The Cheap Wind Energy Echo Chamber

Policies for decarbonization of the UK electrical grid have been built around forecasts of cheap off-shore wind power, but those forecasts are clearly wrong.

Every three years the UK government puts out a forecast of the future costs of wind and solar power. The document is produced by the Department for Energy Security and Net Zero, a subsidiary of the Department of Business, Energy and Industrial Strategy (BEIS).

Forecasts from that document are used in studies by such bodies as The Royal Society and the Climate Change Committee, and the results of those studies are fed back to the government as Policy Briefs, eventually becoming the basis for energy policy in the country. So, we have a kind of “echo chamber” where forecasts produced by the government are fed back to the government as policy recommendations.

What if those forecasts are wrong, not by a few percentage points, but by a factor of 2 or 3 or more?

Offshore wind is being touted as the mainstay of future British energy policy. The BEIS document forecasts a levelized cost of £32 to £51/ MWh for electricity generated by offshore wind in 2040, in real 2021 prices (see table below). The mid-point of the forecast, £41/MWh, is the same for both offshore and onshore wind, even though offshore is known to cost more to build and maintain.

But recent developments in the offshore wind industry cast some serious doubts on those estimates. Let’s take a look at the basic assumptions that were used to develop those cost forecasts:

The assumed Capital cost of offshore wind is £1,760 per KW

Compare that to quoted costs for some of the recent installations:

East Anglia ONE £2.5 billion 714 MW, cost per KW - £3,500 in 2021

Hornsea One £4.2 billion for 1.2 GW, cost per KW - £3,500 in 2022

Moray East £2.6 billion for 950 MW, cost per KW - £2,736 in 2022

Dogger Bank £9 billion for 3.6 GW, cost per KW - £2,500 in 2023 to 2026

IRENA gives a capital cost of $3,300 to $5,000 per KW for offshore wind (£2,700 to £4,100)

All of those costs are significantly higher than the BEIS forecasts, and there is no compelling reason to believe that capital costs for offshore wind will be going down at any time in the future. Manufacturers of large offshore wind turbines (Vestas, General Electric and Seimens Gamesa) have all recorded massive losses in their wind turbine operations and have increased wind turbine prices by an average of 38% over the last two years.

Actual audited costs of offshore wind farms in the UK show an increasing trend, as per this chart from Professor Hughes of Edinburgh University:

In fact, there is a compelling reason to assume costs will increase because the prime locations will have been used and wind farms will be in deeper water and further from shore.

The BEIS document seriously underestimates the capital cost of offshore wind.

Operating and maintenance costs are assumed to be £42,400/MW/year.

This Research Gate publication, a summary of seven different studies of Dutch wind farms, puts the operating and maintenance costs at 30 Euros/MWh, equivalent to £113,000 /MW/year, 250% higher than the BEIS estimate.

Capacity factors are estimated at 69%

Calculated capacity factors based on measured wind speeds from 1980 to 2016, and the UK’s fleet of wind turbines as of 2020 averaged just under 40% (chart below).

Actual results, as per this reference site, don’t come anywhere close to the assumed 69% factor. The only wind farm that has exceeded 50% over its lifetime is the Hywind, which is a very small floating offshore farm that cost £8,800 per KW to construct. Average capacity factors are below 40%, with newer turbines typically in the range of 45 to 48%.

Capacity factors have been increasing as wind turbine sizes and hub heights have increased. However, there is a limit to how high the turbines can go, the 69% capacity factor seems to be based more on wishful thinking rather than any realistic expectation.

If I plug realistic estimates, (£3,000/KW CAPEX, $113,000/MW OPEX, and 46% capacity factor) into the formulae used to determine the cost of electricity, I arrive at a cost of £94/MWh, more than twice the BEIS estimate for 2040.

Perhaps the people who assembled the BEIS cost estimates were influenced by the declining bid prices for offshore wind contracts. Strike prices for wind power contracts fell from £162 to £43.33/MWh (in 2021 currency) between the first bid round in 2015 and the fourth round in 2021.

However, the strike prices are indexed to inflation and those latter contracts were bid at a time when real interest rates were negative. Money was flowing into “ESG” investments including wind energy, and the projected income from the projects was rising faster than the cost of capital. Those bids did not reflect the true costs of the projects once interest rates returned to normal.

Also, the contracts were not mandatory. The first and second round of bidding includes wind farms that are currently producing. The first round has high prices, and projects that bid into the second round have chosen not to take up the contracts, relying instead on market prices which are normally set by the natural gas generators. The owner of the Hornsea 3 project that bid into round 4 has stated that the project may not go ahead without further public support.

Although the low CFD strike prices exist on paper, no wind farm is actually selling wind energy at those prices.

Wind farm revenues in the UK range from a low of about £98/MWh to a high of over £200/MWh, 250% higher than the prices BEIS is projecting for 2040.

Offshore wind costs are increasing, and many projects in the USA have been canceled. Owners have chosen to pay heavy penalties rather than go ahead with projects at previously negotiated prices. Some companies are asking for price increases of 50% or more on contracts that were already priced 2 to 3 times higher than the BEIS estimates.

The latest bidding round for offshore wind contracts in the UK specified a maximum contract price for offshore wind (£51 in 2021 currency) and tightened the rules around the taking up of the contracts. There were no bidders.

Policies for decarbonization of the UK electrical grid have been built around the concept of cheap power from offshore wind turbines. However, government estimates of the cost of offshore wind power are likely too low by a factor of 2.5 or more.

Nuclear power, which is competitive in price to off-shore wind but does not require a dispatchable backup or high-volume storage is probably a better option.