more intensively than most other renewable generators, so the share of electricity generation from biomass is greater than its share of capacity. Biomass provided almost half the UK's renewable electricity in 2007, with 24% from landfill gas, 10% from co-firing biomass in power stations, and 6% from municipal solid waste combustion. Sewage sludge and animal biomass each provided 3% of renewable electricity generation, and dedicated plant biomass stations produced 2%.

Solar

42. Solar energy can be used in a number of ways. For electricity generation the most common process is through solar photovoltaics. Solar PV cells have long been used to power small electronic devices such as calculators. But large groups of solar PV cells can be added together, powering small solar panels in individual households or larger arrays feeding power directly into the electricity grid. In 2007, solar PV provided 0.3% of the UK's renewable generation capacity and 0.1% of its renewable electricity. Professor Bahaj told us that the UK had a very limited resource for solar power, and the likely capacity factor was of the order of 11% (Q 45). Solar generation is more costly than most other forms of renewable generation.

Renewable generation mix

43. Figure 4 shows how much electricity each of the main types of renewable generator produced over the last few years—the key feature is the rapid growth of many kinds of output, particularly that of wind power. Appendix 4, provided by the Institution of Engineering and Technology, summarises its view of the main renewable generation technologies, with the current position, scope for further development, and the main barriers to further deployment.

FIGURE 4
Generation from renewables in the UK

Source: Digest of UK Energy Statistics, 2008, table 7.4

Britain compared to other European countries

44. About 4.6% of electricity in Britain in 2006 was generated from renewable sources—far below the European average of just over 14%.

45. As shown in Table 1, many countries which generate large shares of their electricity from renewables, such as Austria, Sweden, Portugal, Latvia, Romania and Slovenia, have an advantage in topography suitable for hydro-electric power. Around half of Austria and Sweden's electricity is generated from renewables—the highest in the EU—with the vast majority from hydro-electricity. Less than 10% of Austria's renewable generation comes from wind, biomass and solar power.

46. But some EU countries have reached higher levels of generation from renewables than Britain with little use of hydroelectric power: just over a quarter of Denmark's electricity comes from renewables with more than three-fifths of that coming from wind and most of the rest from biomass. In Denmark and Finland over 10% of electricity comes from biomass compared to 2.8% across the EU. The transmission networks connecting Denmark with its neighbours are strong. This eases the task of accommodating a large amount of intermittent generation. Spain, in contrast, has rapidly increased its use of wind power, despite having limited connections to its neighbours. Some countries with relatively high levels of (non-hydro) renewable generation have above-average carbon emissions, typically because they also generate a high proportion of their power from coal (Keay Q 82).

TABLE 1

Gross Electricity Consumption from renewable sources in the EU 2006 (in percentages)

	Total Share	Hydro*	Wind	Biomass	Solar	Geothermal	2010 TARGET
EU27	14.5	9.2	2.4	2.7	0.074	0.2	21.0
EU25 ^#	14.3	8.8	2.5	2.8	0.076	0.2	21.0

Belgium	3.9	0.4	0.4	3.1	0.002		6.0
Bulgaria	11.2	11.1	0.1				11.0
Czech Republic	4.9	3.6	0.1	1.3	0.001		8.0
Denmark	25.9	0.1	15.7	10.1	0.005		29.0
Germany	12.0	3.2	5.0	3.4	0.358		12.5
Estonia	1.4	0.1	0.8	0.4			5.1
Ireland	8.5	2.5	5.5	0.4			13.2
Greece	12.1	9.3	2.6	0.2	0.002		29.4
Spain	17.3	8.5	7.7	1.0	0.042		21.0
France	12.4	11.0	0.4	1.0	0.004		21.0
Italy	14.5	10.3	0.8	1.8	0.010	1.5	25.0
Cyprus	0.0				0.021		6.0
Latvia	37.7	36.5	0.6	0.6			49.3
Lithuania	3.6	3.3	0.1	0.2			7.0
Luxembourg	3.4	1.3	0.7	1.1	0.266		5.7
Hungary	3.7	0.4	0.1	3.2			3.6
Malta							5.0
Netherlands	7.9	0.1	2.3	5.5	0.029		9.0
Austria	56.6	49.6	2.4	4.5	0.021		78.1
Poland	2.9	1.4	0.2	1.3			7.5
Portugal	29.4	20.2	5.4	3.7	0.009	0.2	39.0
Romania	31.4	31.4	0.0	0.0			33.0
Slovenia	24.4	23.7		0.7			33.6
Slovakia	16.6	15.1	0.0	1.5			31.0
Finland	24.0	12.3	0.2	11.6	0.003		31.5
Sweden	48.2	41.3	0.7	6.2			60.0
United Kingdom	4.6	1.1	1.0	2.5	0.002		10.0

