The shift from 15-20 years in CFD tenor requires an adjustment as Sam says - by approximately 12%. On that basis, the real cost in 2024 money is £101.92 per MWh. And this does not, of course, reflect the full cost as consumers will continue to need to retain lots of gas back up remunerated to stand idle, to plumb in more expensive electricity connections to remote generating sites, and pay more balancing costs and constraint payments. The idea of CFDs - as Sam points out - was to ease this "sunrise"offshore wind technology towards commercial viability. We are now more than a decade in and have now seen costs rise over the two most recent auction rounds, during which time power prices for offshore wind have doubled from the 2022 round, and now stand at a roughly 40% per cent premium to current wholesale prices - even accounting for discriminatory carbon costs and high gas costs. Moreover these high prices are locked in for 20 years. It's a disaster for the UK, where - as everyone can now see - industry is shutting down left right and centre due to excessive energy costs. Yet the government will doubtless try to spin this as some sort of triumph..
The other despairing thing about this is majority of equipment will be imported, the steel will be made elsewhere, the fabrication of the offshore substations will be elsewhere all the heavy lift vessels are largely from Holland/Italy, the nacelles are German/Danish with Chinese pushing hard. About all we do is dig holes for the cables and erect the new onshore substations. The least Labour could have done by committing UK to this path was made sure its citizens got most of the benefit in local jobs.
Thanks, interesting stuff. So what's the answer then? You're saying, if I understand, that the current costs of offshore wind are considerable and no longer competitive.
The reason I ask is that some/many/most believe that climate change is an existential threat. Albeit that the main costs will accrue in fifty some years due to heat unliveability, water scarcity and infrastructure degradation. Provided you accept the truth of climate change, choosing not to find a way to displace fossil fuels from our generation mix is tantamount to accepting that future generations will unavoidably face multi trillion pound societal problems.
When Reform get in they transfer the additional costs to consumers and businesses through a levy on governmental departmental budgets, with an expectation that reductions are only allowed to come from civil service headcount reductions and reductions in civil service expenses. NGOs as well.
Interesting piece Sam, it misses one key point for me, which is what the cost of building the alternative fossil fuel energy generation asset would be at today's (or 2024) prices. The most efficient form of fossil fuel generation is of course CCGT and the price that would electricity at is £147/MWH. That makes today's £91/MWH extremely attractive and indeed 38% lower than Gas. I make this and broader points in this piece
That doesn't change the fact that we have a quasi-centrally planned energy system that is at serious risk of overbuilding renewables. Politicians will never have the expertise, knowledge, or political capital to work out the optimum energy mix. We should just let markets decide the cheapest energy mix, influenced by a modest carbon tax, enabled by simple and predictable environmental regulations and planning system and a competitive energy market.
DESNZ also published updated technology generation costs yesterday with a CCGT price of £107; although as always this depends on the underlying assumptions
Any new CCGT could have been planted at a former coal fired power station site with many 2GW locations available that would have avoided any extra transmission expenditure
How do you actually spend £170 million to mitigate impact on seabirds? It’s a colossal amount of money. Is it just a bung paid to NGOs? What does it buy?
Good essay. It's worth looking at some of the alternatives to LCOE which have emerged in recent years. LFSCOE is one approach. FSCOES is another. The 2022-2023 NREL/PNNL Assessments are another example. These approaches tend to expose the high costs of grid upgrades and additional energy storage requirements to cope with increased volatility as total share of energy generated by wind/solar increases. None present a pretty picture which recommends wind/solar at scale for consumers or businesses.
But there is another relatively easy method to demonstrate the folly of full steam ahead for wind/solar. Most unbiased regression analyses by country show that as countries depend more on wind and solar for energy, their energy prices skyrocket.
The irony is that if governments allowed businesses to exploit natural gas resources with relative impunity, then theoretically total carbon costs globally from electrical energy would fall 20% as gas displaced coal as the fossil fuel of choice for energy suppliers. In practice only around half of this would be achievable in the real world. But it's worth noting that the fracking revolution in America did more to reduce America's carbon emissions than any other source of mitigation.
I can't help but think that crystal ball gazing in the world of renewable energy costs is not as useful as perhaps we may think. Why? Because, there's always a plausible case that renewable energy costs may come down in the future thus giving politicians a path to concluding "well, this ain't my problem. Leave it to my successor to sort out this problem. I won't be in Government at any rate, so why does it matter". This thinking has beset UK policy making for some time.
