Wind Power Economics: Rhetoric and Reality
I have collected data for more than 350 SPVs responsible for wind projects that have filed accounts since 2005. The dataset is unique and provides the basis for a detailed analysis of the actual costs of wind power.
The following is the text accompanying the talk given by Professor Gordon Hughes, School of Economics, University of Edinburgh on 4 November 2020 to launch his two new reports for REF on:
It is difficult to make predictions, especially about the future. [Attributed variously to Niels Bohr (Nobel Prize in Physics) and Sam Goldwyn (movie mogul)]
The theme of my talk is the disparity between predictions about the future costs and performance of wind power (especially offshore wind) – the Rhetoric – and the actual evidence that is available on what it costs to build and operate wind farms and the amount of power they produce over their lifetime – the Reality.
As background, I was co-author of one of the first studies of climate change produced by an international organization in 1992. I have written or co-written several studies of adaptation to climate change. My academic field is applied statistics and economics, but much of my work has been on the interface between economics and engineering. I have worked on energy and infrastructure policies for more than three decades. For example I was responsible for developing a set of international environmental standards for power plants while I was at the World Bank.
In the UK and most of Europe, both policymakers and investors have adopted the rhetoric around renewables as the basis for very costly transformations of our economy and society to meet the goal of low or zero carbon emissions. In doing so, they have accepted the claims of dramatic improvements in costs and performance made by wind operators for new projects now and in the future. Unfortunately, the propensity of both governments and companies to understate the costs and overstate the performance of new projects has a history that is long and inglorious. The ongoing record of HS2 – and, indeed, the whole history of railways in the UK – should be sufficient warning not to believe the rhetoric.
There is a core idea that is crucial for proponents of renewable technologies across a wide range. This is that costs – or specifically capex costs – will decline as installed capacity grows due to what are called economies of scale and learning. The issue then is how rapid the decline, usually measured as the % reduction for each doubling in capacity, is likely to be. There is no doubt that such a decline in unit costs has occurred in specific cases – notably the manufacture of aircraft, the production of solar PV modules and the cost of environmental controls such as FGD for power plants. However, the pattern is far from universal – the unit costs of nuclear, coal and LNG plants have tended to increase rather than decline. It is much more plausible for manufactured capital goods than for large projects involving complicated sites and civil works. In the case of offshore wind, the parallel experience of offshore oil & gas is not encouraging.
The reality of what will happen to the costs of key renewable energy and other low carbon technologies is critical. The UK Government’s strategy for meeting its Net Zero target at an affordable cost rests on the core assumption that the costs of wind power have fallen – and will continue to fall. There is, however, a major problem with all of the projections produced by official agencies, academics and other organisations. Put bluntly, they are the product of wishful thinking applied to notional projects in the future with little or no connection to commercial reality.
Hence, in my work I have adopted a completely different approach. My starting point is the actual data reported by companies in their accounts over the last two decades. This is possible because the standard commercial arrangement is that solar, wind and other projects are operated via legal entities known as Special Purpose Vehicles whose accounts are usually audited and are filed with Companies House. I have collected data for more than 350 SPVs responsible for wind projects that have filed accounts since 2005. The dataset is unique and provides the basis for a detailed analysis of the actual costs of wind power.