Croatia	33.4	33.2	0.1	0.1
Turkey	25.5	25.3	0.1	0.0		0.1
Iceland	100.0	73.4		0.0		26.5
Norway	98.3	97.4	0.5	0.4
Switzerland	49.5	46.4	0.0	3.1	0.034

Source: Eurostat, May 2008 and Directive 2001/77/EC on the promotion of electricity produced from renewable energy sources in the internal electricity market.

Total Share = a / (b+c)
a = Gross Electricity Generation from Renewable Sources
b = Total Gross Electricity Generation
c = Net Imports of Electricity
*Note: Does not include pumped storage
# EU 25 is the EU 27 less Bulgaria and Romania which joined in 2007.

47. France and Italy generate respectively 12% and 15% of their electricity from renewables—much higher than in Britain—with the lion's share in both cases coming from hydroelectric plants. Germany generates 12% of its electricity from renewables, of which around two-fifths comes from wind power. Denmark and Germany are encouraging investors to re-power wind farms with larger turbines, which can increase output significantly without taking up more land.

48. A number of EU countries, including Belgium and Luxembourg and newer members such as Estonia, Lithuania, Hungary and Poland, generate less electricity from renewables than Britain.

49. Figure 5 shows the main sources of generation in a number of European countries. At the left are several countries with a very high share of hydro generation—the extreme case of this is the practically all-hydro system in Norway (not an EU Member State, but tightly integrated with the electricity industries in Denmark, Finland and Sweden). Most European countries generate the vast majority of their electricity from fossil fuels or nuclear power. The countries with the highest levels of wind generation are towards the right-hand end of the graph. The penultimate column shows the UK's generation mix in 2006, while the right-hand column indicates a possible mix that would allow the UK to meet a 15% target for renewable energy in 2020. This would require us to have a share of wind power more than twice as great as any European country achieved in 2006.

FIGURE 5
Generation sources in Europe, 2006

Source: Eurostat

"Other" includes lignite (particularly in Germany and Poland) and biomass (particularly in Denmark, Finland and Sweden)

The base cost of electricity generation from renewable sources (excluding additional system costs, addressed in Chapter 4, and support costs, addressed in Chapter 6).

50. The first step in calculating the base costs of renewables is to calculate costs of generation at each type of plant. (As usually presented, these do not include significant additional system costs to provide back up for wind turbines when the wind is not blowing—or is too strong—or to reinforce the transmission grid. We deal with these additional costs in Chapter 4 below). The estimates varied considerably and most submissions gave little information on the assumptions underlying them. Most present a range of costs (Centrica p 102, E.ON p 109, British Energy p 242, Renewable Energy Foundation pp 46-47, Laughton p 387). Among the renewable technologies listed, onshore wind costs least—and in some cases its basic costs are almost as low as gas or coal-fired plants—partly because it is the most mature and developed technology. Off-shore wind is next followed by tidal, with wave power much the most expensive. We also received evidence (not shown in Table 2) that solar photovoltaics were expensive, with high capital costs (Ofgem Q 413, Energy Technologies Institute p 147). We did not receive estimates of the cost of generation from waste or landfill gas. The scope for expanding the latter is however very limited, as noted above. Most estimates show nuclear to have the lowest base cost of all forms of generation, although no station has been built in the UK for many years.

