Why onshore wind isn’t as cheap as it should be in the UK

Wind itself doesn’t cost a penny. steve p2008, CC BY

Europe’s weather systems tend to cross the Atlantic and slam into Britain, which should make the UK ideal for wind power. With very low running costs, cheap and easy integration into the grid in most of the country, and with wind being a mature industry that’s still evolving continuous improvements, how could it not be the country’s cheapest renewable?

Just look at the alternatives. There’s not that much hydro to be harnessed. Tide and wave power aren’t yet ready. Geothermal? This isn’t Iceland, not many volcanoes here. Straightforward, then? No, it never is.

The government has announced it is to end subsidies for onshore windfarms from April 2016, a year earlier than expected. When asked about the decision to withdraw support from a growing industry, the Secretary of State for Energy and Climate Change, Amber Rudd, claimed solar energy is just as cost-effective as onshore wind. And that’s half-true: it has come down in price so far, so fast, that solar farms are bidding for deals as cheaply as some onshore wind farms.

Then again, this government also prefers more costly rooftop installations to solar farms. Anyway, solar and wind are complementary, not direct substitutes, with windfarms generally generating more power in winter.

Only Ireland, Denmark and Sweden can match UK winds. Anne Mirjam Held, KIT, CC BY-SA

Onshore wind is often more expensive than it needs to be in this country. Sure, some onshore wind in Britain is not only the cheapest renewable there is, it’s the cheapest electricity we’ve got from any source, once insurance, pollution and all the other costs are factored in.

However quite a few planned UK onshore windfarms are more expensive than this. Bids to develop onshore wind came in at around £80 per MWh (8p per KWh) in the February 2015 round of CfD allocations, a bidding process meant to reveal the lowest available supply costs. That’s about the same price as some proposed solar parks.

Onshore wind is cheaper in other countries such as Germany (between €0.05 and €0.11/kWh). That price premium for onshore wind in Britain seems to be back-to-front, given the UK’s powerful wind resource.

Why is onshore wind more expensive?

There are several compounding factors. Many years of policy uncertainty and persistent meddling with the revenue schemes presents higher risks to investors. Planning regulations in England and Wales have created further uncertainty, with unpredictable local decisions. Often, rulings will be reversed on appeal, only for the energy secretary to step and reject the application. Investors, faced with higher risk, will require higher rewards.

Even more significantly, investors in windfarm supply chains can choose to locate instead in jurisdictions which offer far greater long-term clarity and security. This is why both Denmark and Germany have strong wind supply chains, and Britain’s is still nascent. Not only does that mean new turbines typically have to be shipped to the UK from factories overseas, it adds currency risk, and means that less of the money invested stays within the country.

Made in Denmark, but soon heading elsewhere. News Oresund, CC BY

So, by removing the policy uncertainties, it is within the government’s power to remove part of the need for onshore wind to be subsidised.

Does onshore wind need subsidy?

The chief assistance for onshore windfarm operators comes in the form of top-up payments from bill-payers, above what the operators receive from selling their electricity in the wholesale markets. The question is to what extent these are a subsidy at all.

Given the payment represents a transfer over and above the market price, it might seem surprising that this is even a question. But it has to be asked, due to a subtle process, known as the merit order effect.

An electricity grid tends to rank different generators in order of marginal cost, prioritising the cheapest forms of generation. This is the merit order. Cheap electricity is brought online first, and the plants with the highest marginal generation cost are saved till last.

The merit-order effect is the reduction in wholesale prices that comes about when more wind is generated. Wind is never the most expensive fuel on the grid, because its fuel is free. The cost of wind power is almost entirely in construction; marginal generation cost is next to nothing. Therefore when the wind blows and power is generated, it knocks out the most expensive generator (and whether that’s coal or gas, depends on their relative prices, the carbon price, and the relative efficiency of the generators) and it lowers prices across the whole market.

Previous research in Germany and Spain has found that these cost reductions outweigh the revenue support paid to wind. Wind is not subsidised in those two countries – indeed, quite the reverse, wind lowers total costs for consumers. The thing that is called a subsidy, whether existing schemes or future ones, acts to correct a market failure.

Two simple things the government can do

First, it needs to figure out how much of these top-up payments merely reflect the merit order effect, simply levelling the playing field with regard to genuinely subsidised generators such as coal and gas. The rest is subsidy. But we can’t make true progress until we recognise this reality.

Second, government policy could give windfarm developers much greater long-term assurances of a supportive and consistent policy environment, thus lowering their risks and hence lowering costs.

Doing these will improve transparency, and reduce the cost of onshore wind further. It would give certainty to investors through decisiveness and leadership, and it would show that the government is taking a pragmatic and cost-effective approach to tackling climate change.