I have been developing and building wind and solar plant in markets around the world since 1997. In 2008 together with a group of uniquely experienced and talented colleagues, I founded Mainstream. We develop wind and solar plant in eight global markets. In the UK we are the country’s leading independent offshore wind company, with over 5000 MW in development. In most, but not all, of our markets, government or the regulator has offered a revenue or capital support scheme to incentivise renewable energy development. Critics of renewable energy have argued that the provision of such schemes “prove” that wind and solar energy are uneconomic, inefficient and costly. What I know, from insights gained over the last 15 years, and from evidence gathered from global markets, is that the benefits to electricity consumers or taxpayers delivered by wind and solar energy outweigh the costs. At Mainstream we refer to these benefits as the “Value of Wind”. Part of our mission as a company is to ensure that the Value of Wind can be more readily understood, and used to help shift policy discussion from the costs to the benefits of renewable energy.

This Report from Cebr, and its companion Paper from Dr Mark Cooper, to be published later this year, continue that mission. They clearly illustrate the value of the investment in, and support for, offshore wind to the UK economy. They build on work completed by other academics and experts in energy policy over the last decade. In 2005 I met the late Dr Shimon Awerbuch of Sussex University. He was working on the application of portfolio theory in energy economics. This theory originated in the field of financial economics, as was championed by the classical liberal economist and Nobel Prize winner, Prof Harry Markowitz.

Markowitz showed that the value of any particular asset in an investment portfolio should be measured not in isolation but rather in terms of its effect on the value of the portfolio as a whole. Adding a risk free or low risk asset to a portfolio of riskier assets, even if the cash yield on the low risk asset is small, improves the overall return from the portfolio.

Shimon Awerbuch pioneered the application of this theory to a portfolio of electricity generating assets. In this context, because wind and solar have no fuel price risk, they are the risk free assets. Generation technologies with ongoing fuel risk (coal and gas) are inherently risky assets. When added to a portfolio of fossil fuel based plant, wind lowers the risk adjusted cost, and the cost of electricity falls. I asked him to look at Scotland in 2006, when the then administration was contemplating raising the country’s targets for wind energy. Awerbuch showed that the penetration of wind could be increased from 23% to 31% of that country’s electricity mix without increasing the risk adjusted cost of total generation, contrary to received opinion which held that increasing the amount of a “subsidised” generation source would increase costs.[1]

There is another aspect to the Value of Wind which is important to recognise along with Awerbuch’s work. Operators of electricity systems are familiar with the “Merit Order effect”, the standard operating method of all utilities to satisfy consumer demand by utilising plant with the lowest marginal cost of generation.  Wind and solar plant – with zero fuel cost – are zero marginal cost plant and sit at the top of the merit order; The most efficient thermal plant is next to be brought on line, and as customer demand increases towards peak the least efficient, and most expensive fossil plant gets used.  The “merit order effect” is the term used to describe the displacement of more expensive marginal cost thermal plant by wind or solar which has zero marginal cost.[2]

In March 2012 the Illinois Power Agency published its annual report on the costs and benefits of renewable resource procurement.[3] In Illinois, common to many other markets, consumers pay through their bills for a support mechanism to incentivise renewable energy. Critics of renewable energy would argue that this was a “cost” to consumers showing that renewables were uneconomic. They would expect that this “cost” would put up the cost of electricity and people’s bills. However, the IPA’s conclusion for 2011 is that the merit order effect lowered the wholesale price by $1.30/MWh for a total saving of over $176m for Illinois electricity consumers.  Or, as the Report put it:

…when the sun is shining or the wind is blowing, the combined output of renewable generators benefits all customers by bringing down the market price of electric energy for all resources operating at that time.

In May 2012, also in the USA, Synapse Energy Economics released a paper showing that if the Midwest ISO Region were to increase wind development, even beyond its current targets, the price suppression effect would be material, pervasive, and “lead to lower electric rates for ratepayers”.[4] Echoing Awerbuch’s Scottish study, Synapse showed that a 20GW increase in wind capacity compared to the base case scenario would “deliver total power supply savings” to a typical consumer of between $80 and $160 per year.  Both these examples are important not only in showing how the merit order effect works in practice, but also to illustrate that even in a country with historically low gas prices, the addition of wind and solar energy can still reduce the cost of electricity.

