The Economics of Renewable Energy - Economic Affairs Committee - Contents

Examination of Witnesses (Questions 213 - 219)


Dr Keith MacLean, Mr Sarwjit Sambhi and Mr Bob Taylor

  Q213  Chairman: Good afternoon and welcome to Mr Taylor, Mr Sambhi and Dr MacLean. Thank you very much for giving up some of your time to be with us this afternoon. Thank you very much for the written submissions that each of you has given us in advance. Whether we will have been able to read all of them I am not sure; I think two of them were late runners, if I can put it that way. Before we move into questions I do not know whether you would like to make any preparatory or introductory remarks. No. In which case let us go straight into questions. I will start by asking you how do the costs of generating electricity from renewables compare to fossil fuel and nuclear generation? What are the current estimates for the costs of greener fossil fuel generation with carbon capture and storage and how do those costs compare to renewable generation?

  Mr Taylor: Firstly we have shared some costs in the evidence in this regard. Before I go into the detail of answering the question, energy investments of course are long term investments and the basis of the analysis to come forward with these costs takes long term judgments about the relative commodity prices for fuels, in addition to some other costs. In our evidence you will see that we are showing costs for offshore wind—these are long run marginal costs—of around £107 per megawatt hour; the costs for onshore wind of around £75 per megawatt hour. That compares to coal, assuming 40 euros a tonne for carbon price, of around £70 per megawatt hour. Broadly you can see that if you make some assumptions around the cost of carbon you can see the cost of coal with the cost of carbon approaching the cost of onshore wind. As soon as you move away from the carbon price and just take the basic underlying costs you get different figures with fossil fuels being much cheaper than the cost of renewable generation. When it comes to carbon capture and storage our view is that the cost of coal with carbon capture and storage, once carbon capture and storage is commercially proven, will break even at the order of 40 to 50 euros per tonne, so you get a cost for coal plus carbon capture and storage of around about £70 a megawatt hour. That is sharing with you the information given in our written evidence.

  Q214  Chairman: Just coming back to wind for a moment, you were talking about long run marginal costs, does that include the impact on standby facilities, given that there is intermittency in the wind, and does it include the impact on the grid?

  Mr Taylor: No, this is purely the long run marginal costs of the renewable investment, the wind investment itself. It will assume a certain cost of connection charge in the economics and the capital cost of that investment, but it does not include any costs associated with supporting the intermittency of wind on the system.

  Q215  Chairman: In order to make decisions presumably one would have to look at the total systems. This is perhaps not for you.

  Mr Taylor: Exactly. We are looking at these as individual investment decisions, but it is important when you are looking at the overall generation mix to consider the holistic economics of operating the system. Going forward, as we move from two gigawatts of wind on the system to 20 or 30 gigawatts of wind on the system then there are other issues to take into account and maybe in other questions we can address these issues and other colleagues can also comment.

  Q216  Chairman: Are there any further comments or do you both agree with your colleague?

  Mr Sambhi: On the comment on the long run costs of generation I would add the word of caution that it really does depend on what you assume the long range prices are for the input fuels. If I took, for example, today where we have very high gas prices and very high coal prices, building a coal fired station or a gas fired station looks very expensive; if you use today's commodity prices, the cost of gas would be over £90 per megawatt hour and coal above £70. They are pushing to either at least or above the cost of offshore wind which does not have any fuel exposure. However, if you assume that prices are half of what they are in the long run the picture does look different. On your question around the cost of intermittency, I think that that point could be overplayed because we have to remember that in the future if we do have a lot of offshore wind in the power system in the UK, the role of our existing plant changes—the existing plant being the existing fossil fuel plant—and they change to become backup plants; they have longer lives because you are using them for less hours and therefore the new investment cost may not be prohibitive.

