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The hidden costs of renewable power

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The hidden costs of renewable power

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Renewable energy

The hidden costs of renewable power

Reform might reveal something closer to the true expense of new energy technologies

© Bloomberg

One of the less well-kept secrets in the renewables industry is the reason why funds that invest in these energy technologies can get away with offering such slender returns to their investors.

Take Greencoat or The Renewable Infrastructure Fund, which between them own more than £2bn of renewable assets in the UK. These entities aim to offer returns of some 6 to 8 per cent to their backers. Compare that to conventional thermal-powered generators such as US-based Calpine, a listed group that achieved long-term average annual returns of 15 per cent.

The answer is to be found in the government-backed contracts that assure renewable generators a market for any power they can produce at a guaranteed price.

By taking away the market risk that any megawatt hours (MWh) produced by a wind turbine or solar panel cannot find a buyer, or might be unloaded at uncertain prices, the state enables owners to raise capital on enviably fine terms. Far from selling to flinty-eyed power investors, they can flog their wares to herbivorous pension funds, which view their shares as something close to high-yielding gilt-edged securities.

And why not, you might say? Having set targets for decarbonisation, why not use government guarantees as a “costless” way to help meet them? As a renewables boss of my acquaintance put it to me when I asked him this question: “Isn’t it in everyone’s interest that these assets get built as cheaply as we can?”

Well, up to a point. Of course, no one might mind if this were simply some sort of state-backed confidence trick, inducing investors to fund technologies that, while novel, would fit seamlessly into the system, getting cheaper and more efficient, and ultimately providing a similar service to the assets they displaced.

But what if these state-backed transactions involved hidden extra transfers of wealth from the consumer to renewable generation technologies, and, worse, led to an underlying build-up of costs in the system as a whole?

It is not in dispute that wind and solar impose additional expenses on the network. These range from the need to constrain excess production when the wind is blowing harder than expected (£82m paid to wind farms in 2016), or the sun suddenly appears (and vice versa when the opposite is the case), to having excess generation in the wrong part of the country, far from the sources of demand. They may require the system operator to pay certain wind farms not to produce, or gas-powered stations either to shut down or power up for a time, to balance the system. Either way, they place costs on the consumer which are socialised, meaning there is no incentive for the renewables participants to suppress the additional expenses their activities entail.

A key question then is how big this cost is. A recent report by the UK Energy Research Centre, which tends to take a favourable view of renewables, suggested that it would amount to £10/MWh even if solar and wind production doubled from today. That’s not trivial when you consider that in 2016, the average wholesale market value of wind output was £38.50/MWh.

But research by Gordon Hughes, a former professor of economics at Edinburgh university who is more sceptical, paints a much gloomier picture. He estimates the actual costs now amount to £22/MWh on average, which implies that the power for which the wholesale energy market paid £38.50/MWh was actually worth only £16.50 to it. Worse, he thinks the balancing costs will magnify as renewables become a bigger chunk of the system, rising perhaps to £80/MWh for “substantial periods of each year within 10 years”. In effect, that is a very substantial hidden subsidy for those technologies, on top of the overt ones they already receive.

Of course, this may be too pessimistic. Some think balancing costs are tumbling fast as we get better at predicting the weather, and the industry is already siting renewables facilities more cleverly so that the wind or sun in location A naturally balances its absence in location B.

That may be so. But a sensible mechanism would in any event put more of the balancing costs directly on those who cause them. Rather than giving renewables operators a free option to sell whatever they produce, it would oblige them to bid to deliver specific quantities of power at certain times of day, with penalties either way if they over- or under-delivered. That, after all, is what thermal generators do.

Such reform might reveal something closer to the true cost of delivering renewable megawatt hours, while giving wind and solar farms incentives not to generate additional system expenses. It would also force renewables operators to justify more fully the low capital costs they enjoy.

jonathan.ford@ft.com

Letters in response to this column:

Act on externalities in the renewable energy market / From Antonis Angelopoulos, Birmingham, UK

Energy policy must draw on evidence-based analysis / From Dr Robert Gross and Dr Phil Heptonstall, London, UK

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