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Ofgem's maths

The Telegraph is reporting that the UK's energy "regulator", Ofgem, has authorised capital expenditure of £7.6bn to allow windfarms in Scotland to be connected to the electricity grid (H/T Lord Beaverbrook).

Ofgem said on Monday it had fast-tracked proposals for infrastructure spending by energy companies ScottishPower and SSE and expected to make a final decision in April, following a consultation.

The investment will be paid for through energy bills and is likely to add 35p to a typical household bill each year from 2013 to 2021.

Eight years, 35p per year, and say 30 million households. By my reckoning the cost to consumers over eight years is £84 million, (£10.5m per annum).

8 × 0.35 × 30 million = 84 million

So who is paying the difference between the £7600m spend and the £84m recouped from consumers?

Or have they got their maths wrong and they mean that the cost per household per year will be £32?

7600 ÷ (30 × 8)  =  32

I guessing they have got this wrong by a factor of 100.

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Reader Comments (21)

35 pounds, 35 pence, what's the difference?

Jan 24, 2012 at 8:33 PM | Unregistered CommenterCurt

Same difference between catastrophic and natural global warming and probably the same mistake.

Jan 24, 2012 at 8:47 PM | Unregistered CommenterLord Beaverbrook

"So who is paying the difference between the £7600m spend and the £84m recouped from consumers?"

Isn't this going to be some sort of free, (but regulated!), market efficiency gain sort of thing? Iberdrola saw this coming back in 2010:

"Cooperation with the British Regulators
Regulatory review of energy activities began in the United Kingdom in 2010 in order to achieve the goal of an 80% reduction in greenhouse gases by 2050 as compared to those in 1990, preserving the
safety of supply and maintaining costs at levels accessible for consumers. The British regulators calculate that investments of 200,000 million pounds in infrastructure and measures promoting energy efficiency will be required in the coming years."

Jan 24, 2012 at 8:58 PM | Unregistered Commenternot banned yet

Michael Mann selected the data to input, Phil Jones set up the Excel spreadsheet and Steig was in charge of the maths.

Jan 24, 2012 at 9:14 PM | Unregistered CommenterGixxerboy

The scam is, it would appear, that Salmond aims to sell this power to England, at up to three times the price of electricity produced with fossil fuel, while making up the shortfall when the wind doesn't blow enough – or at all – by buying in power from England, at fossil fuel prices. By this means, he hopes to make profits of billions of pounds.

Jan 24, 2012 at 9:38 PM | Unregistered Commentermatthu

I would guess that their claim is actually that the 32p is the incremental cost to consumers; the balance is what would be paid anyway for the power provided through other sources. This would mean though that the wind power is only 1% more expensive than the other sources. That also doesn't sound right, unless it is being subsidised by government and people are therefore paying for it through higher taxes.

Jan 24, 2012 at 9:44 PM | Unregistered CommenterSpiny Norman

'add 35p to a typical household bill each year '. If that's a cumulative 35p it still only comes to £378m

Jan 24, 2012 at 9:55 PM | Unregistered CommenterPharos

After 2021, boy oh boy!

Jan 24, 2012 at 9:58 PM | Unregistered CommenterPharos

Major transmission infrastructure would not normally be recovered over 8 years, so I'm not sure why Ofgem would be citing a 2013 to 2021 rate impact. My integrated utility amortizes "lines" over 35 - 100 years, and I would imagine that the high voltage (500kV) lines are on the high end of that range, given the need for Rights of Way, etc.

That being said, they have to collect at least the carrying cost:
7.6Bn x 6% = 456M annually
if there are 30M households, that's 15.2 GBP/annually per household

And that hasn't even absorbed any amortization (or paid down principal, depending on how you look at these things). Amortizing over 50 years at 6% (which is likely a real, rather than nominal discount rate) requires ~1.87Bn GBP annually, or just over 60 GBP/household - and that would escalate

Jan 24, 2012 at 10:32 PM | Unregistered Commenterdcardno

Silly - they're going to use the 84 million to buy oxygen credits (thus cornering the market), and hold on to them until we're all gasping for air, and then sell them for hundreds of times what they paid for them. That 7600 million will be pocket change. Clever little sods, aren't they?

