Will renewables deliver better value for money than Hinkley Point?
The recent announcement that two offshore wind farms have won contracts from the UK government to supply electricity at £57.50 per MWh is good news – a dramatic reduction from the prices seen in the previous auction (£114/MWh) – and even further below the administered price that the government itself believed appropriate just a few years ago (£140/MWh).
Few commentators have resisted a comparison with the £92.50 per MWh promised to the nuclear station at Hinkley Point. It is conceivable that the final price for Hinkley could be lower than this – there’s a reduction if a second station is built, and the European Commission imposed a deal where any cost savings would be shared with consumers (stronger than the best terms the UK had been able to negotiate) – but this would do little to close the gap.
A more interesting comparison is with the “medium term … target” of £60 per MWh proposed for a Small Modular Reactor by Rolls Royce. Once numbers get this close, we need to be careful about the details. In particular, both the Rolls-Royce estimate (and I am well aware of the sorry history of nuclear cost estimates) and the winning wind power bids (which I hope are not examples of the over-optimistic winner’s curse) are effectively numbers for the Levelised Cost of Energy (LCOE). This divides the total cost of a project by the total output it is expected to produce. Both numbers are discounted to reduce the impact of payments, and output, that are further into the future. If a generator receives the LCOE for every MWh it sells, it should end up breaking even.
Commentators and politicians are fond of comparing the LCOE of different technologies – I was asked for a comparison when giving evidence to a House of Lords committee a couple of years ago. I should have had the courage to ask my questioner if those were the numbers he really needed, because the value of electricity is just as important as its cost.
While electricity consumers mostly pay a flat rate for power, the price in the wholesale markets goes up and down, depending on how many stations are needed for generation, and how expensive they are to operate – not how expensive they are to build. When demand is high and renewable output is low, we need to run the most expensive stations, and wholesale prices are high. Times with low demand and high renewable output need few fossil-fuelled stations, and as only the cheaper ones are running, wholesale prices are low. We normally quote the average price over the year as “the” wholesale price of electricity, but each station will have its own average revenue, depending on when it runs.
A nuclear station aims to run flat out throughout the year, and gets revenues per MWh sold roughly equal to the time-weighted average. Peaking stations that only run at the times of highest demand receive a very high price per MWh sold – but they need to do so if they are to cover their costs in just a few hours of operation. When we just have a few solar panels, and since their output comes in the middle of the day when prices tend to be high, its value may be greater than the time-weighted price. This is particularly true in countries where electricity demands and prices are higher in summer (when panels generate the most) than in winter, unlike Great Britain, with our winter peaks.
The problem for solar power is that once we have a lot of capacity generating at the same time, it depresses wholesale prices as fewer other stations are needed at that time. The panel owners receive a guaranteed price (or just avoid buying power from the grid) and don’t mind this. But the value of the electricity produced will fall below the average price in the market. The same thing happens for wind power, as stations – even scattered around the UK and its surrounding seas – still tend to generate at the same time, and not necessarily when the demand for their power is highest.
Colleagues and I did the calculations in a recent issue of Electric Insights Quarterly, which we produce (independently) for Drax Power. Looking at prices in the year to 31 March 2017, the value of the electricity from renewable power – whether wind or solar PV - was only 91% of the average price. The trend is downwards – two years earlier, solar PV output would have been worth the average price, and wind 94% of it. This means that while we should indeed celebrate the dramatic reductions in the cost of renewable electricity, and if we want to have it, we need to pay that cost, we should also remember that its value is gradually falling. Counter-intuitively, paying £60/MWh for something worth the market price of electricity (whatever that turns out to be) may be better value than paying £57.50/MWh for something worth only nine-tenths of it.
Written by Richard Green is the Alan and Sabine Howard Professor of Sustainable Energy Business, Imperial College Business School.
UK must stop blundering into high carbon choices warns CCC
The UK Government must end a year of climate contradictions and stop blundering on high carbon choices, according to the Climate Change Committee as it released 200 policy recommendations in a progress to Parliament update.
While the rigour of the Climate Change Act helped bring COP26 to the UK, it is not enough for Ministers to point to the Glasgow summit and hope that this will carry the day with the public, the Committee warns. Leadership is required, detail on the steps the UK will take in the coming years, clarity on tax changes and public spending commitments, as well as active engagement with people and businesses across the country.
