Offshore Wind Costs. A Story By David Turver |The Telegraph| We are all familiar with the apocryphal tale that if you tell a lie big enough and repeat it often enough, it becomes the accepted truth.
Sadly, it seems that the offshore wind calculations set out in the Government’s latest Electricity Generation Costs report fall into that category. As if to illustrate the point, BP today announced it was considering building two offshore wind farms outside of the Government’s Contract for Difference (CfD) scheme, demonstrating that the Government estimates are too low.
The new report showed that the estimated levelised cost of energy (LCOE) for wind had fallen from £57/MWh in the 2020 report to £44/MWh in the latest publication.
A careful comparison of the two reports shows that costs have fallen in almost all of the cost categories. This is driven by an increase in the expected load factor from 51 percent to 61 percent, meaning they now expect offshore wind farms to produce far more electricity than before so the high fixed costs can be spread over more units.
They also appear to have assumed an unbelievable 81 percent reduction in infrastructure costs for a 1GW wind farm deploying in 2025, from £344.8 million to £64.3 million. They assumed that construction and capital costs remain flat. In addition, they assume a 30-year asset life, in contrast to 25 years or less assumed in the accounts of many wind farm developers.
The Government’s assumptions simply do not stand up to scrutiny in the real world. Over the past 5 years, offshore wind farms have achieved an average load factor of only 41 percent. It is surely unrealistic to assume that new wind farms will achieve anything like an average 61 percent load factor over their lives.
Averaging the cost increases shown in the investor presentations from Siemens Gamesa and Vestas shows that wind turbines have gone up 47 percent from the end of 2020 to the end of 2022, despite government assumptions about costs.
In the Government’s 2016 energy cost report, they assumed a cost of capital of 8.9 percent. By 2020, this had fallen to 6.3 percent. These hurdle rates were typically around 6.5 percent above the average of the 10-year and 30-year gilt yields in those years. Applying that same premium to gilt yields today would indicate a more realistic cost of capital of around 11 percent.
Constructing a discounted cash-flow model using the parameters assumed by the Government yields a LCOE of £44.64/MWh, which is just a rounding error away from the Government’s result. It is then possible to produce a sensitivity analysis applying the more realistic assumptions on construction and infrastructure costs, interest rates, asset life and load factor.
If the construction costs are increased by the average 47 percent increase in turbine costs, the infrastructure costs are restored to 2020 levels, then the LCOE increases nearly 39 percent to £61.50/MWh. Increasing the discount rate from 6.3 percent to 11 percent pushes up the cost by almost 37 percent to £61.13/MWh. Pushing the load factor down from 61 percent to the 41 percent average for the past five years increases the cost by over 47% to £65.91/MWh. Reducing the asset life to a more realistic 25 years increases the costs by 4.5 percent to £46.66/MWh.
Taking all those sensitivity factors into account together pushes the cost up by a staggering 193.6 per cent, to £131.05/MWh. Remember, this does not include the substantial costs of balancing the grid due to the inherent intermittency of wind power. Nor does it include the massive costs of installing new power lines to connect the offshore wind farms to the parts of the country that need the power. Taken together, these dodgy assumptions amount to the big lie that offshore wind is cheap.
In effect, the Government, lobbyists and commentators are gaslighting the nation into believing that offshore wind is cheap. Claims of cheap offshore wind look like a big lie designed to keep the whole net zero edifice intact. This is a national scandal that needs to be exposed, before we see even more damage.
David Turver’s substack can be read here