Wednesday, 30 October 2013

Wind Power history blows away Ed Davey's excuse for giving short contracts to renewables

Ed Davey's excuse for limiting wind power contracts to 15 years whilst Hinkley C gets a whopping 35 year contract is blown away by some elementary history checking. Lots of wind turbines in Altamont Pass - installed during the so-called Californian 'windrush' - are still turning after 31 years. Davey claims that the contracts he has awarded are in proportion to the technologies' design life expectancy. Yet the Altamont turbines will be turning until 2015, a 33 year lifetime, and only then taken down because of a repowering exercise, and also modern planning conditions which they did not have back in 1982. See I am given to understand by a leading authority on the subject that it is likely that quite a few machines built in the early 1980s are expected to carry on running past 2015....

Certainly one can expect modern wind turbines to last a lot longer than these efforts right at the start of the modern windmill era.

So using the Davey formula (about 60 per cent of lifetime as a contract length), using even 33 years as an example, wind power should get a 20 year contracts, not 15. But if this happened, the 'strike price' for wind (£95 per MWh at year 2018) would be reduced below that set for Hinkley C.This would breed trouble as the UK Government tries to claim that they are giving the same incentives to renewables as nuclear to pass through the EU's state-aid regulations (see previous blog post). (Note added in September 2014: Since this was written, payments for onshore wind have been reduced to £90 per MWh (or less) from 2018, making the Hinkley C settlement look even more lop-sided towards nuclear power).

The fact is that wind turbines are much easier to replace than nuclear power stations means that their lifetime, tower for tower, will normally not last as long. In fact nuclear power stations are retrofitted over the years and in reality the oldest nuclear power stations still running (40-44 years) will have had much of their mechanics replaced over the years. So the comparisons being made do not mean very much - except as an excuse for a political conjuring trick to fool the European Commission.

Then there is the loan guarantee for Hinkley C, all £10 billion of it, that constitutes 65 per cent of the capital cost of the 3.2GW development. If wind power got such guarantees, their costs could be reduced much further as well, since the borrowing costs would be a lot less. Indeed borrowing costs could be reduced by at least 2 per cent - which makes a big difference to the economics of wind power.

I have calculated what the effects of these two changes - increasing the contract length from 15 years to 20 years, and giving loan guarantees for 65 per cent of the capital costs. The result is that if this was applied to windpower then a strike price of £75 would be the equivalent of the £95 per MWh the Government is offering wind power from 2018. This figure is considerably less than what the Government is giving to Hinkley C.

When the comparisons are done with Germany, the story is even starker. In Germany investment costs are very cheap compared to the UK because of arrangements with local banks, underwriting from wind generator manufacturers, high debt-to equity rations, and the schemes do not have to subsidise the utilities like they do in the UK. So, incredibly, although average windspeeds are much lower in Germany (and average capacity factors are much lower than the UK), wind still comes out as being much cheaper in Germany. Feed-in tariff rates for solar pv have also now fallen well below the rate the Government has set for Hinkley C. Indeed, the German feed-in tariff system as a whole gives out far less money since feed-in tariff rates decline during the project length and they are not uprated with inflation as compared to the UK.

See the comparison graph at This was prepared by Thomas Gerke of Agora Energy. As Renewables International who discuss the study comment: 'Clearly, the rates that will be offered for new nuclear by 2023 in the UK are far above what solar + wind currently cost – and the rates for solar + wind will go down by then, not up!'

By comparison with this, Hinkley C will deliver bigger and bigger profits to its investors as time goes on with a contract of such length as 35 years. This is because, as time goes on, interest charges and bank loan repayments are reduced by inflation, whilst the Hinkley C revenues are partly uprated in line with inflation (using CPI).The deal has been slammed by investment analysts for this reason. See:

All in all, the Government's reduction in the contract length for renewables and its offer of a £10 billion loan guarantee for Hinkley C with a 35 year year contract represent a piece of political gerrymandering to try and squeeze a camel through the needle of the EU state aid regulations.

1 comment:

  1. Wind is a clean source of renewable energy that produces no air or water pollution. And since the wind is free, operational costs are nearly zero once a turbine is erected. Mass production and technology advances are making turbines cheaper, and many governments offer tax incentives to spur wind-energy development.