According to Clownopedia, carbon credits are soooooo yesterday.

Jan 24, 2012 at 10:45 PM | Unregistered CommenterCrusty the Clown

lol at gixxerboy...awaits BBD's diversionary intervention blaming it on big oil

Jan 24, 2012 at 10:58 PM | Unregistered Commenterdiogenes

It'll be peddled as using private capital investment, which means National Grid plc or some such outfit borrowing from China, paying interest on the loan, paying stock dividends, paying corporation tax, charging admin and maintenance costs, charging transmission tariffs and all to be recouped in our bills.

Jan 24, 2012 at 11:00 PM | Unregistered CommenterPharos

Lets see what they say to an FOI request on the matter

Jan 24, 2012 at 11:53 PM | Unregistered CommenterNick

I think that the problem is all down to the introduction of decimal currency.
Bring back good old English pounds, shillings and pence.
That will make the maths much easier to do.
We will then have no more unfortunate errors like mistaking #32 for a mere 32p.
(Sorry about the # sign - blame the Ausie keyboard)

Jan 25, 2012 at 3:48 AM | Unregistered CommenterAusieDan


I emailed the press office to see if they would explain.

Jan 25, 2012 at 7:20 AM | Registered CommenterBishop Hill

Looking at DUKES data for 2010, of the electricity consumption of 328,000GWh, industry used 104,000GWh, transport used 4,000GWh, domestic consumers used 119,000GWh and others (commerce, public administration (ahem) and agriculture used 101,000GWh. I believe the cost is accumulative, i.e.32p in year one, 64p in year two etc.

Thus assuming the cost is shared equally, the whole lot over 8 years will be, according to my calcs, as follows:

# of households = 25,000,000 (119,000GWh / 4.7MW)
Cost per household over 8 years = 36 x .32 x 25,000,000 = £288 million
Total cost to all consumers = 288,000,000 x 328 / 119 = £794 million

It can be seen that this arithmetic growth in costs will soon cover the investment. Over the following 8 years the cost to consumers will be £2.205 billion, and the next 8 years the cost to consumers will be £3.616 billion.

By this typical piece of sleight of hand, Ofgem has made a huge and wasted investment sound like a small cost to consumers.

PS The author has not verified any of the calculations and bears no responsibility for the correctness of the calculations, which have not been peer-reviewed. Users of the results do so at their own risk.

Jan 25, 2012 at 7:27 AM | Unregistered CommenterPhillip Bratby

I think the best rated comment on the Telegraph bears repeating. It is what I have been saying to DECC ministers via my MP for several years now, clearly also to no avai. I have also been saying it at wind farm public inquiries, but Inspectors don't want to hear it and take no notice of the hard evidence, because it runs counter to Government policy:

