Adam Bruce is a former Conservative parliamentary candidate. He was UK CEO of the international wind energy company, Airtricity, which was sold in 2008 for £1.6bn. He then joined the start-up Mainstream Renewable Power. Since its launch Mainstream has raised over £180m to invest in developing wind and solar plant in eight countries around the world. It is the largest independent developer of offshore wind in the UK.
As a Conservative and a developer of wind and solar farms, I wish I could sell my goods in an open and transparent UK electricity market. In this market, my fossil and nuclear competitors would bear the full cost of their environmental impact, would receive no tax breaks to prospect for their resource and would be required to pay to insure and to decommission their plant. In this market, the electricity price reduction effect of my technology would be passed on in full to the consumer. But I can’t sell in such a market, because it doesn’t exist. I have to sell into the market that exists in the here and now.
Most global energy markets are riddled with subsidies or “policy interventions”, both implicit and explicit. The UK is no exception. The Government is making tentative moves to prise open the UK electricity market and let in the sunlight of transparency and liquidity. Sometimes I think that the Government should abandon its attempt to shoe-horn an open market into the Lawsonian oligopoly that survives from privatisation in the 1980s and just join the Nordpool, but I digress.
I want to discuss a simple issue that seems to exercise a number of Conservative MPs. It is the notion that wind energy puts up bills. If only we weren’t being forced to build all these wind farms, runs the argument, we could have cheaper bills and more economic growth. I will show that we can have wind farms and economic growth, for the simple fact is that wind energy lowers the price of electricity – and in a country like the UK with a massive wind resource, it provides a very significant contribution to GDP and balance of payments.
Wind energy lowers the price of electricity. Prof Harry Markowitz, the Nobel Prize winning Chicago school economist was one of the first to describe modern portfolio theory. The theory, simply put, states that to deliver the best possible return from an investment portfolio you need a mix of high and low risk assets. Apply Markowitz’s theory to electricity markets and you observe the same result – where an optimal mix of risky (gas and coal plant with all that price volatility) and non-risky (free fuel wind and solar plant) delivers the best possible risk adjusted return – which in this case is a lower electricity price than a comparable market with no wind or solar plant.
There is another theory to add to Markowitz’s and then we can observe them both in practice. Electrical plant managers and grid operators will be very familiar with “Merit Order Operation”, the most economically efficient method of utilities to satisfy consumer demand by utilising plants with the lowest marginal cost of generation. Wind and solar plants – with zero fuel cost – are zero marginal cost plants 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.
In March 2012 the Illinois Power Agency published its annual report on the costs and benefits of renewable resource procurement. In Illinois, in common with the UK, 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 per 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 Europe, where there is a longer history of wind generation, there is a wider body of evidence supporting this effect. In February 2011, the Irish grid operator Eirgrid published a study demonstrating the price lowering effects of wind. Ireland has roughly twice the installed amount of wind plant on its electricity system than the UK, despite having a peak demand of around one tenth that of ours. Like the UK it relies largely on imported gas for additional generation.
Eirgrid 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 subsidy paid by Irish consumers (€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, Eirgrid concluded that wind was not contributing to higher wholesale electricity prices in Ireland.
What about the UK? The British electricity market is opaque. It is very difficult to observe the Merit Order effect because the utilities which dominate the market mainly supply to themselves, and because savings due to increased renewables penetration are internalised. There is no reason to doubt that the portfolio and Merit Order effects are at work in the UK, with wind energy reducing the wholesale cost of electricity. But without real transparency in the market, these effects are hard to detect. Because of this, I have some sympathy for Conservative MPs who are drawn to the erroneous conclusion that subsidies for wind energy put up consumers’ bills, when in fact they help keep down the price rises caused by the rising cost of gas.
This week the Centre for Economics and Business Research published a report (pdf) on the “value-add” to the UK economy created by investment in offshore wind. In addition to the beneficial impact of that energy on current and future electricity bills, the investment itself is already having a very significant impact on the economy. Using Government and National Grid’s forecasts for the installed capacity of offshore wind through 2020 and out to 2030, Cebr estimate that in 2020 offshore wind will be adding 0.4% to UK GDP with a £5bn annual contribution in UK Gross Value Add. Cebr conclude that this growth will by 2020 create close to 100,000 new jobs in the UK. Many of these jobs will be in the engineering, manufacturing and specialist construction sectors which have all been badly affected by the recession.
Even more starkly, Cebr estimate that by 2015 the UK’s offshore wind sector could be contributing an additional 0.2% to 0.4% to UK GDP – potentially the difference between sluggish and real economic growth, and with it, the re-election chances of many Conservative MPs.
Cebr also look at the impact of offshore wind on the UK’s balance of trade. Under one scenario, by 2030 the estimated increase in net exports is £22.5 billion, sufficient to almost entirely plug the UK’s current balance of trade deficit. These positive trade impacts are driven by reduced fossil fuel imports and by electricity exports as a result of greater offshore wind capacity and interconnection.
This week,London hosted the first ever Global Offshore Wind conference, with delegates from Europe, North America and Asia. The UK is the world leader in this sector of the low carbon economy. What Cebr shows is that the macro-economic benefits of investing in offshore wind are a strong reason to adopt policies that ensure this secure, plentiful, domestic resource plays a much larger role in the future supply of electricity in the United Kingdom. These benefits are of particular note at a moment when the economy is struggling to generate jobs and income growth – not to mention a source of comparative advantage in the decarbonised 21st century global economy.
Wind energy reduces price risk and cuts bills even when subsidised. It delivers economic growth, national income and jobs. The UK has the largest potential share of wind energy of any country in the EU. We need more wind energy in the UK’s electricity mix, not less.