In Europe, where there is a longer history of wind generation, there is a wider body of evidence supporting the merit order effect. In February 2011, the Irish grid operator Eirgrid and the Sustainable Energy Authority of Ireland published a joint study demonstrating the price lowering effects of wind.[5] It showed that the generation of electricity by wind plant on the Irish system in 2011 lowered total wholesale costs by €74m. Not only was this more than enough to offset the cost of the support scheme for wind (€50m) but it was also sufficient to offset the additional constraint costs associated with increased wind on the system, delivering an overall net benefit to the Irish consumer.  In a direct rebuttal of critics of wind energy, the study concluded that wind was not contributing to higher wholesale electricity prices in Ireland.

There have been numerous studies across Europe on the “Value of Wind” and the conclusion is always the same – that wind lowers electricity prices.  The 2010 EWEA publication “Wind Energy and Electricity Prices” summarises the literature and shows that estimates of the magnitude of the effect varies from €3/MWh to €23/MWh depending on the study and country.[6] The effect can be seen most clearly in countries with the greatest penetration of wind energy such as Germany, Spain and Denmark. On occasion in Germany and Holland, with wind and nuclear as the main contributors to electricity supply, the price for electricity has gone negative.

This phenomenon helps explain why fixed price tariffs are necessary to make sure that wind and solar plant are built.  Wind always brings down the average price the customer pays.  If wind plant owners were relying on an electricity market price, they would always be under rewarded because they cause the price to fall.

The risk free nature of wind generation has other positive economic impacts. The negative impact on the economy of volatile fossil fuel prices was first demonstrated empirically by James Hamilton in 1983 and has since become known as the “oil-GDP” effect where even a small rise in the oil price can have a much larger negative effect on a country’s GDP.[7] Because wind bears no fossil fuel risk, it mitigates this effect when introduced to the electricity generation mix. In addition and clearly illustrated in the Cebr Report, the reduction of fossil fuel imports as a result of renewable energy generation has a very marked positive effect on the UK’s economy, particularly when foreign trade multipliers are taken into account.

The Value of Wind can also be seen in the management of other resources. In water stressed countries, such as South Africa, the generation of wind and solar energy, and the consequent reduction in generation by coal, will have a significant impact on water use. Even in Europe the lack of water can affect electricity generation. Warmer than average summers in France have seen plant in that country’s nuclear fleet taken out of operation as river levels have fallen. Ernst & Young recently reported that in many markets “the availability of fresh water [is] as critical a challenge as CO2 emissions and climate change. If current water consumption trends continue, the world could face a 40% shortfall between global fresh water supply and demand by 2030”. This will have a direct upward effect on the price of water intensive energy sources such as coal, shale gas and some nuclear.

Lastly, but perhaps most importantly, wind power generation does not emit CO2.  This has great value to society where reducing CO2 pollution is the principle method of mitigating climate change. As governments impose carbon taxes and other penalties on carbon emissions, the carbon-free nature of wind energy will become of greater value to generators, and enable further cost savings to be delivered to consumers. It is occasionally said that so much carbon based energy goes into manufacturing wind turbines that they never get to repay this carbon deficit.  The facts prove otherwise.  The modern wind turbine pays back its “carbon deficit” in three months.

What about the UK? The British electricity market is opaque. It is very difficult to observe the merit order effect when the utilities, which dominate the market, mainly supply to themselves, and savings due to increased renewables penetration are internalised. However, the current market reforms proposed by the UK Government and by Ofgem should help to increase transparency and we will be able to more clearly observe the positive price impact of renewables, to more effectively counter the monotonous and wrong-headed criticism of opponents of renewables, that they increase the cost of electricity for consumers.

In the absence of this clarity, we have commissioned Cebr and Mark Cooper to look at one part of the UK’s electricity sector to illustrate its present – and future – contribution to the UK economy. Offshore wind has the potential to transform electricity generation by delivering – in a decarbonised power sector – a very large amount of carbon and fuel-free power to consumers, and by enabling the UK to capture significant additional value from the wider industrial benefits that the sector will deliver. In 2010 the Offshore Valuation Group published the first ever study of the UK’s offshore renewable energy resource. It showed that by 2050 the UK could be a net exporter of energy, generating the electricity equivalent of 1bn barrels of oil a year from its offshore resources.