I still vividly remember the piece to camera by Nick Clegg in circa 2010 dismissing the case for investment in nuclear given it wouldn't come online until 2021. As a person living in 2026, all I can do is laugh out loud.
The recent developments in perovskite panels, or the purported breakthrough by Donut Labs in solid state batteries, both provide further ammunition for kicking the can on renewable energy investment if a politician were so inclined. And future breakthroughs will similarly add cause for slowing down.
But perhaps sometimes politicians just need to commit to their principles, and hope with a fair wind that their decision will be proven the right one in the course of time.
There's still the energy density rule. The lower the energy density, the higher the resources, labour and capital required to make use of it. The Asians still seem to be able to deliver nuclear power for $9 billion over a much shorter period. Most biased sources have to claim that a modern nuclear power plant only lasts 40 years to make it look far less attractive than a realistic 80 year lifespan would suggest.
One key metric is Energy Return on Energy Invested. Solar and wind have improved somewhat in this regard, but not at levels with justify the insane green optimism. Solar PV panel costs never include the costs of installation which are fairly fixed in farms, and they certainly don't account for the fact that thieves habitually break-in to steal the copper, a problem which no amount of CCTV seems capable of solving.
Fair comment. And I don't quibble with your cogent point about energy density. The Government's recent work to tackle nuclear policy dysfunctionality will hopefully help move the dial. Albeit not quickly as is ever the case.
I would push back around green optimism. I accept that green energy generation isn't as green as some would like us to believe. But, if it is accepted that climate change will cost multiple trillions in human displacement due to heat unliveability, increased water scarcity and infrastructure and housing damage from increasingly disruptive weather, then surely the significant shortcomings of wind and solar are more than justified. If we continue with fossil fuels, we are simply prioritizing the immediate needs of the current generation, whilst shouldering the next generation with significant societal and economic problems.
The picture of a future climate scenario like this is highly implausible. Effects to date have been mostly net positive- global greening, fewer heat/cold deaths combined, higher crop yields from increased CO2 in the atmosphere globally, reverse desertification for the same reason, etc. This trend won't continue. There will be point at which negative effects outweigh positives, but we haven't reached it yet. The best projections put total temperature change at 3C or slightly above by 2100, including all temperature rise to date.
Meanwhile, solar and wind are directly responsible for placing the German economy in peril, same thing for the UK. The real energy successes are countries like France or Sweden. I'm not arguing that there shouldn't be action, but there are far more rational choices we should be making. For example, better funding to develop CO2 neutral concrete, a major contributor to carbon globally. We already have the chemicals for refrigeration which are far better than what's currently used from a climate perspective.
Simply mandating that customers are able to search by manufacturing guarantee on places like Amazon would probably shift the needle by a few percentage point, and pushing better rideshare data gathering to match people for shared drives to work, and educating parents that the somewhat unpleasant experiences on school buses actually builds emotional resilience in children, making them happier, less anxious and prone to depression as adults could also mitigate total carbon produced without adversely affecting people's lives. Congestion is a major factor in carbon transport costs- in this day and age only those parents who are driving their kids to specialists schools should be driving their kids to school for the school run.
Here's one the problems. People think that a shift to mass transit is possible. It's not. Someone looking for work with the assistance of a car has the capacity to potentially engage with 30 times as many prospective employers as someone using mass transit. Currently around 22% of the public in the UK use public transport to work. Looking forward, the maximum who could be added without causing massive losses of work for the UK working population is somewhere between 13% and 18%, because don't forget all of those employers also need employees, and there simply isn't the space to relocate their businesses to high density areas which mass transit systems might cover.
Besides, a recent article by The Conversation looked at the attitudes of climate scientists in the developed world versus the rest of the world. The scientists in the developed world were more positive about the degrowth agenda, although most of them probably didn't realise that degrowth would probably cost a lot them their jobs, as well as at least half of people working in the public sector (no money). The scientists in the developing world were adamant. They wouldn't accept a degrowth agenda and would only accept green growth approach.
Here's the problem. Originally, the reason for countries like the UK and Germany to push forward was to show other countries a path forward, a positive example. Currently, these examples don't serve as a model to emulate, but rather as a warning of what to avoid.
