Why the Telegraph is wrong on the cost of wind turbines to our bills


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10:55 am - January 15th 2013

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by Damian Kahya

How much are we paying for the power lines that connect Offshore wind turbines to the UK?

A release from the reputable Public Accounts Committee reported in almost every newspaper claimed it was £17bn. That, the Telegraph calculated yesterday, adds up to £35 a year on household bills, and helping to pay for a 10-11% return on investment for those lucky enough to own a offshore wind power line.

But is it true?

1) It’s not £35 – it’s about £9.80 per household

It’s not hard to work out how the Telegraph got to it’s £35 figure. Take £17bn, divide it by the number of years it’s spread over (20) and then divide again by the total number of UK households (around 25 million) and – hey presto. It’s also wrong.

The cost of offshore transmission is added to bills – but (and this is a frequent mistake) it’s not just hard pressed households who use power.

Domestic consumers account for around 30% of domestic electricity demand. That means the Telegraph is off by about two thirds. So by our calculation the actual cost – per household – is about £9.80, or less than a pound a month. 

But even that figure is not entirely accurate, for reasons we discuss below. 

2) It’s not £17bn – its £566m so far, and its unlikely to add up to £17bn

The £17bn figure wasn’t calculated by the PAC committee, it came from a report by the National Audit office and applied to the total cost of building transmission infrastructure for offshore wind between now and 2020.

But that report was based on just four tenders - with a total value of £566m. There are two reasons why those may not lead to an accurate assessment of the future cost. 

Firstly, as the NAO pointed out, the early competitions were ‘challenging’, not least because of the credit crunch. Much has changed since then, and following the NAO report the market regulator, Ofgem, started a review to see if consumers could get better value.

That review is expected to look in particular at one of issues which most vexed the Public Accounts Committee – whether the contracts should be fully linked to inflation. That means the total figure could wind up being significantly lower than £17bn.

“[Our] objective is to ensure this necessary investment is delivered at a fair price. As with any new market, there are lessons from early transactions. The initial tenders were conducted under interim arrangements,” said an Ofgem spokesperson.Ofgem claimed that so far the competition for licenses had saved consumers £290m.

3) 10-11% return is accurate – but limited

That means that the 10-11% return on equity investment the Public Accounts Committee highlights may not remain so high. That return also only applies to a relatively small portion of the £17bn spent. Equity – which is basically money from shareholders – is a relatively small share of big infrastructure investments.

Most of the money comes from lenders – such as the European Investment Bank or, the government hopes, our pension funds. Their returns will still be significant, perhaps around 6%, but not 10%.

All of which isn’t to say that the situation in peachy when it comes to offshore wind infrastructure.

The Public Accounts Committee’s recommendations include a number of suggestions which – they believe – could provide better value for consumers.

The complex system, by which the ownership of the transmission infrastructure was separated from the ownership of the turbines was designed to attract ‘institutional’ investors such as pension funds, generally too risk averse to buy wind farm.

But that has come in for criticism by some who say dividing up the system simply adds to costs. The committee’s main concern appears to be to avoid the risk of a ‘one way bet’ with consumer bearing all the risk of offshore wind investment, whilst investors get all the gain – as happened with government so-called PFI schemes to fund new schools and hospitals.

The problem is the story is far more nuanced and, frankly, hypothetical, than it has been portrayed so far.

ADDENDUM:

It’s been argued that the domestic consumer pays a larger share of the cost of renewables than industry and businesses, for example because of industrial exemptions to certain clean energy costs. It’s not clear if that would apply here – because these schemes are not funded through ROCs – but if it does the cost to households may be larger – though still nowhere close to £35.

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Damian Kahya is the Energydesk editor and former foreign, business and energy reporter for the BBC. You can following him on Twitter @damiankahya

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Reader comments


So we now know what it isn’t, without a clear explanation of exactly what IT is. Now can you explain the total cost of renewables for each domestic household?

We’re still paying too much for the tiny bit of power that comes from wind. Typically 1% of all electricity comes from wind, less on cold clear winter days.

I think the truth is that we’re not paying enough for pollution, not that we’re paying too much for renewables.

“3) 10-11% return is accurate – but limited

That means that the 10-11% return on equity investment the Public Accounts Committee highlights may not remain so high. That return also only applies to a relatively small portion of the £17bn spent. Equity – which is basically money from shareholders – is a relatively small share of big infrastructure investments.

Most of the money comes from lenders – such as the European Investment Bank or, the government hopes, our pension funds. Their returns will still be significant, perhaps around 6%, but not 10%. ”

Err, yes?

Sure, equity is only part of the financing. But a government guaranteed 10% is way, waaaay, over the top. Hell, I’m as right wing and capitalist as they come but I can’t see any reason to guarantee returns to equity at all. Might be willing to think about (not for this project, but in theory, in general) guarantees on debt, but not for equity.

“I think the truth is that we’re not paying enough for pollution, not that we’re paying too much for renewables.”

That’s certainly a possibility. But upon examination it’s not true. The Stern Review told us that if we just paid for the pollution the cost would be $80 per tonne CO2-e. And all these subsidies are adding up to a higher figure than that.

It would actually have been cheaper (and better, as I’ve been screaming for years) to just impose the carbon tax. Job done at that point.

“Sure, equity is only part of the financing. But a government guaranteed 10% is way, waaaay, over the top. Hell, I’m as right wing and capitalist as they come but I can’t see any reason to guarantee returns to equity at all.”

I can. A guaranteed return to wind-farm operators is a way to compensate them for the merit order effect they have on the overall energy market.

Tl;dr version – adding wind farms to your supply mix means that when the wind is blowing the price point at which the energy market clears drops (the renewable units, which are zero-marginal-cost producers, displace units such as natgas generators which have a minimum economic price set by the fuel they consume). You can pay renewables a fairly hefty ‘subsidy’ (via FIT or whatever) and still, at the societal level, end up paying less overall for your energy supply.

See http://www.eurotrib.com/story/2011/3/2/104652/4088 (declaration of interest – the author is an investment banker who works on project finance for wind farms) for a more in depth discussion of this, with links to other blog posts he’s done on the subject.

Regards
Luke

6. Matt Wardman

I can see no £35 figure in the DT article.

Sorry, just read that article, and while you sit there saying the Telegraph is wrong, I can’t see anywhere in the article where £35 is referred to. Perhaps they are not the ones who are wrong?

Please do point to where the Telegraph conducts the calculation you say they have if I am wrong. I have clearly missed it.


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