TILTING AT WINDMILLS: AN ECONOMIC ANALYSIS

OF WIND POWER:   Professor David Simpson, The David Hume Institute

Summary:

1. At the present time the cost of generating electricity from wind power is approximately twice that of the cheapest conventional alternative source. By 2010 the cost of subsidising wind and other renewable forms of energy is officially expected to be about £1 billion every year.

2. The principal instrument of Government policy for promoting wind power is the Renewable Obligations scheme. The cost of the scheme falls on electricity companies who pass it on to consumers in the form of higher bills. At the present time, the extra cost of renewables is thought to be adding about 2% to domestic electricity bills, and it is set to grow. Most consumers are unaware that they are paying this hidden levy, and they do not know what they are getting for it.

3. It is widely believed that wind power will eventually become competitive in price with conventional sources of power. But projections by Government advisers, using relatively optimistic assumptions, show that even by the year 2020 a generation portfolio containing 20% wind power will still be more expensive than a conventionally fuelled alternative.

4. Achieving a target of 20% of electricity generated by wind power would cost consumers at least an extra £1.2 billion each year, and over £2 billion annually on less favourable assumptions, over and above the costs of a conventional generation portfolio.

5. It is most unlikely that realising the official targets for the output of renewables, of which wind power is the principal component, is the lowest cost way of achieving the desired reduction in CO2 emissions. Achieving greater efficiency savings in transport, households and businesses would be more cost-effective.

6. Between now and 2010 overall CO2 emissions from the UK are expected to resume an upward path. This reflects strongly increasing emissions from the transport and household sectors, as well as from power generation. Carbon emissions from power generation are expected to rise after 2010 because of the planned rundown of nuclear power stations.

7. A serious attempt to address the issue of a reduction in CO2 emissions in the UK has yet to begin. When it does, it may prove to be costly, raising wholesale electricity prices by perhaps 40 to 60% over a five year period.

8. Because of the cost of providing additional stand-by generating capacity, it is unlikely that wind power will ever account for more than 20% of electricity generation through the National Grid. That being the case, its development can make no substantial contribution to a reduction in carbon emissions from power generation.

9. No matter how large the amount of wind power capacity installed, the unpredictably variable nature of its output means that it can make no significant contribution to the security of energy supplies.

10.A 20% share for Wind and other Renewables in power generation capacity will require a major re-engineering of electricity transmission and distribution networks, costing an extra £2.5 billion to £4.5 billion.

11.Government should take advantage of the renewables review coming up in 2005/6 to reconsider the nuclear option. If they are approved as being safe by the Nuclear Inspectorate, the lives of some existing nuclear plants could be extended.

12.Nuclear power avoids extra network costs, emits no greenhouse gases, and as a base load generator contributes to security of supply. Government needs to ensure that solutions are developed within reasonable timescales for the management and disposal of nuclear waste if popular acceptability is to be gained.

13.The Government should move quickly to implement the EU scheme for the allocation of tradable carbon emission rights, preferably by auction, up to its chosen level of emissions. It could then dispense with most of the other policy measures it has put in place to achieve the environmental objectives of its energy policy.

14.On the basis of past experience, it seems likely that the energy technologies that will play an important part in the economy of 2020 do not feature prominently in current Government policy.

15.In energy policy, as elsewhere, government decisions taken on the basis of short-term political pressures have unforeseen long term economic consequences, usually unfavourable.

16.Wind power may have a valuable potential role in locations where grid connections are too expensive, notably in remote and sparsely populated areas, especially for functions such as pumping water where intermittency is not a problem.

To read the whole report link to DHI Paper