There are lots of areas which we should be exploring which we're not. There are exciting developments in geothermal. Africa built a 5bn dam across the Nile, emulating China's big dam project. One area which has not been explored at anywhere near the level of capital it needs is human and animal sewage extraction, not just in naturally produced gas, but also for chemicals like phosphorus (and incidentally, reducing the pollution of vital coastal fisheries).
As a general rule, funding RND to tackle climate change produces far, far, far, far, far more climate good than funding solar and wind beyond the thresholds at which they are not economically viable. Here in the UK and many parts of Europe, we crossed that threshold a long time age. I should mention there is a special exception for solar when it's paired with a high use of AC, such as in China or California.
Climate change can really only be tackled by an iterative approach. The approach of allowing government to pick winners rather than allowing the market to utilise its natural process of discovery has proven disastrous. We should fund research but not care at all how companies and organisation go about tackling climate change, other than insisting that their solutions actually work and don't break the bank once they're developed.
any view on whether that £91 price is higher than it would have been had the govt not begun a consultation on moving existing FIT and ROCs contracts from RPI -> CPI ?
I recall a line from Milton Friedman that went along the lines of "The infant industry argument is a smoke screen. The so-called infants never grow up".
Gas is not back up and must run 100% of the time. Gas is what balances the grid's supply and demand. If it were not for gas the grid would collapse.
Some gas (Open cycle gas turbines) is switched off and on, but is of relatively low capacity but must be expensive to cover operating cost as it's generation is low relative to capacity.
The vast majority of gas is Closed cycle gas turbines and incorporate a steam generating section using waste heat from turbine exhaust. These run, often at low output levels, (which impacts its steam generating ability, as low level load reduces gas temperature significantly and reduces efficiency as well. (CCGT can run at 60% efficiency if they were utilised correctly, instead of being used to compensate for wind's deficiencies.)
The shift from 15-20 years in CFD tenor requires an adjustment as Sam says - by approximately 12%. On that basis, the real cost in 2024 money is £101.92 per MWh. And this does not, of course, reflect the full cost as consumers will continue to need to retain lots of gas back up remunerated to stand idle, to plumb in more expensive electricity connections to remote generating sites, and pay more balancing costs and constraint payments. The idea of CFDs - as Sam points out - was to ease this "sunrise"offshore wind technology towards commercial viability. We are now more than a decade in and have now seen costs rise over the two most recent auction rounds, during which time power prices for offshore wind have doubled from the 2022 round, and now stand at a roughly 40% per cent premium to current wholesale prices - even accounting for discriminatory carbon costs and high gas costs. Moreover these high prices are locked in for 20 years. It's a disaster for the UK, where - as everyone can now see - industry is shutting down left right and centre due to excessive energy costs. Yet the government will doubtless try to spin this as some sort of triumph..
The other despairing thing about this is majority of equipment will be imported, the steel will be made elsewhere, the fabrication of the offshore substations will be elsewhere all the heavy lift vessels are largely from Holland/Italy, the nacelles are German/Danish with Chinese pushing hard. About all we do is dig holes for the cables and erect the new onshore substations. The least Labour could have done by committing UK to this path was made sure its citizens got most of the benefit in local jobs.
Thanks, interesting stuff. So what's the answer then? You're saying, if I understand, that the current costs of offshore wind are considerable and no longer competitive.
The reason I ask is that some/many/most believe that climate change is an existential threat. Albeit that the main costs will accrue in fifty some years due to heat unliveability, water scarcity and infrastructure degradation. Provided you accept the truth of climate change, choosing not to find a way to displace fossil fuels from our generation mix is tantamount to accepting that future generations will unavoidably face multi trillion pound societal problems.
When Reform get in they transfer the additional costs to consumers and businesses through a levy on governmental departmental budgets, with an expectation that reductions are only allowed to come from civil service headcount reductions and reductions in civil service expenses. NGOs as well.
