REF Comments on PAC’s Offshore Wind Report (UK)

On its blog, Renewable Energy Foundation (REF) has commented on the Public Accounts Committee’s report regarding the costs of grid connections for offshore wind.

The central finding of the report is that:

“The terms of the transmission licences awarded so far appear heavily skewed towards attracting investors rather than securing a good deal for consumers.” (Summary)

REF believes that this is correct, and that the principle implied can be generally applied to most if not all of the United Kingdom’s climate change policies, where the attainment of EU-mandated renewable energy targets is regarded as justifying extreme costs. The costs arise partly because the sector is new and inherently hazardous, and partly because the targets require the electricity industry to do so much so quickly. In other words, there is both a ‘High Risk Premium’, and an ‘Express Service Charge’.

The PAC’s figures illustrate these points, and suggest that the annual consumer costs of the offshore grid licenses would be in the region of £850 million a year, totalling around £17 billion over the 20 year lifetime of the license.

The PAC remarks that “The investors’ estimated returns of 10-11% on the initial licences look extremely generous given the limited risks the investors bear.” While this is a good rate of return for a grid infrastructure asset, the PAC may be mistaken in thinking that the risks are low. In common with other investors in the offshore wind sector, and more generally in renewables, there is a widespread recognition that renewables are a high risk investment, since they are fundamentally uncompetitive with conventional energy and require market distortions and direct income support subsidies to survive. They are thus vulnerable to policy change. In assessing the risks the PAC is perhaps confusing the low risk of consumer default with the much higher technological and political risks.

It is also important to note that the costs described by the PAC are only part of what REF has referred to as the “ancillary costs” of the renewable energy targets, and that the total cost of the renewables targets is very much larger.

In previous work REF has estimated that the income support subsidy cost of the offshore wind necessary to meet the targets in 2020 would be about £4.5 billion a year (Energy Policy and Consumer Hardship (2011), Figure 4.) Using cost estimates prepared by Colin Gibson, (formerly Power Networks Director for National Grid) REF estimates that the additional system costs would come to about another £3.5 billion a year, giving a total cost (subsidy + ancillary costs) of £8 billion a year.

The offshore transmission arrangements discussed in the PAC report are part of the extra £3.5 billion a year additional cost in Gibson’s estimates, and confirm our judgment that the ancillary costs for the wind policy are high.

In this important publication, the PAC has put its finger on a fundamental problem with the current energy policy; in order to meet arbitrary targets the government repeatedly sacrifices the consumer interest to lure investors into very high risk gambles on renewable energy.

There is a real case for experimenting with offshore wind, but it is technically and economically reckless to invest this heavily ahead of the learning curve. It is not surprising, therefore, that investors want very high rates of return. They don’t expect these policies, or perhaps the equipment itself, to last more than five to ten years.

The material revealed by the PAC provides further support for suspending the EU Renewable Energy Directive targets in order to protect the consumer against unreasonable cost, and also to allow the renewables industry to grow at a more natural and sustainable rate.

[mappress]

Press release, February 4, 2013; Image: Ministry Of Foreign Affairs Of Denmark