Uneconomic greenery

The Times reports that Adair Turner is going to investigate why all the energy companies are exiting the renewables sector as fast as they possibly can.

Doubts have surfaced over the Government’s commitment to cut UK greenhouse gas emissions by at least 34 per cent by 2020 as falling oil prices and the global credit crisis have triggered a funding crisis. Last week E.ON, the German utility group, and Masdar, a fund controlled by Abu Dhabi, said that they were reconsidering the viability of the London Array.

Shell pulled out of the scheme last year, citing spiralling costs, while BP also said it was abandoning the UK’s renewable energy sector, blaming a lack of incentives. Gordon Brown has put the creation of thousands of “green-collar” jobs at the centre of his plans for an economic recovery.

When times are good, big business can play along with the green scam as a sop to politicians and as a quid pro quo for favours in other areas. Now that belts are being tightened, executives are having to get real.

Expect all of the spending on green projects to go down the same plughole as the bank bailout cash.

Comments

[PeterMG]

The way I read it is these companies are using the credit crunch as the ideal excuse to extract themselves from what they see as loss making enterprises. They know the fundamental engineering is flawed, which means all the costs are wrong, and without a massive extra Government subsidy they don’t want to know.

It would be better for all if they had the Guts to tell the truth though, as it would force people like Fred Astaire, sorry I mean Adair Turner to justify the current over optimistic projections in the face of mounting operating experience.

[Kevin B]

It will be interesting to note the changing marketing techniques as the recession takes shape.

In good times, 'green' marketing is a good way of selling stuff to differentiate your product from the rest. People might buy your product, even if it costs a bit more, when they have the cash, (or credit), to spend on feeling good about themselves. Now, the emphasis is going to be on price.

I find it amusing that ExxonMobile, who held out against the green pressure for longer than any other petrochemical company, finally succumbed late last year just as the tide began to turn against the environmentalists.

Who knows, perhaps one day soon I'll be able to pop down Sainsbury's and buy a few 100W incandescent light bulbs again.

[Toad Stomper]

Looks to me like the whole green economy - recycling, green energy etc - is just another bubble. When it bursts there's going to be a lot of pain for those who deserve it, but unfortunately a lot of pain for those that don't. However, the sooner it does burst the sooner some sanity might return ... maybe.

[Bruno Prior]

This is textbook rent-seeking behaviour. When the Government is formulating general energy policy (e.g. during their recent Energy Review), wind is claimed to be cheap and plentiful. When the Government is fixing determining mechanisms and levels of support (as at present, where they are finalizing the RO Order 2009), wind is claimed to be difficult and expensive. The Government's bizarre determination to broadly pick its winners in a pseudo-philosophical debate largely divorced from economics, and then to micro-manage incentives to ensure that their "winners" are generously backed (which they wouldn't need to be if they were genuine winners), opens the door to cynical manipulation by the wind industry.

Getting reliable figures for the real economics of wind is almost impossible. You can find claims ranging from £25/MWh to £150/MWh. My guess is that it is very site- and project-specific, that you could find projects that lay anywhere on this range, and that the distribution is roughly normal but somewhat slanted towards the top-end.

If so, and this is broadly consistent with many of the claims of the wind industry, then they are more than genuinely supported under the proposed changes to the RO, where offshore wind will receive 50% more support than it received previously (around £60-70/MWh on top of the wholesale value of the power) and offshore wind will continue to receive £40-45/MWh of support (+wholesale), despite the fact that the RO was supposedly being based on need and almost no one can argue that onshore wind requires that level of support.

The real problem for developers is not the level of support for wind under the RO, which is unrealistically generous, but the unpredictability of forward prices for wholesale electricity and for the EU-ETS. But these large energy companies who complain that renewables are not economic are exactly the same companies who are wedded to an inherently volatile "carbon-pricing" mechanism, because it is so helpful to embed their incumbent position, and so fond of the vertical-integration that has prevented a liquid trading market for electricity that is so essential to the emergence of strong forward markets, and to reducing the risk of investment in capacity.

[Bishop Hill]

But presumably there would be no investment in wind capacity at all if it wasn't for the subsidy? What are wholesale prices for gas-generated electricity?

[Michael Orman]

Shell pulled out of the scheme last year, citing spiraling costs, while BP also said it was abandoning the UK’s renewable energy sector, blaming a lack of incentives.

[Bruno Prior]

There would be some onshore wind, assuming they could get planning permission and connections, but probably no offshore wind. Forward wholesale electricity prices are currently down to around £50/MWh, from around £85/MWh last summer.

Renewables benefit not only from wholesale prices and ROCs, but also from exemption from the Climate Change Levy (around £4.70/MWh). And part of the wholesale price is the cost of the EU-ETS, although that is currently not worth much. So the total amount of support that renewables currently get is in the region of £55/MWh over the costs of fossil-fired generation. Under a banded RO, offshore wind would be getting (say) £75/MWh of support, and if EUAs recover in value (unlikely in the short-term, but you never know), that could rise another £5 or 10/MWh.

I would argue that a rational mechanism to price carbon is not subsidy, but the internalization of an externality (we can argue what the value of that should be, but a rational mechanism should yield a price that helped to discover that value). Unfortunately, we have several mechanisms providing quadrupled-counted support in some sectors and negative support (i.e. taxing green to support brown) in others, and not one of them is rational.

[Bishop Hill]

Not quite following this.

If the market price is £50 and renewables are getting £50 subsidy in order to compete then their production cost must be getting up towards £80 (allowing £20 for their profits). Fossil must have a production cost of say £30 (again, £20 for profit).

If the subsidy goes, why would you get any wind power at all?

[Bruno Prior]

What makes you think that the subsidy is priced rationally? Or that there is a single "cost of production" that applies across all wind installations at all times? Or across all installations of any other technology come to that?

What people get and what they need are two different things.

And I suppose it depends how you define profit (e.g. are you netting off costs of financing capital expenditure? Are you allowing for depreciation? etc), but by most definitions, your 40% margin for fossil-fuelled plants is very optimistic.

I don't know if the following is accurate, and someone may be able to supply more accurate figures, but based on the best information I have to hand, if they can buy gas at (say) 56p/therm (£19/MWh) and coal at $80/tonne (depends on CV and exchange rate, but say roughly £6.50/MWh), and allowing average conversion efficiencies of (respectively) 50% and 35%, cost of fuel alone is around £38/MWh for gas and £19/MWh for coal.