51. The cost of generation depends critically on the assumed capital cost of a power plant, the rate of return required by the generator, the cost of fuel (except for some renewable generators) and the amount of output that the plant is expected to generate (its load factor). Figure 6 below illustrates how different assumptions can lead to very different cost estimates, particularly for some technologies (Royal Academy of Engineering p 450, Institute of Mechanical Engineering p 373).

FIGURE 6
Costs of different types of electricity generation (excluding back-up and grid integration)

Key
Biomass BFBC—Biomass Bubbling Fluidised Bed Combustion
Gas OCGT—Open Cycle Gas Turbine
Coal IGCC—Coal Integrated Gasification Combined Cycle
Gas CCGT—Combined Cycle Gas Turbine
Coal CFBC—Coal Circulating Fluidised Bed Combustion
Coal PF—Pulverised Coal

52. Construction costs can vary for many reasons. For wind farms they vary from site to site. For example, different ground conditions can affect costs of cable lengths and the foundations of turbines (IET p 370). Copper and steel prices affect the cost of building wind turbines yet are extremely difficult to predict so a range is often used. The cost of land to build renewable projects also varies (IET p 370).

53. Financing costs vary depending on the perceived risk of the investment. Risks include engineering performance and changes in the regulatory environment. For the mature technologies, such as onshore wind generation, the performance risks are relatively low but are significant for newer technologies (IET p 371). The higher the assumed rate of return required by the generator, the greater the cost per year per MW of capacity. This effect will be particularly important for generators with high capital costs, such as nuclear stations and many renewable generators. Different companies will have different costs of capital—Shell told us that they had withdrawn from the London Array (a 1 GW offshore wind farm in the Thames Estuary) because the projected returns did not meet their investment hurdle rate (Q 348). But the company's partners, E.ON and DONG (a Danish generator), are continuing the project with Masdar, an investment fund for renewable technologies owned by the Government of Abu Dhabi.

54. The expected load factor and plant life will affect the capital cost per unit of output. This is particularly important for wind and marine generators, with few costs apart from capital costs. The higher the load factor, the lower the cost per unit of output. Possible sites for wind farms, for example, can be more or less windy and so have different costs per unit of power. The windier sites will have lower costs per unit of electricity generated as they produce more power with little or no increase in cost at the station. But many are remote from the main centres of demand and have higher costs of connection to the electricity system.

55. Between different biomass and waste plants, transport can be a substantial variable cost. Some plants are close to a ready supply of fuel such as woodchips from a wood processing plant. But those which take fuel from sources of waste or energy crops further afield will incur transport costs. They may also have to compete for alternative uses for the feedstock such as food production, or alternative biomass power plants (IET p 371).

56. For biomass, the UK's relatively small land area means that a heavy dependence would imply substantial imports, where costs could vary substantially depending on demand from other countries and international crop yields (IET p 371).

57. Finally, there is no commercial-scale generation of electricity from wave or tidal generators in the UK. Cost estimates for commercial-scale generation are extrapolated from small, often experimental, projects and accordingly have wide margins of error.

INFERRING COSTS FROM FEED-IN TARIFFS

58. The cost estimates presented to us can be compared with the prices actually paid to renewable generators in Germany and Spain, where the authorities set feed-in tariffs—a form of subsidy used to remunerate renewable generators.[21] These tariffs can be expected to exceed the actual cost of renewable generation; and clearly there would be little or no investment if the tariffs were less than cost.

59. The system of tariffs used in Germany is complex. A wind farm at a site with good wind conditions receives a starting price for five years, and a lower basic price for fifteen. Both decline gradually in nominal terms during the life of the contract. This front-loads the support received by the generator, reflecting the dominance of capital costs. A wind farm at a site with less favourable wind conditions receives the starting price for longer, and may receive it for the entire twenty-year length of its contract. Sites with poor wind conditions are not eligible for support.

60. Between 2003 and 2006, the average amounts received by German wind generators varied between 7 and 7.25 pence per kWh.[22] Around 2,000 MW of capacity was added in each of the years 2004-2006. A revised tariff has been introduced for 2009 onwards, reflecting the higher price of steel, which has increased the cost of wind turbines (EWI pp 316-317).

