Why Renewables Will Always Increase Energy Bills
Even with new installations at lower prices, index-linking means bills will keep rising
In the aftermath of the Allocation Round 5 (AR5) renewable energy auction debacle, a number of the renewables advocates have been insisting that renewables in general and wind is particular are still cheap. This comes after winning bids for onshore wind and solar being much higher than the Government’s Levelised Cost of Energy estimates and no offshore wind being awarded because developers were unable to make the economics work at such low prices. The main culprit was Carbon Brief whose article included the chart in Figure 1.
There is so much wrong with this chart, it would take over 1,000 words to take it apart completely. However, in brief, why is their solid line for gas-fired electricity roughly double the actual power price in the dotted back line from 2013 to 2020? Why do the solid yellow, orange and red lines not reflect the reality that Government estimates of LCOE have been proven wrong by AR5 (and me, here)? Why are they maintaining very low renewables prices in Contracts for Difference (CfD) prices out to 2028, when CfDs are index linked? For instance, the weighted average price we are paying for offshore wind on CfDs is currently ~£177/MWh compared to their estimate of ~£100/MWh. They show onshore wind at about £75/MWh, whereas the reality is ~£110/MWh with solar shown at ~£65/MWh when we’re currently paying ~£106/MWh under CfDs and around £190/MWh under Feed-in-Tariffs (FiTs). It does not bear any resemblance to reality. To back up my analysis, we paid over £100m in subsidy to wind farms just in August which demonstrates that CfD strike prices are above that of gas-fired electricity that sets the reference price (See Figure 2).
However, this got me thinking about what it would take for the actual price we pay for renewables to come down. I touched on that when writing the about how renewables increase electricity bills. I didn’t pursue it at the time, so this article looks at what needs to happen in theory for renewables prices to stay nominally stable and then looks at what we might expect renewables prices to do with current prices and installation rates.
What Would It Take to Stabilise Overall Renewables Prices
This is quite simple to model, but a bit tricky to explain, so bear with me. Imagine a renewable technology with 10GW of installed capacity with a current strike price of £100/MWh. If in Year 1, we were to add new capacity with a strike price of half the current strike price at £50/MWh, then the total weighted average strike price would fall. However, in Year 2 that weighted average would be indexed upwards by the rate of inflation. It turns out that if the new installations have strike prices half that of the installed base, then to keep overall prices stable, the rate of new installations needs to be twice the rate of inflation (see Figure 3).
In Figure 3, the weighted average price rises very slightly, and I keep the new installations at £50/MWh nominal. The starting capacity is 10GW. To maintain a 6% installation rate over time, the overall installed base must increase exponentially just to keep prices stable, rising to over 40GW of installed capacity by Year 25. This is clearly unrealistic in two ways. First, the price of new installations is likely to increase with inflation and the installed base is much more likely to increase in a linear fashion, reflecting the relatively fixed capacity of the country to deliver new projects. Once you take these things into account, the chart looks like Figure 4 below.
Here, the starting point is 10GW of installed capacity and £100/MWh average price. Then 0.6GW is added each year starting at £50/MWh, rising at 3% each year and the CfD price for installed base is indexed at 3% inflation too. The weighted average price rises from £100/MWh to £143/MWh and the installed capacity goes up to just over 24GW by Year 25.
In the real world, index-linked CfD prices and realistic build out rates even with new installations starting at half the current installed base, mean prices will continue to rise. Now let us look at what this tells us about the current installed base of onshore wind, offshore wind and solar PV.
Note that in the discussion below, current strike prices are sourced from the LCCC (CfD) and Ofgem (FiT) with installed capacities from Energy Trends Table 6.1. Moreover, at the time of writing the recent day ahead price according to Trading Economics for gas-fired electricity is around £80/MWh.
Potential Evolution of Onshore Wind Prices
We currently have 14.8GW of onshore wind installed and on average have added 0.67GW per annum since 2016. The current CfD strike price of existing onshore wind is around £110/MWh and contracts were awarded under AR5 at ~£70/MWh in 2023 terms (£52.29/MWh at 2012 prices). There is a large installed base of onshore wind built under the ROC scheme, but it is difficult to get data on actual prices paid to these wind farms, so I have used the CfD amount in this analysis. Figure 5 shows how we might expect overall onshore wind prices to evolve if we continue to add 0.67GW p.a. at £70/MWh with current prices and new additions indexed at various rates of inflation.