  Dr MacLean: A further point on that, I think it is important to underline the fact that once the investment has been made in the renewable forms that we are talking about, they are then independent of the fuel price going forward, whereas one of the big issues that we are facing at the moment is not only the high price but the volatility and uncertainty of the price, but also the difficulties with availability that will increasingly have in the prices. It is slightly difficult to do a comparison. In our written evidence—which I think was amongst the later papers—you will see that that we have tried to show a graph which compares the price dependency of gas generation versus renewables and it can be seen from that that the curve for gas goes up very, very steeply depending on the oil price, whereas for renewables it is a much flatter curve. With regard to the back up issue, I think it is wrong to think that it is only renewables that have to have backup. We currently have a system that is made up of generation that is best suited for doing different things. Peak lopping, for instance, is not something that nuclear does and we already have to have things on the system which will do that. As you rightly said, the capital costs of many of the backup measures—which need not be generation, they could be storage, they could be demand side measures as well—if those are, as with coal or gas, relatively low capital cost then the overall cost to the system is still relatively small because the main cost will then be incurred only when they are having to run to provide that backup capacity. That is an economic reality that we already face with the mixed portfolio of generation that we have and we are just changing the balance of that situation by moving to a higher renewables penetration.

  Q217  Chairman: Previous witnesses have suggested to us that the degree of intermittency associated with wind is of a different order than for any other form of generation; is that correct?

  Dr MacLean: It is a different type. If you look at the situation we had a couple of weeks ago when Sizewell B and Longannet both dropped off the system at the same time, that was a massive intermittency of gigawatts. That is something we would never have with that single point of failure with renewables. The system has been built to be able to cope with that sort of change. It must also be remembered the biggest intermittency on the system at the moment is not on the supply side but actually on the demand side. The change from the summer trough to the winter peak is absolutely enormous and the system has been designed to be able to cope with those ups and downs, minute by minute, hour by hour, month by month. We are altering the balance but we are not fundamentally introducing a situation that we have not been dealing with for many years already.

  Q218  Chairman: Is there not a difference between intermittency which is a failure of plant and intermittency which is a failure of the source of power?

  Dr MacLean: The durations are certainly different and I am not saying that we will not have to modify the system to cope. All I am saying is that we already manage these issues within the current system; the technical means are there and we believe the economic model that we currently have will probably cope with that change as well.

  Q219  Chairman: Is there a point at which there is so much wind generated into the system that the costs then flip into being significant? You are suggesting at the moment that it is done on the margin. Perhaps your colleague would like to answer that.

  Mr Taylor: I do think there is a difference once we start going to the extreme levels that we aspire to in order to meet the renewables target. At the moment we are able to cope with that on the system and, as my colleague mentioned, National Grid operate enough spinning reserve to cope under most circumstances with a major plant coming off the system. If we look at the load factors, and in particular here we are talking about wind as the main part of renewables investments, we are looking at onshore load factors of around 30 per cent, a little higher towards 40 per cent for offshore. If we look at the inherent variability compared to the running variability of a conventional plant, then the running capability available of a conventional plant suffers up to five per cent forced outages resulting in an average technical running capability outside of planned outages of 95 per cent. When we analyse the data from our real wind farms that exist now—we have 21 geographically dispersed wind farms across the UK—and we look at that data, that data clearly demonstrates that in particular during the winter peak periods (which are some of the most essential periods for capacity on the system) the firm capacity of our wind portfolio is somewhat under 10 per cent, around eight per cent. In the longer term we will aspire to solve some of that through energy storage, through demand side management and indeed through very significant interconnection between the system. If we look at northern Germany—of course our company is present there—there are some 20 gigawatts of wind and there are lessons to be learned from how the system operates and the impact there. Some of the submissions we have made elsewhere have demonstrated that we could require the capacity to be increased from around 76 gigawatts (which is the current total capacity on the UK system) to beyond 100 gigawatts, possibly up to 120 gigawatts, in order to support up to 40 gigawatts of wind and towards 50 gigawatts if we go even further. So I think there are some differences and it needs to be addressed and thought through. There are differences technically and differences commercially.

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