61. In Spain, most wind generators have chosen to receive the wholesale market price plus a support premium, rather than a feed-in tariff. The premium is now adjusted so that the combination of the market price plus the premium has a floor of 5.7 pence per kWh and a cap of 6.8 pence per kWh.[23] Around 1,800 MW of capacity were added each year between 2004 and 2006, which doubled to 3,500 MW in 2007.

Comparing the cost of renewables with fossil fuel and nuclear power

62. One of the key questions is how the cost of electricity produced from renewable sources compares with that of power from fossil fuel or nuclear stations. When making comparisons, the different cost structures of each type of generation need to be borne in mind. Renewable and nuclear plants have high initial capital costs but most of their costs are then fixed (Royal Academy of Engineering p 445). The cost of electricity from fossil fuel power stations by contrast depends crucially on the volatile price of the fuel. For EU generators, the cost of carbon emissions permits (effectively a tax)[24] under the EU Emissions Trading Scheme will also be a factor. Long-run calculations of power generation costs therefore vary with estimates of the prices of fuel and the cost of carbon permits (IET pp 371-372).

63. Gas and oil prices, which have risen in recent years, are linked through indexation clauses in long term gas supply agreements in Europe. As the UK is now a net importer of gas and linked to the Continental gas network, gas prices in the UK tend to move with those in Europe. Coal prices depend more on the global market, and are also high, driven by demand in emerging economies and high oil and gas prices. The range of predictions of fossil fuel prices leads to a range of estimates of costs for electricity generated from gas and coal fired plants.

64. A modern gas-fired power station emits roughly 0.4 kg of carbon dioxide per kWh of electricity, while a new coal-fired power station should emit 0.8 kg per kWh. When deciding whether to build wind farms or conventional plants, the generator will include the cost of buying emissions permits for coal and gas-fired power stations—assuming that few permits, if any, will be allocated free of charge to the power sector after 2012. As emission permits are a policy measure to increase the cost of high-carbon generation, their price depends on government decisions on how many permits to issue.

65. The price premium of renewable over conventionally-generated electricity is reduced when the cost of fossil fuels rises. Witnesses who submitted evidence on the cost of renewable generation also gave estimates of the cost of electricity from fossil fuels and nuclear power. In these estimates, reproduced in Appendix 5, nuclear power is typically the cheapest form of generation. In most estimates, generation from coal or gas is cheaper than renewable power, although some evidence suggested that onshore wind generation could be as cheap as fossil fuels. We received some predictions of the costs of coal-fired stations with carbon capture and storage (CCS)—inevitably speculative since no commercial plant has been built—which were higher than the accompanying estimates of the cost of onshore wind.

66. We do not know the assumptions on fuel, carbon or construction costs, or interest rates, which underlie the estimates in Appendix 5. We have therefore made our own estimates (Table 2 below) of the cost of wind power and of the three main options, coal, gas and nuclear power, based on work done for the Government for its renewable energy consultation,[25] with the exception of our estimates of fossil fuel prices, where we took the actual prices paid in the twelve months to June 2008. During this period, the price of oil averaged $96 per barrel. The coal price was 0.74 pence per kWh (£54 per tonne) and the price of gas was 1.4 pence per kWh (40.6 pence per therm). We assumed that the thermal efficiency of a new coal-fired station (the fraction of its fuel converted into electricity) would be 45%, and that of a new gas-fired station 55%. For a biomass station, we used a fuel cost of 1.3 pence per kWh (£3.60 per GigaJoule) and a thermal efficiency of 28%. In the case of nuclear power, we take the cost of fuel per kWh of nuclear output from the Government's nuclear consultation.[26]

67. Table 2 shows that coal, gas and nuclear power have similar base generation costs, and that these are much lower than the cost of wind power (either onshore or offshore) and biomass. The cost of the three non-renewable forms of energy is around 4 pence per kWh, while the cost of onshore wind is 7 pence per kWh, and that of offshore wind 8 pence per kWh. Biomass generation is predicted to cost 9 pence per kWh.

