Onshore wind: how do the costs compare?

12 April 2016

The electricity generated by onshore wind farms in the next few years is expected to cost less to produce, or similar, than electricity from other main renewable sources. But it's expected to cost more than power from gas-fired plants.

The cost compared to nuclear power differs depending on which source is used. Government projections of costs for projects starting in 2013 suggested that nuclear energy would be cheaper than onshore wind. But subsidies agreed for nuclear projects beginning in the middle of the 2020s suggest costs will be higher than those for upcoming onshore wind projects.

These estimates don't include wider costs such as the impact on air quality and the environment from burning fossil fuels, or the cost of integrating different technologies to the grid.

All things being equal, higher costs for energy generation should filter through to higher prices in energy markets and eventually to higher prices to consumers. But as we’ve seen before that relationship isn’t straightforward.

The government expects onshore wind power to be cheaper than other renewables

Onshore wind power was set to cost generators £101 per megawatt hour (MWh) of electricity generated according to government forecasts from 2013. That was higher than new gas power at £80, and nuclear power at £90.

It was the cheapest renewable power source listed, against large scale solar plants at £158 per MWh and offshore wind at £122 per MWh and above.

These estimates were of the ‘levelised cost’ of different technologies, including all the direct costs associated with building, operating and decommissioning power stations over their lifetimes. They were adjusted to take into account their ‘present value’, and then divided by the amount of power the plants were expected to produce over their lifetime.

They’re all estimates for projects beginning in 2013, and show the estimated costs for owners of generating plants rather than the costs consumers end up paying.

There’s some uncertainty to them, too. The government says the calculation is “highly sensitive” to assumptions on things like how much energy will be provided by projects, and on costs like fuel and maintenance. 

The other way to look at costs is to look at the subsidies that are given to energy generators to cover the costs of generating power. These show that upcoming nuclear power projects aren’t cheaper for generators than onshore wind.

Subsidies for nuclear energy projects are going to be higher than for onshore wind

In practice, the government has agreed subsidies for upcoming nuclear power projects that are more costly than for onshore wind.

The government’s ‘Contracts for Difference’ subsidy scheme involves paying certain low carbon generators a top-up to the money they receive for selling power.

In simple terms, this means that if the market price of energy is £50 per MWh, but a generator can only turn a profit by receiving £100 per MWh, the government promises they’ll be paid the extra £50 per MWh. It’s paid for by the energy suppliers, who ultimately set consumer bills.

The total amount the power station receives per MWh—in this example, the £100—is the strike price.

The idea is that these prices match reasonably well to the costs generators believe their projects will have—if generators overstate costs in order to get more money in subsidy they risk not getting anything at all if their competitors put in lower bids.

Strike prices vary year to year. The strike price agreed for future onshore wind projects is around £79 per MWh in the next few years. That’s lower than offshore wind at about £114 per MWh and above, and lower than the cost of the Hinkley Point nuclear plan, where the cost is either £90 or £93 per MWh depending on how many reactors are eventually built.

And it's the same as the strike prices awarded for solar power—although two projects had originally been awarded a lower strike price of £50 per MWh these are no longer going ahead, with one of the companies saying the strike price was too low.

In the case of renewables, prices were arrived at via auctions, which involved generators submitting ‘bids’ for the amount of money they’d be willing to accept. The cheapest bids are those that can go forward under the subsidy.

For new nuclear, the strike price is what has been agreed directly between EDF Energy and the government.

There are a few reasons the strike price subsidies are different to the levelised cost estimates. When the government made its cost estimates it stressed that levelised costs would inform the level of subsidy given to future projects, but so too could other costs, and considerations such as the need to get secure electricity supplies.

And it was making its forecasts based on data and assumptions from 2013. The strike prices will in some cases have made use of more recent information.

Other costs are hard to pin down

Neither levelised costs nor subsidies will fully take into account wider costs to society from generators.

Different technologies pose different challenges for the supply of electricity nationwide, but quantifying these in a comprehensive and comparable way is challenging.

On one day last November, for instance, National Grid had to tell generators it needed more power to be produced, and some responded by increasing their output and selling it to the grid at a higher than usual price.

This wasn’t solely due to wind, as has been suggested—it was the result of a few factors. Wind was low, but this had been predicted and alternative power sources arranged. The call for more electricity came after the unexpected failure of other plants.

So it’s difficult to say here whether the extra costs should be attributed to wind power or the failure of the other power sources.

Other costs go wider than those paid by consumers—the impact on air quality isn’t counted, for instance.

How will this impact the price that consumers pay?

Consumer prices are set by supply companies. The supply companies find power either through generating it themselves or buying it from generators in the wholesale market.  

All things being equal, you’d expect more expensive sources of energy to lead to higher wholesale prices, and you’d expect suppliers to pass those on to consumers in the form of higher bills. But as we’ve seen, wholesale prices might not reflect the full cost of producing energy.

That relationship between bills and wholesale prices is complicated. For one thing, the suppliers are companies seeking to make profits, and might decide not to pass on higher or lower wholesale prices.

Onshore wind has recently been subsidised using a scheme called the Renewables Obligation, which will be replaced for new projects with the Contracts for Difference scheme. Both schemes cover a variety of renewable technologies, including solar power and offshore wind.

The government has estimated that in 2014 the Renewables Obligation for all low-carbon technologies covered, not just onshore wind, added £36 to the average household’s electricity bill of £627. By 2020 it expects it, combined with Contracts for Difference, to account for £78 out of £633.

We don’t have comparable figures for other sources of electricity.

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