January 27, 2008
Subsidies Make Wind UK Farms Very Profitable

Taxpayer subsidies have made onshore wind farms highly profitable in Britain.

LAVISH subsidies and high electricity prices have turned Britain’s onshore wind farms into an extraordinary moneyspinner, with a single turbine capable of generating £500,000 of pure profit per year.

According to new industry figures, a typical 2 megawatt (2MW) turbine can now generate power worth £200,000 on the wholesale markets - plus another £300,000 of subsidy from taxpayers.

Since such turbines cost around £2m to build and last for 20 or more years, it means they can pay for themselves in just 4-5 years and then produce nothing but profit.

What I want to know: How many kilowatt-hours (kwh) are they saying comes from that 2MW turbine (which is probably running at 30% capacity or less on average) to net £200,000 (double that in dollars) on the wholesale market? The period of time sounds like a year. What are they selling the electric for on average at wholesale costs?

To put that in context, on average in the United States in 2007 the residential retail price of electricity was about 10.65 cents ($0.65USD) per kwh. That 2MW turbine running at a US site at 30% capacity for a year will produce .3 * 2000 kwh * 24 hours * 365 days = 5.265 million kwh per year. At retail that's a half million dollars or a quarter million pounds. But at wholesale it is probably half that amount or about £125,000. So are wholesale electric prices higher in Britain? Probably.

The revenue from the subsidy is bigger than the revenue from selling the electricity. That seems out of whack. But it is certainly a reason to be bullish on wind tower sales.

With the US dollar in the neighborhood of about 2 dollars per British Pound British wind subsidies are currently about the same amount of money as US wind subsidies.

According to Ofgem, the Labour government's wind subsidies currently stand at £485 million a year.

But the US has a lot more wind capacity. The US has more prime wind locations and so the same amount of subsidy money buys more wind power in the US than in Britain.

The British government now wants to allow the construction of unsubsidized nuclear power plants while simultaneously spending big money to subsidize a build-up of offshore (and therefore about 2 cents/kwh more expensive if some sources are to be believed) wind. Christopher Booker claims nuclear power would deliver just as much power at a quarter the cost.

At £2 million per megawatt of "capacity" (according to the Carbon Trust), the bill for the Government's 33 gigawatts (Gw) would be £66 billion (and even that, as was admitted in a recent parliamentary answer, doesn't include an extra £10 billion needed to connect the turbines to the grid). But the actual output of these turbines, because of the wind's unreliability, would be barely a third of their capacity. The resulting 11Gw could be produced by just seven new "carbon-free" nuclear power stations, at a quarter of the cost.

The EU's plans for "renewables" do not include nuclear energy. Worse, they take no account of the back-up needed for when the wind is not blowing - which would require Britain to have 33Gw of capacity constantly available from conventional power stations.

The same drawbacks apply to the huge increase in onshore turbines, covering thousands of square miles of countryside. They are only made viable by the vast hidden subsidies that wind energy receives, through our electricity bills. These make power from turbines (including the cost of back-up) between two and three times more expensive than that from conventional sources.

Europe is geographically not well suited to produce cheap wind or cheap solar in amounts large enough to let these sources produce most of Europe's energy. So the European solution appears to be to raise prices.

Meanwhile in the US a fight over wind power subsidies continues. Wind supporters want a continuation of the wind Production Tax Credit of 2 cents per kwh.

The 2005 energy bill provided exactly the kind of multiyear support the wind industry says it needs. The impact has been dramatic. Nearly one-third of all US power capacity added last year – about 5,244 megawatts – was in wind. Overall wind-generating capacity soared 45 percent last year, adding the clean-energy equivalent of 10 large coal-fired power plants, the American Wind Energy Association (AWEA) reported last week.

...

The production tax credit, or PTC, now pays utilities about 2 cents for every kilowatt of wind power they produce over the first 10 years of a project's operation. Congress's Joint Committee on Taxation estimated the cost to taxpayers at less than $1 billion a year, AWEA officials say.

Think of it this way: Those 5.244 GW of wind towers build in 2007 will probably run at about 30% of capacity. So we are really talking about the equivalent of a 1.57 GW nuclear power plant. The production tax credit of 2 cents per kwh, if applied to nuclear power, would clearly make nukes cheaper than coal. As things stand now a new nuke will probably cost a little more than coal electric.

Jerome a Paris, who lines up financing for wind projects in Europe, says the US wind production tax credit is so popular in Congress that it gets used to get other proposals enacted.

Oddly enough, the problem with PTC is not that it's unpopular in Congress, but the opposite: that it's hugely popular. That means that any law that includes it is likely to be supported by a strong majority, and then gets larded with more disputable - and disputed - items, which are then opposed. The PTC gets taken hostage, effectively... Crazy, but true.

The American Wind Energy Association wants a 5 year extension of the US Production Tax Credit. Curiously, in their argument for the extension they claim at least in New York State wind energy displaces mostly natural gas (PDF).