68. The table divides the costs into capital costs—the cost of paying for the plant itself—and running costs, chiefly fuel and operations and maintenance costs. Four of our technologies—all except biomass and gas—have similar running costs in the region of one and a half to two pence per kWh. The high costs of wind generation are due to its much higher capital costs per kWh actually generated. Although capital costs per kW of capacity for onshore wind and coal are similar, costs for power actually generated by wind are much higher because of the relatively low operational availability of wind turbines. The running costs of biomass generators are high because they use a lot of fuel for each unit of electricity produced.

69. The second part of the table gives the key assumptions made in preparing these cost estimates. The power station's construction cost includes a local connection to the grid, but not the cost of any more distant reinforcement work required—as with intermittency, this is not a cost which the individual generator is asked to bear. We have used the same cost of capital for each technology, although generators might require a higher expected rate of return to invest in those perceived as more risky. The base case excludes the cost of carbon permits for coal and gas-fired plants.

70. The third part of the table shows what happens when we vary these key assumptions. The relative cost of coal, gas and nuclear plant might change, particularly if the cost of one technology was altered, but not that of the others. This might be most relevant for fuel costs, since fossil fuel prices have been more volatile than the cost of nuclear fuel. The penultimate line of the table includes the amount coal and gas generators would need to spend on carbon permits at a price of £20 per tonne of CO₂ (2 pence per kg),[27] given that the coal-fired plant would emit 0.76 kg of carbon dioxide per kWh it generated, and the gas-fired station would emit 0.37 kg,[28] while the other types of power station have practically no emissions. At this carbon price, nuclear power would be expected to cost less than coal or gas-fired generation. The final line includes the cost of carbon permits at £50 per tonne of CO₂—roughly the level ($85 per tonne of CO₂) recommended by the Stern Review of Climate Change.

TABLE 2

Estimates of the cost of electricity generation in pence per kWh produced. These figures exclude the costs of backup conventional plant and grid integration, which are explored in Chapter 4

	Coal	Gas	Nuclear	Biomass*	Onshore Wind	Offshore Wind
Base cost (pence per kWh)[29]	4.1	3.9	4.5	9.0	7.3	8.1
Capital cost (pence per kWh)	1.9	0.9	3.0	3.4	5.5	6.0
Running cost (pence per kWh)	2.1	3.0	1.5	5.6	1.7	2.1
Key assumptions
Construction cost (£ per kW of capacity)	£1,070	£523	£1,500	£1,837	£1,111	£1,574
Average output relative to capacity (load factor)	81%	81%	77%	80%	27%	37%
Plant life (years)	25	20	30	20	20	20
Interest rate	10%	10%	10%	10%	10%	10%
Fuel cost (pence per kWh of output)	0.74	1.38	0.44	4.6	0	0
Emissions of carbon dioxide (kg per kWh)	0.76	0.37	Nil at the station	Nil at the station	Nil at the station	Nil at the station
Base cost of electricity given:
Assumptions above	4.1	3.9	4.5	9.0	7.3	8.1
Construction cost up 20%	4.5	4.1	5.1	9.7	8.4	9.3
Interest rate of 13%	4.6	4.1	5.6	9.9	8.4	9.5
Lifetime up by 25%	4.0	3.9	4.4	8.8	6.9	7.7
Load factor down by one-fifth	4.6	4.2	5.5	10.1	9.1	10.1
Fuel price up by 50%	4.9	5.2	4.7	11.3	7.3	8.1
Buying carbon permits at a price of £20/tonne CO₂	5.6	4.6	4.5	9.0	7.3	8.1
Buying carbon permits at a price of £50/tonne CO₂	7.9	5.7	4.5	9.0	7.3	8.1

* specialised power plants burning biomass material (not energy crops)

71. On the basis of these figures, we estimate the average base cost of generation across the whole system with the current share of each type of output to be 4.3 pence per kWh. In the next chapter (Table 3) we use these figures to show how the total base cost of generation in Great Britain would change with different levels of renewable generation.

