Who's a bad loser then?

[splyn]

I'd never heard of GWPF before, but having Lawson as a spokesperson is hardly going to help anyone take them seriously. However, a bit of searching found this which I assume is the basis of their claim:

https://www.thegwpf.org/content/uploads/2017/09/OffshoreStrikePrice.pdf

linked from a letter to the FT: https://www.ft.com/content/949ff02c-a539-11e7-b797-b61809486fe2

For those who don't have the time or interest, the nub of their argument is that they simply don't believe that costs have declined anywhere near that implied by, or that offshore wind is viable, at the prices (£57.5 and £74.75) bid in the latest auctions: [note, my bold]

Putting aside such special factors, there are three possible explanations for a large drop in the auction prices. These are:

•Bidders believe that investors will accept much lower real rates of return on the equity or debt required to fund the capital investment. For this to add up, the real cost of capital would have to be less than 2%, but even in current conditions this is exceptionally low and there is no evidence that investors are willing to accept such rates of return on investments that are still of relatively high risk.

•Bidders believe that the cost of building new offshore wind farms after 2020 will be less than 40% of the projected figures in our analysis discussed above. There is no public evidence of any kind to support this belief, and in fact our analysis is based on public statements made by developers themselves, which tend in any case to be optimistic.

•The companies bid low and uneconomic prices in order to make sure of obtaining the CfDs, which they see as low-cost, no-penalty ptions, gambling on future market circumstances and policies that will generate income over and above the CfD.

In our view this last possibility is the most probable explanation. The media excitement around the auction has generated very useful pro-wind and anti-nuclear PR, which is doubtless welcome. However, it is not the main motivation, which is a commercial speculation on future policy and wholesale prices. The holder of the option, the CfD, has an established position in the market that inhibits competition, but is in fact not restricted by the contract.

If future wholesale prices seem very likely to rise above the strike price and remain there, then the wind farm may be built, and the contract quickly abrogated, which is neither difficult nor costly, leaving the wind farm able to take the higher prices that it actually needs. At present, of course, it does not appear that conventional energy prices are likely to rise sufficiently by the early 2020s to produce the high wholesale prices required, but the wind farm developers may entertain hopes of policy support, such as a carbon price. Without the likelihood of such higher prices, these options will be allowed to lapse. All this is a perfectly reasonable gamble for a large company.

However, the tactic has risks. In a revealing story published by Bloomberg on 20 September 2017, Irene Rummelhoff, executive vice president Statoil ASA’s New Energy Solutions unit, is reported as remarking:

The offshore wind industry needs to be careful... They’re taking on these options, and when you get to the delivery date, if they’re not able to build the projects, it will ruin the reputation of the industry

I've no idea if their argument stands up to serious scrutiny or not but ultimately only time will tell. There are plenty of numbers out their put out by the industry but I expect that 'real' costs are almost impossible to come by being commercialy highly sensitive - no-one wants their competitors to know how much they pay for anything, or profitability beyond what they are legally required to publish in accounts.

Still I'm sure there are some here who have a good enough handle on actual development costs to shed more light on how plausible or ludicrous their arguement. Personally I do find the dramatic drop in the CFD bids hard to believe given that quite a large number of fields have been, or are currently being built, such that economies of scale must already be quite a way down the curve.

Perhaps another explanation is that insufficient competition meant that previous/current pricing allowed huge margins for everyone involved (or serious price gouging by manufacturers with demand well in excess of supply) and that fierce bidding has now driven them down to the bone.

Does it look like Chinese manufacturers will become serious threats to the incumbents such as Siemens, Vestas etc. in the near future as they did with PV?

[M]

Still I'm sure there are some here who have a good enough handle on actual development costs to shed more light on how plausible or ludicrous their arguement. Personally I do find the dramatic drop in the CFD bids hard to believe given that quite a large number of fields have been, or are currently being built, such that economies of scale must already be quite a way down the curve.

I'd also appreciate the input from those who know better. The price drop is significant, but my first thoughts are that the £57.50 bid (about £60 in todays money) is for commissioning in 2023, so a few more years of WT development. Next the earlier schemes seem to have delivered a higher capacity factor than expected, this is partly why the levy control framework is short of cash, so that allows for lower bids. I also understand that the WT construction costs have fallen, installs are faster and cheaper with specialised shipping, larger turbines 'farm' higher and stronger winds, whilst requiring less WT's and bases for the same capacity. I think these points are facts, but not sure.

[M]

If you really want to upset these folks then do what I did yesterday on the Guardian and compare capacity deployment of off-shore wind v's HPC based on the same amount of subsidy, it even shocked me.

Taking a future wholesale price from the NAO of about £50/MWh away from the relative CfD's of £57.50 & £92.50, and also taking the term lengths of 15yrs and 35yrs into account, then applying cf's of 50% and 92% and I got a shock:-

3.2GW x (0.92cf / 0.50cf) x (35yrs / 15yrs) x (£42.50/£7.50) = 77.9GW

Been doing a bit of polishing, and replacing the 2012 costs with approx 2017 costs (HPC £97/MWh and 2023 off-shore wind £60/MWh) gives us:

3.2GW x (0.92cf / 0.50cf) x (35yrs / 15yrs) x (£47/£10) = 64.57GW

That's a hell of a lot of wind capacity.