A recent New York study found that if wind energy supplied 10% (3,300 MW) of the state’s peak electricity demand, 65% of the energy it displaced would come from natural gas, 15% from coal, 10% from oil, and 10% from electricity imports

That is disappointing. I'd rather it displaced relatively dirtier coal. Probably in states that use larger percentages of coal for electricity wind displaces more coal than natural gas. But I'd be curious to hear from anyone who knows for sure.

Does the United States really have a coal electric tax credit?

The PTC provides a tax credit of 1.5¢/kWh (in 1993 dollars and indexed for inflation) for wind, closed-loop biomass and geothermal. Currently, the PTC for these technologies is 2.0¢/kWh. Electricity from open-loop biomass, small irrigation hydroelectric, landfill gas, municipal solid waste resources, and hydropower receive half that rate -- currently 1.0¢/kWh.

The duration of the credit is 10 years. However, open-loop biomass, geothermal, small irrigation hydro, landfill gas, and municipal solid waste combustion facilities placed into service after October 22, 2004, and before enactment of EPAct 2005, on August 8, 2005, are eligible for the credit for a five-year period. Refined-coal facilities will receive $4.375 per ton (indexed for inflation) for a 10-year term. Indian coal production facilities will receive an increase in tax credit during the seven-year period beginning January 1, 2006, in the amount of $1.50/ton through 2009, and $2.00/ton after 2009.

My take on these subsidies: If governments are determined to offer them then the subsidies ought to take the form of guaranteed minimum prices rather than fixed amounts per kwh. Then if the cost of electric power from other sources goes up (e.g. when natural gas production starts declining and prices skyrocket) the governments won't have to spend as much on the subsidies. Also, minimum price guarantees would encourage governments to more realistically estimate what wind power will end up costing and wind farm builders would have more incentive to get their costs down below the minimum prices.

If Europe achieves its goal of getting 20% of its energy from renewables it will probably get most of that energy in the form of electricity. In that case Europe's renewable electricity might even surpass nuclear power as an electric power source. I say might? Yes, might. You might be surprised to learn that as a result of France getting 80% of its electric power from nuclear power Europe gets a higher percentage of its electricity from nuclear power (a third) than the United States (a fifth).

Currently nuclear power produces around a third of Europe's electricity, with 15 of the 27 member states producing it.

France is still building nuclear power plants.

In this case the exception is the French nuclear energy company Areva, which provides about 80 percent of the country's electricity from 58 nuclear power plants, is building a new generation of reactor that will come on line at Flamanville in 2012, and is exporting its expertise to countries from China to the United Arab Emirates.

If we want to move beyond fossil fuels the two biggest practical ways to do it today are wind and nuclear power. Eventually solar photovoltaics and perhaps algae biodiesel will hit price points where they can be seriously considered as well. But so far only nukes and wind can scale to any appreciable extent for affordable prices.

Share |      Randall Parker, 2008 January 27 05:33 PM  Energy Wind


Comments
Paul F. Dietz said at January 30, 2008 5:58 AM:

That is disappointing. I'd rather it displaced relatively dirtier coal. Probably in states that use larger percentages of coal for electricity wind displaces more coal than natural gas. But I'd be curious to hear from anyone who knows for sure.

Natural gas is more expensive than coal, and gas-fired combustion turbines can be ramped up/down faster than coal burning steam turbine plants. So of course combustion turbines are the source that are throttled up and down as the wind fluctuates (unless there is hydro that can be adjusted without wasting the water.)

(Diesel peaking plants would also be throttled, but they are now rather rare.)

Daniel said at June 26, 2008 6:43 AM:

I fail to see how wind is a helpful part of the equation because wind cannot displace much, if any, coal fire power plants. The reasons are simple:

1. Wind cannot be used for baseload electricity. Coal and nukes are used for baseload. You turn them on and they run at pretty much the same amount providing the base of electricity on the grid. I deal with power spikes, such as the late afternoon, they use natural gas plants that spin up quickly and produce electricity for peak times. They aren't very energy efficient, but that's not the point.

You write that you were disappointed that the wind didn't displace coal. Read the quote before that again. It says, "if wind energy supplied 10% (3,300 MW) of the state’s peak electricity demand..." The key is "peak" demand. At peak demand, the peaking power is from natural gas and that's why wind electricity at that time will mostly replace natural gas. It has very little to do with the energy mix of the state and everything to do with where a state gets its peaking power. [As an aside, even though 10% of the electricity wind replaces would be from coal, it wouldn't reduce CO2 emissions from those coal-fired power plants. The reason is that the boilers at coal-fired power plants take days to heat up to temperature and they must be kept at that temperature even if they aren't producing electricity. Therefore, wind isn't reducing CO2 emissions from coal-fired power plants by any meaningful amount.]

2. Wind is not dispatchable. Wind is intermittent. During the peak periods of electricity use, you can't tell the wind to blow the right amount to produce electricity. Worse, peak times of electricity use (hot and cold times) are usually associate with little wind. You can't just fire up wind so that it's there when people want to use electricity like you can a natural gas fired power plant.

Wind is nice if you only want to use electricity when the wind blows. Other than that, it's not very helpful.

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