"It it is hard to discern any comprehensive strategy in the climate plans we have seen in the last 12 months. There are gaps and ambiguities. Climate resilience remains a second-order issue, if it is considered at all. We continue to blunder into high-carbon choices. Our Planning system and other fundamental structures have not been recast to meet our legal and international climate commitments," the update states. "Our message to Government is simple: act quickly – be bold and decisive."
The UK’s record to date is strong in parts, but it has fallen behind on adapting to the changing climate and not yet provided a coherent plan to reduce emissions in the critical decade ahead, according to the Committee.
- Statutory framework for climate The UK has a strong climate framework under the Climate Change Act (2008), with legally-binding emissions targets, a process to integrate climate risks into policy, and a central role for independent evidence-based advice and monitoring. This model has inspired similarclimate legislation across the world.
- Emissions targets The UK has adopted ambitious territorial emissions targets aligned to the Paris Agreement: the Sixth Carbon Budget requires an emissions reduction of 63% from 2019 to 2035, on the way to Net Zero by 2050. These are comprehensive targets covering all greenhouse gases and all sectors, including international aviation and shipping.
- Emissions reduction The UK has a leading record in reducing its own emissions: down by 40% from 1990 to 2019, the largest reduction in the G20, while growing the economy (GDP increased by 78% from 1990 to 2019). The rate of reductions since 2012 (of around 20 MtCO2e annually) is comparable to that needed in the future.
- Climate Risk and Adaptation The UK has undertaken three comprehensive assessments of the climate risks it faces, and the Government has published plans for adapting to those risks. There have been some actions in response, notably in tackling flooding and water scarcity, but overall progress in planning and delivering adaptation is not keeping up with increasing risk. The UK is less prepared for the changing climate now than it was when the previous risk assessment was published five years ago.
- Climate finance The UK has been a strong contributor to international climate finance, having recently doubled its commitment to £11.6 billion in aggregate over 2021/22 to 2025/26. This spend is split between support for cutting emissions and support for adaptation, which is important given significant underfunding of adaptation globally. However, recent cuts to the UK’s overseas aid are undermining these commitments.
In a separate comment, it said the Prime Minister’s Ten-Point Plan was an important statement of ambition, but it has yet to be backed with firm policies.
Baroness Brown, Chair of the Adaptation Committee said: “The UK is leading in diagnosis but lagging in policy and action. This cannot be put off further. We cannot deliver Net Zero without serious action on adaptation. We need action now, followed by a National Adaptation Programme that must be more ambitious; more comprehensive; and better focussed on implementation than its predecessors, to improve national resilience to climate change.”
Priority recommendations for 2021 include setting out capacity and usage requirements for Energy from Waste consistent with plans to improve recycling and waste prevention, and issue guidance to align local authority waste contracts and planning policy to these targets; develop (with DIT) the option of applying either border carbon tariffs or minimum standards to imports of selected embedded-emission-intense industrial and agricultural products and fuels; and implement a public engagement programme about national adaptation objectives, acceptable levels of risk, desired resilience standards, how to address inequalities, and responsibilities across society.
Drax Group CEO Will Gardiner said the report is another reminder that if the UK is to meet its ambitious climate targets there is an urgent need to scale up bioenergy with carbon capture and storage (BECCS).
"As the world’s leading generator and supplier of sustainable bioenergy there is no better place to deliver BECCS at scale than at Drax in the UK. We are ready to invest in and deliver this world-leading green technology, which would support clean growth in the north of England, create tens of thousands of jobs and put the UK at the forefront of combatting climate change."
Drax Group is kickstarting the planning process to build a new underground pumped hydro storage power station – more than doubling the electricity generating capacity at its iconic Cruachan facility in Scotland. The 600MW power station will be located inside Ben Cruachan – Argyll’s highest mountain – and increase the site’s total capacity to 1.04GW (click here).
Lockdown measures led to a record decrease in UK emissions in 2020 of 13% from the previous year. The largest falls were in aviation (-60%), shipping (-24%) and surface transport (-18%). While some of this change could persist (e.g. business travellers accounted for 15-25% of UK air passengers before the pandemic), much is already rebounding with HGV and van travel back to pre-pandemic levels, while car use, which at one point was down by two-thirds, only 20% below pre-pandemic levels.