This crazy dash for development of inefficient wind-turbines and other renewables both in Scotland and England and Wales requires the upgrade of National Grid £17.6-billion and Scottish Power £7.6-billion plus interconnectors by undersea cables to many countries in Europe. We must looking at transmission and distribution upgrades in total of over £40-billion pounds to deliver energy that is intermittent and requires the equivalent capacity to operate as regulating and standby reserves.
The intermittency is causing very efficient gas-turbine generators to operate more frequently at reduced outputs thereby lowering their load factors and decreasing their overall operating efficiencies causing more carbon dioxide emissions into the atmosphere.
The transmission losses of the network must be another significant factor, of the order 10% to 15% between Scotland and England. We are heating up our atmosphere by these transmission losses and surely this is additive to global warming, plus the manufacturing and construction carbon footprints of these new transmission connections. These effects should all be loaded against the wind turbines and other renewables because they are so very remote.
On top of this the off-shore wind turbines receive 12p/kWh subsidies and on-shore currently 6p/kWh.
Additionally to this, the balancing costs caused by the necessary standby and operating reserves operations (on conventional generators) are increasing.
All of these increased carbon emissions and cost increases should be factored against the renewable generation developments because they are causing these changes.
It is very unlikely that there will be any beneficial reduction in carbon dioxide emissions resulting from the government induced ‘so-termed’ renewable energy developments. The total increased costs must be in the order of £100-billion or more which amounts to £3,300 per household which will relate to an increase in electricity bills of £330 per household per year ad infinitum.
I have offered Chris Huhne and DECC to set up a team to honestly and rigorously evaluate all of these pollutant effects and cost differentials but they have declined even to answer me.
This resultant cost increase will be devastating for the end consumers for what appears to be no overall reduction in green-house gases. On top of this we will all be encouraged/forced to accept the roll-out of smart electricity meters at a DECC quoted cost of £11.1-billion which in the final costings is likely to be twice this that would cost at least £34 per household per year ad infinitum.
Why are we doing this?
The developments of shale gas extraction off our shores and new efficient gas-turbine power station implementations would in reality reduce carbon dioxide emissions by a greater extent and we would not require these exhorbitant transmission infrastructure costs.
I simply do not understand this madness, its as though there has been a brain disconnect by our politicians not asking if there are any real carbon dioxide reduction savings from the deployment of vast swathes of wind turbines destroying our beautiful landscapes and seascapes.
George Wood, retired head of Technical and Economics, Balancing Services, National Grid

The real problem is that the big energy companies are all going to make a bomb out of the scam and so aren't prepared to rock the boat by telling the truth. I still see no way we can stop this lemming-like, suicidal and mad energy policy. There's hardly a single politician who understands the issue at all.

Jan 25, 2012 at 7:42 AM | Unregistered CommenterPhillip Bratby

"I simply do not understand this madness,"

Well, if elec wholesale is about £50MWh, which I make 5p/kWh, IMO this line helps to explain it:

"On top of this the off-shore wind turbines receive 12p/kWh subsidies and on-shore currently 6p/kWh."

I once tried to find out how all this finds its way through the consolidated accounts of our europower suppliers. Hmmm.

Sad really - the politicians thought they were doing their bit for the planet and have been railroaded into some, at best, highly inefficient investment policies and, at worst, some economically and socially catastrophic ones.

Who's going to be the first with the nouse to say "Time for a pause - just to check we are on the right track of course!"?

Jan 25, 2012 at 8:34 AM | Unregistered Commenternot banned yet

First, it is likely that the £7.6bn is an underestimate and there will be over-spends. History of all past large scale infra-structural projects suggests that this will almost certainly be the case. Hence, energy bills are likely to rise even more than you suggest.

Second, should not the expense be split between ScottishPower and SEE customers or will other energy companies be contributing towards the capiutal costs of the infra-structure?

Politicians are desperate to keep the true cost of all this from the public until it is a fait a complis.

A proper audit of the effectiveness and cost implications of windfarms is well overdue and a public debate on whether the public wish to go down this route should take place without delay and before even more huge sums of money are wasyed.

Jan 25, 2012 at 11:27 AM | Unregistered Commenterrichard verney

"I guessing they have got this wrong by a factor of 100"

Normal for slack hacks. How many abstracts and press synopses of published papers have I seen which confuse milli- and micro-? Answer - I don't know because I have lost count. In my field of interest this makes the difference between kilograms and tonnes of emission or sequestration per hectare of land.

Jan 25, 2012 at 2:51 PM | Unregistered CommenterFilbert Cobb

Why should Ofgem want to fast-track the proposals when they know many Scots want independence?

Why should English consumers fork out for Scottish infrastructure, that then allows the Scots to more-easily sell their unpredictable commodity to the English?

Jan 25, 2012 at 6:00 PM | Unregistered CommenterJoe Public

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