High risk, high rewards for those seeking energy security

Meeting wind energy targets does have an implication for power costs, but so does a heavy reliance on imported fuels. The long term rewards for wind may be worth the financial risk

The Kyoto Protocol has been ratified and gone into operation and in Europe emissions trading has begun. That has put the cost of lowering carbon emissions under the microscope, and scrutiny has only been increased by recent reports that attempt to quantify the cost of carbon abatement programmes.

A report from the German Energy Agency DENA said that it was “possible” for Germany to meet its 20 per cent target for renewable energy by 2015-2020, provided that further developments are made in the electricity supply infrastructure.

“Possible”, it transpired, is a very flexible word. For the Federal Wind Energy Association it meant that “nothing now stands in the way of further integration of wind energy into the German electricity grid”. Nothing except investment, and anything is possible, if there is enough money. How much is enough? In Germany, DENA estimates that as well as the cost of the wind farms themselves, the cost of expanding the high-voltage grid would be €110 million per year, while grid charges would increase by 2.5 hundredths of a cent per kWh.

UK domestic energy consumption per household, by final use in kilogrammes of oil equivalent.
Click here to enlarge image

Whether that cost is acceptable depends very much on where you stand on Kyoto. In the UK, the government’s target acknowledges this constraint: it wants to ensure that 10 per cent of electricity used in Great Britain is from renewable sources, “subject to the costs being acceptable to the consumer”.

In fact, it seems the UK’s trading arrangements should allow it to manage wind at lower cost than is likely in Germany, according to David Milborrow of the British Wind Energy Association. Milborrow said some of the costs in Germany arose because ‘gate closure’ – the time at which forecasts of demand and supply are finalised and when energy trading ends for each trading period – was more than 12 hours ahead. That meant there was a significant chance that wind energy available would be higher or lower than had been forecast and other generation would have to be brought on or taken off the system. In the UK, however, gate closure is much shorter – one hour ahead for each half-hour slot – so generators had only to forecast up to one and a half hours ahead. The requirement for balancing was therefore typically very small. UK system operator NGT had said that at its present level (a few per cent) the effect of wind on the system could not be distinguished and adding 10 per cent wind to the UK system – above the 2010 target which assumes wind would provide 7.5per cent of electricity – would require no more frequency response than was already in the system.

Perhaps this is the result of the UK’s market-based approach. Supporting renewables through obligation certificates (ROCs) is designed to bring the most market-ready renewables on line as quickly as possible, and to direct them towards the most economic sites and it is certainly effective: wind is growing fast and at sites that produce good capacity factors and hence good returns. Nevertheless, according to a recent report from the UK’s National Audit Office (NAO) “By 2010, public support for the renewables sector will cost consumers and taxpayers over à‚£1 billion a year”.

Is it worth it? The NAO points out that “As a means of reducing CO2 emissions the Obligation is several times more expensive than other measures currently being implemented,” citing energy efficiency as likely to bring the best CO2 reduction for the investment available.

In Germany the same point has been made: the DENA report puts the cost of cutting CO2 emissions by building wind farms at between €41 and €77 per tonne and the Agency’s director admitted, in a newspaper interview, that it would be cheaper to improve housing.

It is the usual story of risk and reward. It is relatively cheap and low-risk to improve the energy efficiency in buildings and appliances but the possible rewards are strictly limited: once every house is energy efficient you cannot make more gains by building more houses. What is more, it is far from clear that this type of domestic gain can be fully realised. Those living in what is known in the UK as ‘fuel poverty’ are living in poverty as well, and a reduction in fuel costs is likely to be balanced by other spending and hence CO2 emissions.

Investing in renewables is more risky but the potential rewards are greater. The UK’s Energy Minister, Mike O’Brien, pointed out other benefits. The UK “cannot rely on energy efficiency alone,” he said. “Security of supply is important and for that we need new and diverse forms of electricity generation.” He added that “the cost of climate change includes à‚£95 million a year for 50 years to protect the UK’s flood defences.” Increasing energy prices and concerns over security of supply are likely to make the risk/reward ratio for wind increasingly attractive.

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