And whilst this is only a thought exercise, we can go further and compare annual generation, with

HPC (at 92%) generating 25.79TWh's pa
64.57GW of off-shore wind (at 50%) generating 282.81TWh's


Clearly at that level they'd be wiping out each others margins by generating around the same time, but it's just to show what capacity the subsidy 'might' buy these days in other technologies, so even if PV and on-shore wind were also £60/MWh today, then HPC's generation could be matched by just off-shore wind (6GW), or PV (28GWp) or on-shore wind (12GW) for approx £4bn each v's the approx £46bn for HPC. Note the £46bn is based on the current price of £97/MWh, and the NAO predictions of prices dropping down to or below £45/MWh by the early 2030's.

So triple HPC's generation for £12bn, with £34bn left for tidal lagoon and storage investment ... perhaps?

[brackwell]

I think there are a no of factors.

All the detailed reports i have read on Levelised costs of leccy generation indicate how critical the Capacity Factor(CF) is.  There will be no doubt that improved design and optimisation will have improved the CF by a few % and this will have hugely improved the profitability out of all proportion.   The reports also indicate that the capital cost is less critical for wind particularly when spread over 35yrs unlike nuclear with its huge upfront cost

With experience will have come the confidence to reduce "the just in case" amount factored in.

By now the infrastructure is becoming established and the specialised ships etc have been built and perhaps even paid for themselves.

Investors, like pension cos, are willing to buy an asset for the income stream it produces as that is the way they work.

We have already moved into the era of non subsidy Onshore Wind so with the better CF offshore then we must be getting to the time of low subsidy offshore wind.

Who knows what is going to happen to leccy prices as we move into the EV era.

Ken

[pdf27]

The prices don't look unreasonable to me, but I've got no inside knowledge to be sure:

• Costs will mostly scale with number of turbines installed, not with the number of megawatts installed - with turbines getting bigger very fast, this will have a huge impact on the cost base.
• Installation infrastructure is also improving very fast - installers are having to compete less to get hold of the specialised installation vessels, and cable laying/route clearance techniques for the interconnects are getting much better.
• Operational experience is growing fast, so maintenance costs are likely to have come down significantly.
• They're installing a lot of turbines, so learning how to install them cheaper. This is the conventional reason for price drops, and is the only one Lawson's lot seem to be allowing for. The reality is that in this case it's probably the least significant of the lot - turbine growth being the most important since installing a big turbine and a small one should cost almost the same.

[azps]

The prices don't look unreasonable to me, but I've got no inside knowledge to be sure:

• Costs will mostly scale with number of turbines installed, not with the number of megawatts installed - with turbines getting bigger very fast, this will have a huge impact on the cost base.
• Installation infrastructure is also improving very fast - installers are having to compete less to get hold of the specialised installation vessels, and cable laying/route clearance techniques for the interconnects are getting much better.
• Operational experience is growing fast, so maintenance costs are likely to have come down significantly.
• They're installing a lot of turbines, so learning how to install them cheaper. This is the conventional reason for price drops, and is the only one Lawson's lot seem to be allowing for. The reality is that in this case it's probably the least significant of the lot - turbine growth being the most important since installing a big turbine and a small one should cost almost the same.

I agree with all of that. There's more too:

• windfarm design has got much more sophisticated in the past few years, so more yield for the same investment.
• Commodities (steel, in this case) are much cheaper now than they were a few years ago.
• Vessel design is evolving, for faster, safer, lower-cost installations
• Telemetry and condition monitoring is improving, increasing the scope for proactive maintenance
• There's competition between market players throughout the supply chain

[M]

Is this just a case of the naysayers getting caught out. Rumours were rife of good contract prices in the 2017 CfD auction from late last year, not least from our own azps. The odd comment popped up in many articles, and this article could not have been more clear:

U.K. May Get Subsidy-Free Power From Offshore Wind Farms - June 8th 2017

“For it to be shockingly cheap in the way that Denmark and the German auction have been, a price in the 60s would be amazing,” said Emma Pinchbeck, executive director of RenewableUK. “My personal view is that a price in the 70s is not unlikley.”

Prices for offshore wind in Europe have fallen dramatically in the last half decade and plunged 22 percent in 2016 alone, according to BNEF.

So there have been a lot of clues, and I started to get way too excited by about July, with September seeming so far away back then. Ok, £60ish (£57.50 in 2012) is lower than I expected, but it's still in the ballpark (perhaps in the crowd, with a home run scored).

[dhaslam]

There is still a bit of scepticism about wind power.  The next stage  should be far offshore   wind farms that are in undisturbed wind and  have wind constantly one the area covered is large enough.    It will be more expensive, at least initially,  but  it is difficult to see any  large scale alternatives  when fossil fuels start to run out.   

http://newatlas.com/offshore-wind-farm-atlantic-whole-world/51700/

[desperate]

It's nothing to do with price, it's pure ideaology, even if renewables were producing electricity at a penny a MWh Lawson and his cronies would argue against it, hes just a lobbyist for his mates in the oil industry. He was cr*p as a chancellor too

Desp

[stannn]

If only he had used the North Sea oil bonanza to set up a UK sovereign wealth fund on Norwegian lines!
Stan

[Tiff]

It's nothing to do with price, it's pure ideaology, even if renewables were producing electricity at a penny a MWh Lawson and his cronies would argue against it, hes just a lobbyist for his mates in the oil industry. He was cr*p as a chancellor too

Desp

Exactly and for every arguement you close down they then just find (or make up) something else.