Last year ended with new low prices in offshore wind auctions regularly being posted. It means Offshore wind has joined onshore wind right at the heart of the electricity mix debate.
Some have castigated auctions winners for their recklessness. Others have raised concern about what messages governments will take from the new lows. This is especially the case for those governments who committed to projects at much higher subsidy rates not that long ago.
We have published our explanations of how we think players have managed to bid so low. These are mainly focussed on proactive, pipeline approaches from the market leaders, early adoption of latest technology, a more positive view about incorporating uncertain future O&M technology into cost models and the more ready availability of low cost money, especially via debt.
We call on developers of these new low-price projects, however, to find ways to tell the story of their cost reductions. This should not be in a way that gives away all their commercial advantage, but in a way that enables all to have confidence in the sustainability of the approach and in the reasonableness of prices that are already fixed. This is important as all of us electricity users will be contributing to these prices for many years to come.
The great positive with these lower prices is that it puts offshore wind right at the heart of the electricity mix debate in regions where conditions are suitable for offshore wind. The next step is to better inform that debate.
We have for a long time dealt in levelised cost of energy (LCOE) – the undiscounted revenue per MWh required to obtain a ‘market’ rate of return on investment over the life of a project. This has been useful in comparing technologies and projects within the wind industry. We have also used it in comparing cost trajectories between different forms of energy generation, keeping as many parameters consistent across technologies as is reasonable in order to give a balanced perspective.
In the UK we have recently seen tidal lagoon projects move closer to construction, with a government-backed review suggesting that a first project should go ahead. The leader of that project, Tidal Lagoon Power, has suggested a 90-year contract of about £90 per megawatt hour, a rate a bit below what the UK government has committed that the owners of Hinkley Point C nuclear plant will receive, over 35 years. All indications are that the next offshore wind auction round will beat that, with a commitment for only 15 years, suggesting that costs of around £90 per megawatt hour are going to look very expensive if still being paid out so far into the future when offshore wind and other technologies will have taken significant further cost reduction steps. After 25-30 years, the generating assets of an offshore wind farm can be repowered at much lower cost, with the additional benefit that the transmission assets could be refurbished and re-used, providing further savings compared to the original CAPEX.
Quite rightly, however, tidal lagoon players argue a significant benefit in producing energy at times that can be predicted many years in advance. It is vital that such benefits are properly reflected in any comparison of technologies, in establishing an efficient electricity mix. We have pushed for many years to increase the focus on LCOE, working to establish a common language that enables different innovations or projects or studies to be compared. Within any industry, it is right that this continues, but we think it is now time also to develop a broader language, say of social cost of energy (SCOE). This needs to take into account factors beyond endogenous (industry internal) capital and operation costs, energy production, project lifetime and cost of money. For any government seeking to more rationally consider energy generation across a range of technologies, a range of exogenous (external) costs and benefits need to be considered. These include:
• System support benefits / balancing costs
• Climate and other environmental impact
• Local employment / other value creation
• Local amenity impacts
• Fuel, raw material, R&D and other less-direct subsidies
Immediately, challenges appear. For example, what will the energy system look like in 20 years’ time, such that balancing costs can in some way be reasonably evaluated. We think, however, that it is time to develop this broader language and establish a more inclusive, shared understanding of the full, real social cost of electricity generation by different technologies. With this we can then communicate simply but accurately enough to be of use to decision makers within industries and governments, globally. We call on the wind industry to show leadership in providing transparent and fair estimates of social costs, now and looking into the future.
A version of this blog first appeared as ‘Viewpoint: Broader language needed to explore social costs‘ in the January/February edition of WindPower Monthly (sub required)