The Opportunity Cost of Renewables Investment

  • Date: 12/04/17
  • Dr John Constable: GWPF Energy Editor

In a statement announcing the latest round of auctions for Contracts for Difference the UK government has reported capital investment of £52 billion in renewable electricity generation over the period from 2010 to the present day, which implies an average capital cost of about £2.5m/MW, five times the cost of Combined Cycle Gas Turbines. This represents a convenient measure of both the opportunity cost and the scale of the potential malinvestment.

The UK government has announced the latest round of auctions for Feed-in Tariffs with Contracts for Difference (CfD) to support low carbon electricity. The document contains several useful numbers that can be used as the basis for further calculations revealing important points about the United Kingdom’s  renewable energy programme.

The current round is worth £290m (per annum), and is part of the government’s commitment to issue contracts allocating £730m per annum in this parliament. These figures represent a 6% and 15% increment respectively on the current annual cost of about £5 billion.

Since these contracts last for fifteen years, we can calculate the total additional burden that government is proposing to put on to consumer as £4.4 billion from the current round and £11 billion in all the contracts that will be issued under this parliament. The subsidy component of this allocation is harder to calculate, since it depends in very large part on the future price of gas, on which it is in essence a gamble. As a rough approximation we can estimate that between half and two thirds of the sums above will be subsidy, say up to about £3bn for the current round and about £7 billion for the allocation in the current parliament. These are large sums.

Government also notes that there has been £52 billion of capital investment in renewable electricity generation since 2010. Capital cost data is extremely difficult to come by, so it is very useful to have such a figure in an official statement. Unfortunately, the government does not refer to the capacity built in that period but we can estimate this. There is approximately 33 GW of renewable generation capacity operational at present, of which about 14 GW was operational before 2010, so we can assume that the £52 billion invested has funded about 20 GW of capacity, mostly solar (11 GW) and offshore wind (4 GW), at an average of about £2.5m/MW. That is extremely expensive in comparison with Combine Cycle Gas Turbines at about £500,000/MW, and reminds us that the £52bn invested in renewables has an opportunity cost. That money would have bought about 100 GW of CCGTs, which is about 30 GW more than would be required to serve the UK’s current peak load of 60 GW, and that CCGT fleet would have secured the system and generated comparatively cheap kilowatt hours.

Since there has been so much excitement in the press about the supposedly falling cost of offshore wind, in particular, it is perhaps interesting in passing to check BEIS’s implied capital cost figure, of about £2.5m/MW, against data from another source. The following chart comes from an EU funded study with the FOWIND consortium (Facilitating Offshore Wind in India) and prepared under the auspices of the Global European Wind Energy Council:


Figure 1. The capital cost of offshore wind 1990 to 2014. Source: EU, FOWIND, Offshore Wind Policy and Market Assessment: A Global Outlook (December 2014), 22.

It is worth noting that not only does the mean capital cost of offshore wind rise sharply between 2000 and 2010, but the range appears to become much broader, suggesting, perhaps, that site specific features are a large part of capital expenditure. Furthermore, the trend line provided by the authors seems a highly questionable representation of the data points, which optically seem to indicate a rising not a falling trend.

At any rate, the cost per MW for offshore wind during the period under consideration, 2010 to the present day, is around €3.5m and €4m per megawatt, somewhat above the figure implied in the BEIS announcement, as would be expected, since BEIS’s estimate dominated by solar, which at scale is cheaper if not cheap.

Returning to the headline figure, £52 billion is only something of which to boast if that expenditure really is investment, not malinvestment or sub-optimal investment. And let us not forget that these financial figures are tokens representing real world resources, special materials, ordinary materials, energy, and computational and human time, that cannot used for other purposes. £52 billion represents a significant fraction of the capital formation in the six year period 2011 to 2016 that we are considering. Indeed, it is only somewhat less than the quarterly capital formation in that period. Potential malinvestment on that scale can hardly be regarded without anxiety.

An indication of whether this investment is likely to be good value can also be found in the BEIS statement. Mr Norman, Parliamentary Under Secretary of State and Minister for Industry and Energy, is quoted as observing that the latest round of the CfD will save 2.5 million tonnes of carbon dioxide per year. It is not clear how that figure has been reached, but taking it at face value it allows us to calculate, using the subsidy proportion assumptions described above, that the abatement cost would be in the range £60–80/tCO2, or approximately $75–100/tCO2. Such figures are considerably in excess of all but the extreme estimates of Social Cost of Carbon ($105/tCO2), and vastly above the current €5 price of an emissions allowance for a tonne of carbon dioxide in the EU ETS. It must also be remembered that the EU ETS both guarantees and caps the savings in the EU, so the saving that Mr Norman mentions is not additional to that guaranteed by the ETS, but simply the substitution of a very expensive saving, via renewables policies, for the cheap one that would otherwise have been provided by the ETS.

Of course, and in fairness, it must be said that the very high abatement CfD cost is actually an improvement on those under the Renewables Obligation and the Feed-in Tariff, which can run to several hundred dollars per tonne, and in the case of small scale solar up to $1,000 dollars a tonne. Clearly, Government is trying to restrain renewables subsidy expenditure, and seems to be making some progress, but it remains committed to an oblique and timid incremental process the tardy pace of which entails further and quite avoidable economic harm, as well as continuing to give deeply confusing signals to power sector investors. Mr Norman and his staff must understand the implications of the figures given in their statement as well as anybody. Why do they not act firmly upon them?