72. Of the variables in the third part of Table 2, only one, carbon permits priced at £50 a tonne of CO₂, would by itself make onshore wind competitive with coal, while offshore wind would remain slightly costlier; gas (and nuclear) would both remain cheaper than either form of wind power. An alternative hypothesis of, say, an increase of 50% in fossil fuel prices together with carbon permits priced at £20 a tonne, would bring the cost of coal- and gas-fired power close to that of an onshore wind station with a high (over 30%) load factor. Nuclear power would still be significantly cheaper (in the absence of changes to its own costs), and offshore wind and biomass generation would remain more expensive than electricity from fossil fuels.

73. We have not made our own estimates for other forms of renewable energy, or for plants with carbon capture and storage. There are only a few prototypes for wave and tidal power, and no commercial scale carbon capture and storage project exists. This means that cost estimates for these technologies can only be very tentative. We did not receive estimates for the cost of landfill gas or waste burning, which we believe to be cheaper than other renewables, but there is little scope to expand these.

74. All the cost estimates showed that nuclear power was cheaper than renewable energy. The cost of nuclear power is little affected by the oil price, although the uncertainty over the cost of decommissioning and waste disposal is a unique risk for nuclear stations. Nuclear plants have very low emissions and are not affected by changes in the cost of carbon. We cannot consider renewable energy in isolation from the rest of the UK energy system and we support measures to include nuclear plants as an essential element of the UK's energy mix.

75. In summary, the cost of electricity from onshore wind farms at good locations would only be comparable with that from fossil fuel generators when prices of oil, gas and coal are very high or allowance is made for the price imposed for carbon emissions permits (effectively a tax). It is more expensive than nuclear generated power. In our base case, onshore wind cost 7 pence per kWh, as opposed to around 4 pence per kWh for the other technologies—coal, gas and nuclear. Offshore wind, biomass, wave and tidal power are even more expensive. And these estimates exclude the additional costs of integrating more renewable generation into Britain's electricity grid. (These are outlined in Chapter 4.)

Future changes in the costs of renewable generation

TECHNOLOGY DEVELOPMENTS

76. Future developments in technology—such as advances in equipment design, manufacturing and installation—can be expected to reduce the costs of renewable energy significantly, as well as of some alternatives such as nuclear power. This is borne out by the long term trend of falling costs for onshore wind. But forecasting costs on the basis of these expected developments is far from a precise science. As a result it is only sensible to present a range of cost estimates.

77. Such estimates are nevertheless crucial in assessing the likely costs of renewable energy. The International Energy Agency has shown how the costs for various forms of renewable generation have fallen as more generators are built. The "learning curves"—which are the straight lines in figure 7 below—show how the cost per kWh of electricity produced by various technologies has fallen as the total amount generated by them has risen. For example, the top line in figure 7 below shows that over a period in which the cumulative output of photovoltaic power doubled, the cost of electricity from new installations fell to 65% of its level at the start of the period. In other words, unit costs fell by 35%. Total generation (or in other studies installed capacity), rather than the mere passage of time, appears to be the critical factor in reducing costs.

78. The steeper the learning curve, the more the costs have fallen as the amount of installed capacity increases. The percentages show what has happened to the cost of generation each time cumulative output doubles. So while the cost of solar photovoltaic power falls to 65% of its previous (very high) level, giving a reduction of 35%, the reduction in the more mature technologies of coal and natural gas combined cycle generation are much lower, at 3% and 4% respectively. These curves represent technical progress at the power station and take no account of possible improvements in technology to extract fossil fuels, which could also reduce costs.

FIGURE 7
Learning curves for types of renewable generation

Learning Curves for generation technologies
Source: International Energy Agency

79. Figure 7 shows straight lines but both axes use logarithms. Moving along each line from left to right means successively greater increases in cumulative output are required to give successively smaller absolute reductions in costs.

80. Studies cited by Dr Karsten Neuhoff found costs for various renewable technologies fall 10-20% as installed capacity doubles (p 196). This does not however mean that the fall in costs is smooth or constant. Cost reductions of wind farms have been interrupted in the last few years because of supply bottlenecks and/or fossil fuel and commodity price increases. These bottlenecks have led to higher prices for turbines coupled with long lead times. Similarly, all marine energy technologies, including off-shore wind, are competing with the offshore oil and gas industry for installation vessels and other equipment (Neuhoff p 197).