We have set out to build on the work of the Offshore Valuation Initiative in this project. The “Value of Offshore Wind” to the UK is truly significant. The Cebr show that the net economic benefit to UK plc from investment in offshore wind, both in terms of contribution to GDP, and to the country’s balance of trade is considerable. Mark Cooper will show that in addition to these effects, the risk reduction to the UK electricity system provided by offshore wind will deliver further savings and wider economic and policy benefits.

With a proper interconnected electricity network linking the UK to neighbouring markets, we can export renewable energy into a single European electricity market, further adding to the economic benefits. In May 2012 it was reported in the FT that Germany’s power-transmission companies have announced plans to build four electricity “Autobahns” to link wind farms off the north coast with manufacturing centres in the south.[8] Building a North Sea grid to connect to these “Autobahns” and link UK and German offshore wind farms with load centres here and in Germany would give this country significant trading opportunities, deliver much needed infrastructure projects, and transform the low carbon economies of both countries.

We have embarked on a once off transition from fossil fuels towards a low carbon economy. All forms of renewable energy, from solar energy to tidal energy, will contribute to delivering this transition in the UK. Offshore wind provides this country with a clear global comparative advantage, and will assist in providing affordable electricity to consumers and enhancing the country’s energy security.

As Cebr and Mark Cooper show, wind energy, and particularly offshore wind, offers a clear low carbon growth path for the UK economy, and a clear low carbon growth strategy for the UK Government. Their work is a very valuable addition to the debate on this country’s energy policy and I welcome its publication.

June 2012

• There are no technical barriers to the European Supergrid, and it could become economically feasible in comparison to the status quo, a series of point-to-point connections from individual wind farms to onshore load centres (the base case), for either a small increase in the cost to consumer, or by allowing other energy generators to use the network, whereby a cost to the new user could be charged. However, this small increase in either TUoS to the consumer or increase in grid usage, will give way to a far more efficient and effective transmission network.

• The base case (a continuation of business of usual, with the absence of a long-term strategy) would require significant onshore reinforcements in order to utilise the full resource granted in the Round 3 zones allocated by the Crown Estate. These reinforcements are not possible with the onshore grids congestion levels and inability to handle the high penetration of renewable energy that would be required in this situation if all wind development was realised and no power was to be curtailed. The additional cost of such reinforcement was not included in the final cost of the base case as it was out with the scope of this study. In addition, with point-to-point connections the variability of wind power is ‘frozen in’ and expensive assets needed for transmission are under-utilised. Furthermore, they are under-utilised with no method by which to facilitate either; a reduction in the variability by means of collective smoothing, an increase in the utilisation, nor a reduction in the TUoS charge.

• It was found that for the same cost to the consumer, an interconnected grid which was connected to a wider European market with increased security of supply and reduced variability could be built whereby some amount of wind power was curtailed. But, why constrain a free source of energy?

• It was also found that a fully-developed Supergrid where zero wind power would be curtailed could be built with an increase in TUoS charge to the consumer, but a wider European market to allow for the trading of renewable electricity between EU member states is provided. Not to mention that a solution to onshore grid congestion is presented by means of bootstraps created by the interconnected offshore grid. Also, the interconnected grid has the advantage of allowing other sources of power to flow on the network – increasing the grid utilisation, reducing variability and reducing the cost to the consumer with every additional MWh that flows of the system. This is not an option with a BAU scenario and is only one of the many advantages of investing in new transmission when following a well thought-out strategy such as the Supergrid.

Overall, the key to ensuring a secure supply of energy for Europe in the future requires long-term thinking. A key message portrayed at EWEA Offshore 2011 Conference was that thinking towards 2020 is no longer enough. Longer term targets such as 2030 and more so, 2050 are the key to ensuring we stay on track to meet our emissions targets. The targets for 2020 can be met by continuing BAU, connection individual wind farms to shore in a point-to-point fashion, can be met by individual member states meeting an individual target which combined will allow the EU to meet its overall target. However, the more ambitious targets set for 2050 will, without doubt, require a cooperative effort, involving trans-national efforts in the generation, transmission and consumption of renewable energy. This is something that should be in our strategic plans now, in order for it to be cost effective and efficient in the future, when it will absolutely necessary.

Einstein said “We can’t solve problems using the same kind of thinking we used to create them”. We need to think differently. The Supergrid is the solution.

Please feel free to get back to me with your comments.

Heather