Interesting piece Sam, it misses one key point for me, which is what the cost of building the alternative fossil fuel energy generation asset would be at today's (or 2024) prices. The most efficient form of fossil fuel generation is of course CCGT and the price that would electricity at is £147/MWH. That makes today's £91/MWH extremely attractive and indeed 38% lower than Gas. I make this and broader points in this piece
The piece I mentioned above is here
https://www.linkedin.com/posts/juergen-maier-cbe-frs-freng-b4114961_its-a-good-day-for-uk-rail-energy-infrastructure-activity-7417228677131943936-Zlbp?utm_source=share&utm_medium=member_android&rcm=ACoAAA0DYyEBOGkNvyZY75y8lpgGlXkPo_xWZyE
That doesn't change the fact that we have a quasi-centrally planned energy system that is at serious risk of overbuilding renewables. Politicians will never have the expertise, knowledge, or political capital to work out the optimum energy mix. We should just let markets decide the cheapest energy mix, influenced by a modest carbon tax, enabled by simple and predictable environmental regulations and planning system and a competitive energy market.
renewables are already overbuilt especially solar which is why they should have concentrated more on storage before adding ever more renewables
DESNZ also published updated technology generation costs yesterday with a CCGT price of £107; although as always this depends on the underlying assumptions
Any new CCGT could have been planted at a former coal fired power station site with many 2GW locations available that would have avoided any extra transmission expenditure
How do you actually spend £170 million to mitigate impact on seabirds? It’s a colossal amount of money. Is it just a bung paid to NGOs? What does it buy?
Good essay. It's worth looking at some of the alternatives to LCOE which have emerged in recent years. LFSCOE is one approach. FSCOES is another. The 2022-2023 NREL/PNNL Assessments are another example. These approaches tend to expose the high costs of grid upgrades and additional energy storage requirements to cope with increased volatility as total share of energy generated by wind/solar increases. None present a pretty picture which recommends wind/solar at scale for consumers or businesses.
But there is another relatively easy method to demonstrate the folly of full steam ahead for wind/solar. Most unbiased regression analyses by country show that as countries depend more on wind and solar for energy, their energy prices skyrocket.
The irony is that if governments allowed businesses to exploit natural gas resources with relative impunity, then theoretically total carbon costs globally from electrical energy would fall 20% as gas displaced coal as the fossil fuel of choice for energy suppliers. In practice only around half of this would be achievable in the real world. But it's worth noting that the fracking revolution in America did more to reduce America's carbon emissions than any other source of mitigation.
Great article.
I can't help but think that crystal ball gazing in the world of renewable energy costs is not as useful as perhaps we may think. Why? Because, there's always a plausible case that renewable energy costs may come down in the future thus giving politicians a path to concluding "well, this ain't my problem. Leave it to my successor to sort out this problem. I won't be in Government at any rate, so why does it matter". This thinking has beset UK policy making for some time.
I still vividly remember the piece to camera by Nick Clegg in circa 2010 dismissing the case for investment in nuclear given it wouldn't come online until 2021. As a person living in 2026, all I can do is laugh out loud.
The recent developments in perovskite panels, or the purported breakthrough by Donut Labs in solid state batteries, both provide further ammunition for kicking the can on renewable energy investment if a politician were so inclined. And future breakthroughs will similarly add cause for slowing down.
But perhaps sometimes politicians just need to commit to their principles, and hope with a fair wind that their decision will be proven the right one in the course of time.
There's still the energy density rule. The lower the energy density, the higher the resources, labour and capital required to make use of it. The Asians still seem to be able to deliver nuclear power for $9 billion over a much shorter period. Most biased sources have to claim that a modern nuclear power plant only lasts 40 years to make it look far less attractive than a realistic 80 year lifespan would suggest.
One key metric is Energy Return on Energy Invested. Solar and wind have improved somewhat in this regard, but not at levels with justify the insane green optimism. Solar PV panel costs never include the costs of installation which are fairly fixed in farms, and they certainly don't account for the fact that thieves habitually break-in to steal the copper, a problem which no amount of CCTV seems capable of solving.
Fair comment. And I don't quibble with your cogent point about energy density. The Government's recent work to tackle nuclear policy dysfunctionality will hopefully help move the dial. Albeit not quickly as is ever the case.
I would push back around green optimism. I accept that green energy generation isn't as green as some would like us to believe. But, if it is accepted that climate change will cost multiple trillions in human displacement due to heat unliveability, increased water scarcity and infrastructure and housing damage from increasingly disruptive weather, then surely the significant shortcomings of wind and solar are more than justified. If we continue with fossil fuels, we are simply prioritizing the immediate needs of the current generation, whilst shouldering the next generation with significant societal and economic problems.