81. As a technology such as onshore wind power is more widely used, cost increases can still occur when investment rises. Similar increases caused by supply bottlenecks may also occur in other forms of renewable generation as they are rolled out (Neuhoff pp 195-196). There is also a shortage of engineers, scientists and skilled craftsmen (Royal Academy of Engineering p 445). Dr David Clarke of the Energy Technologies Institute said: "There is evidence that the capacity in the supply base is inadequate for what we currently need." He added: "If I talk to the marine power developers then they will most definitely cite shortage of skills in the marine industry from the point of view of dockside skills in terms of fabrication, assembly of very large structures" (Q 324). Neil Hirst, director for energy technology and R&D at the International Energy Agency also referred to industrial infrastructure as a factor in the different costs of renewable electricity generation in various countries: "In many cases you will find the costs are actually lower where the deployment is highest, simply because there is an industrial infrastructure for manufacturing and there is a learning by deploying elements which tends to bring costs down" (Q 394).

82. The cost of solar photovoltaics has followed a similar pattern. After three decades during which the cost was reduced by a factor of 100 (i.e. to 1% of its initial level), the price stabilised in the last four years, during which Government support for solar power in various countries led to a surge in demand and supply bottlenecks (Neuhoff p 196).

83. Once extra supply resolves these bottlenecks the cost of wind-generated electricity and solar power are expected to resume their downward trends. Dr David Clarke of the Energy Technologies Institute said of offshore and onshore wind: "There is real potential to drive down the cost from those systems to a level that is competitive with current centralised generation" (Q 309, Neuhoff p 196).

84. Wave and tidal generation costs are even more difficult to predict as the technology is at an early stage of development. So far many of the companies pursuing demonstration projects are small start-ups, focussed on getting the next round of funding for their first large-scale demonstration plant and showing that their concept has merit. Mass production that would reduce costs but seems far off and difficult to predict (Neuhoff p 196).

85. Future developments in the base generation costs of electricity from renewable sources depend upon many variable factors such as technological development, the rate of return required by generators and construction costs. But from the evidence we have seen it seems clear that as things stand the base costs of generation of electricity from onshore wind are likely to remain considerably higher than those of fossil or nuclear generation and that costs of generation of marine or solar renewable electricity are higher still.

RESEARCH TO IMPROVE RENEWABLE ENERGY TECHNOLOGIES AND REDUCE THEIR COSTS

86. The Energy Technologies Institute (ETI) was set up to help sustainable low-carbon energy technologies become commercially viable. It is a 50:50 public/private partnership with BP, Caterpillar, EDF Energy, E.ON, Rolls-Royce and Shell. Each private sector partner will contribute £5 million a year for ten years, and the Government is prepared to match the contributions from up to 11 partners, giving a potential budget of £1.1 billion.

87. The ETI aims to:

(i) reduce greenhouse gas emissions

(ii) accelerate development and deployment of affordable low carbon technology solutions

(iii) increase security of energy supply in conjunction with greenhouse gas mitigation

(iv) increase the level and capacity of the low carbon skills pool—both in the UK and internationally

88. Investment in the UK has mostly been in research on novel technologies or in setting up full-scale systems ahead of commercial deployment. The important intermediate stages of development—technology integration and system demonstration—have been less well supported despite their importance in developing investor confidence. The ETI aims to help bridge this gap (p 146).

89. Offshore wind was cited as an area where research on improving the reliability of the wind turbines could reduce costs. Some wind turbines offshore had not been designed to cope well there (Clarke Q 310). Dr David Clarke, the Chief Executive of the ETI, said "The way to reduce the cost of those systems and to bring down the cost of the electricity generated in many cases is to improve the reliability and the operating costs of the machines themselves and then the systems, including the grid and the network infrastructure that is necessary to support those, whether it is gas or electricity. Those are the kinds of issues that we are seeking to address through the Energy Technologies Institute" (Q 308).