Even at 2% inflation, the weighted average price climbs to £143/MWh as capacity rises to nearly 31GW in year 25, even with new capacity starting at £70/MWh in Year 1. At higher rates of inflation, the prices rise even more steeply, to as high as £287/MWh with 5% inflation.
Potential Evolution of Offshore Wind Prices
We currently have 13.8GW of offshore wind installed and on average have added 1.4GW per annum since 2016. The current weighted average CfD strike price of existing offshore wind is around £177/MWh. Of course, no new contracts were awarded in AR5, so we don’t know what the current market rate might be. However, in 2019 Beatrice came online at a then current strike price of £155/MWh and several onshore windfarms came online at £92/MWh. This is a ratio of Offshore to Onshore of 1.68:1. Using this ratio to estimate today’s offshore wind price would give £118/MWh. This is not a million miles away from my estimate of around £131/MWh when I applied more realistic assumptions to the Government’s LCOE calculations. Note also that no floating offshore wind contracts were awarded in AR5 at the indicative price of £116/MWh (£156/MWh at 2023 prices), despite one small project being awarded a contract at £87.30/MWh in AR4. Figure 6 shows how we might expect overall offshore wind prices to evolve if we continue to add 1.4GW p.a. at £118/MWh with current prices and new additions indexed at various rates of inflation. Note that with Norfolk Boreas being suspended and no new windfarms being awarded during AR5, the ambition of adding 1.4GW each year might be somewhat optimistic.
Capacity rises to over 47GW by Year 25 and at 2% inflation, the weighted average price dips a bit in the early years, but still climbs to nearly £217/MWh by Year 25. At higher rates of inflation, prices rise more steeply, to as high as £435/MWh with 5% inflation. With a lower build out rate, prices would rise more quickly. Ironically, higher gas prices would probably lead to more inflation that would further increase wind prices and low inflation probably means stable gas-prices, so wind would continue to be more expensive than gas.
Potential Evolution of Solar PV Prices
We currently have 14.6GW of solar PV installed and on average have added 0.5GW per annum since 2016. The current CfD strike price of existing solar PV is around £106/MWh. However, there is a big installed base of solar panels that were installed under the FiT scheme. The FiT scheme is mostly solar and the average strike price in year ended March 2022 was £196/MWh. The solar farms currently operating under the CFD scheme are small in comparison to the total installed base. So, I have chosen £170/MWh as a base-price for the currently operating installed base. The shape of the results is not particularly sensitive to the starting price. New contracts were awarded under AR5 at ~£63/MWh in 2023 terms (£47/MWh at 2012 prices). Figure 7 shows how we might expect overall solar PV prices to evolve if we continue to add 0.5GW p.a. at £63/MWh with current prices and new additions indexed at various rates of inflation.
At 2% inflation, the weighted average price dips slightly in the early years, but then climbs to nearly £196/MWh by year 2025 as capacity rises to 26.6GW. This happens even though new capacity is coming on at £63/MWh, only 39% of current strike prices. At higher rates of inflation, the prices rise to as much as £392/MWh with 5% inflation.
As we have seen, the public square is awash with claims that renewables are cheap. These rely on either models of the future that have been shown to be erroneous such as the Government’s LCOE calculations. Or they rely upon false representations of the present that conveniently ignore the fact that CfDs and FiTs are index-linked, so what we pay today is far more than the strike price agreed when the projects started producing.
Clearly, these claims of “cheap” renewables are manifestly false. Renewables have never been cheap and are never going to be cheap. Index-linking means that even if new contracts are awarded at “cheap” prices today, we will still end up paying more in the future because there is no way the new projects can significantly impact the effect of the existing index-linked projects. Note also that all the figures above exclude the eye-watering costs of grid balancing and adding extra transmission lines, so the true cost of renewables is even higher than indicated.
It is time for some reality to be injected into the debate about renewables. In the meantime, prepare for your bills to go higher. Much higher.
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