The picture of a future climate scenario like this is highly implausible. Effects to date have been mostly net positive- global greening, fewer heat/cold deaths combined, higher crop yields from increased CO2 in the atmosphere globally, reverse desertification for the same reason, etc. This trend won't continue. There will be point at which negative effects outweigh positives, but we haven't reached it yet. The best projections put total temperature change at 3C or slightly above by 2100, including all temperature rise to date.
Meanwhile, solar and wind are directly responsible for placing the German economy in peril, same thing for the UK. The real energy successes are countries like France or Sweden. I'm not arguing that there shouldn't be action, but there are far more rational choices we should be making. For example, better funding to develop CO2 neutral concrete, a major contributor to carbon globally. We already have the chemicals for refrigeration which are far better than what's currently used from a climate perspective.
Simply mandating that customers are able to search by manufacturing guarantee on places like Amazon would probably shift the needle by a few percentage point, and pushing better rideshare data gathering to match people for shared drives to work, and educating parents that the somewhat unpleasant experiences on school buses actually builds emotional resilience in children, making them happier, less anxious and prone to depression as adults could also mitigate total carbon produced without adversely affecting people's lives. Congestion is a major factor in carbon transport costs- in this day and age only those parents who are driving their kids to specialists schools should be driving their kids to school for the school run.
Here's one the problems. People think that a shift to mass transit is possible. It's not. Someone looking for work with the assistance of a car has the capacity to potentially engage with 30 times as many prospective employers as someone using mass transit. Currently around 22% of the public in the UK use public transport to work. Looking forward, the maximum who could be added without causing massive losses of work for the UK working population is somewhere between 13% and 18%, because don't forget all of those employers also need employees, and there simply isn't the space to relocate their businesses to high density areas which mass transit systems might cover.
Besides, a recent article by The Conversation looked at the attitudes of climate scientists in the developed world versus the rest of the world. The scientists in the developed world were more positive about the degrowth agenda, although most of them probably didn't realise that degrowth would probably cost a lot them their jobs, as well as at least half of people working in the public sector (no money). The scientists in the developing world were adamant. They wouldn't accept a degrowth agenda and would only accept green growth approach.
Here's the problem. Originally, the reason for countries like the UK and Germany to push forward was to show other countries a path forward, a positive example. Currently, these examples don't serve as a model to emulate, but rather as a warning of what to avoid.
There are lots of areas which we should be exploring which we're not. There are exciting developments in geothermal. Africa built a 5bn dam across the Nile, emulating China's big dam project. One area which has not been explored at anywhere near the level of capital it needs is human and animal sewage extraction, not just in naturally produced gas, but also for chemicals like phosphorus (and incidentally, reducing the pollution of vital coastal fisheries).
As a general rule, funding RND to tackle climate change produces far, far, far, far, far more climate good than funding solar and wind beyond the thresholds at which they are not economically viable. Here in the UK and many parts of Europe, we crossed that threshold a long time age. I should mention there is a special exception for solar when it's paired with a high use of AC, such as in China or California.
Climate change can really only be tackled by an iterative approach. The approach of allowing government to pick winners rather than allowing the market to utilise its natural process of discovery has proven disastrous. We should fund research but not care at all how companies and organisation go about tackling climate change, other than insisting that their solutions actually work and don't break the bank once they're developed.
Fascinating points. Let's see if Sam's blog alongside other think-tank pushback leads to a change in thinking.
any view on whether that £91 price is higher than it would have been had the govt not begun a consultation on moving existing FIT and ROCs contracts from RPI -> CPI ?
I recall a line from Milton Friedman that went along the lines of "The infant industry argument is a smoke screen. The so-called infants never grow up".
Sam,
please write 100 times:-
Gas is not back up and must run 100% of the time. Gas is what balances the grid's supply and demand. If it were not for gas the grid would collapse.
Some gas (Open cycle gas turbines) is switched off and on, but is of relatively low capacity but must be expensive to cover operating cost as it's generation is low relative to capacity.
The vast majority of gas is Closed cycle gas turbines and incorporate a steam generating section using waste heat from turbine exhaust. These run, often at low output levels, (which impacts its steam generating ability, as low level load reduces gas temperature significantly and reduces efficiency as well. (CCGT can run at 60% efficiency if they were utilised correctly, instead of being used to compensate for wind's deficiencies.)