90. Research council spending on renewable energy projects has risen from £8.3m in 2000/01 to £30m in 2007/08. Solar power and fuel cell projects received over £6m each in 2007/08. Wind—which is a mature renewable energy technology—receives less than £1m (Research Councils UK p 441). This is only 1% of the Research Councils' total budget of £2.8 billion.

91. Dr Strachan of King's College London and the UK Energy Research Centre pointed out that some new technologies would not succeed. He advocated supporting a range of technologies with broad-based near-term support until it was clear which technologies were improving and which were offering cost and other advantages (Q 14).

92. This report is mainly about technologies in use or development. There are many other fields where basic or applied research might also yield practicable and cost-effective ways to help safeguard the environment and ensure reliable and secure supply of energy. Researchers, industry and Government can all play a part by remaining alert to the possibilities and flexible in their response. We list at Appendix 6 some potentially promising areas.

93. We hope that the ETI's work will yield technological advance and lower costs. The Government should consider, perhaps in collaboration with others, offering a substantial annual prize for the best technological contribution to renewable energy development. An initiative on these lines might help set the scene for a wider effort by the Government to encourage and promote research across on a range of technologies aimed at finding new and cost-efficient ways to reduce carbon emissions. We return to this theme in Chapter 6.

Noise, visual and other negative impacts of renewable deployment

94. There are widespread local objections to renewable generators—especially wind farms. These include:

(a) the visual impact of wind turbines (Campaign to Protect Rural England (Devon) p 252, Penk p 419, Jack p 374, Bishopton Village Hall Management Committee p 233);

(b) noise from the turbines and their potential impact on family life and health (Hadden p 325);

(d) economic impact on the community (Hadden p 325); and,

(e) perceived disregard for the opinion of rural communities (Hadden p 325).

Wind farms can also disturb wildlife (Two Moors p 492 and The Royal Society for the Protection of Birds)[30].

95. Most offshore projects would have less impact on local communities. But there are particular concerns about the proposed Severn Barrage. The Environment Agency in Wales said: "The estuary supports important habitats and a unique ecology which have strong protection under international law. The construction of a barrage would have significant impacts on the estuary, for example on wildlife, flood protection, navigation and the landscape."[31]

96. Although their declared purpose is to improve the environment, it is clear that renewable energy installations can also have adverse environmental impacts which the Government should bear in mind as it weighs the benefits and costs of expansion of renewable generation.

14 Much of the material for the definitions of different forms of renewable generation came from Department for Business, Enterprise and Regulatory Reform (2008), UK Renewable Energy Strategy; Consultation Document, p 53-60. Back

15 British Wind Energy Association at http://www.bwea.com/offshore/index.html. Back

16 The 8.2 GW includes the eight offshore wind farms that are already up and running. Figures calculated from BERR consultation document, p 55. Back

17 Digest of UK Energy Statistics, 2008, table 7.4. Back

18 UKERC (2008) UKERC Energy Research Landscape: Marine Renewable Energy. Back

19 Department for Business, Enterprise and Regulatory Reform (2008), UK Renewable Energy Strategy; Consultation Document, June 2008, p 58. Back

20 Transport fuels based on oil are hydrocarbons, containing mostly carbon and hydrogen, as are their biofuel replacements. Back

21 We discuss the use of feed-in-tariffs as a policy measure in Chapter 6. Back

22 The original tariff range in Euros was 8.76 to 9.06 cents per kWh which was converted to sterling at an exchange rate of €1.25 to the pound. Back

23 The original figures were a floor of 7.1 euro cents per kWh, and a cap of 8.5 euro cents per kWh, again converted to sterling at an exchange rate of €1.25 to the pound. Back

24 The scheme requires companies to hold permits to emit carbon dioxide, which are traded and have a price, and the "tax revenue" is the value of these permits. If the Government auctions the permits, it gets to keep this tax revenue, but if it allocates them without charge to energy-using companies, those companies effectively keep the tax revenue. Back

25 Redpoint (2008) Implementation of EU 2020 Renewable Target in the UK Electricity Sector: Renewable Support Schemes. A report for the Department of Business, Enterprise and Regulatory Reform, June 2008. Back