Wind Power in the UK (PDF). - Sustainable Development Commission

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Wind Power in the UK (PDF). - Sustainable Development Commission

4 Costs and benefits of windSecondly, a number of studies have attemptedto estimate the ‘system cost’ of incorporating20% wind energy output on the UK grid by2020. This level of wind capacity represents anextreme scenario, as in reality other renewableswill make some contribution. The net systemcost is calculated by subtracting all the benefitsof wind energy (displaced fuel, avoided plantconstruction, avoided network reinforcement)from the costs (additional cost of plant, networkreinforcement, additional balancing services).This figure is very sensitive to gas pricefluctuations, and updated analysis done for thisreport suggests that with gas prices at theircurrent levels (30p/therm), the net system costof 20% wind would be around 0.17p/kWh. Thisrepresents an increase in electricity prices ofaround 3.8%. This would be the total costconsumers could expect to pay by 2020 if thetrue cost of wind generation were accuratelyreflected in the market. If the carbon benefits ofthis cost are included, it is substantially reduced,and could be negative (ie. a net benefit tosociety) if a high social cost of carbon isassumed.Thirdly, the cost of renewable supportmechanisms has been outlined. This analysisrelies on a recent report by the National AuditOffice, which attempts to determine the cost toconsumers and taxpayers of supportingrenewable electricity generation. The NAO statesthat two thirds of this support is in the form ofthe Renewables Obligation, which providesinvestors with a financial incentive (in the formof ROCs) to invest in renewables. Consumersupport through the RO will cost around £1billion by 2010, equivalent to a 5.7% increase inthe price of electricity. For onshore wind, thevalue of ROCs is high enough to cover theadditional generation costs when compared tothe main alternative (gas-fired plant), asoutlined above. However, because theRenewables Obligation is not cost reflective, thissupport is likely to be in excess of what isneeded for onshore wind to be viable at goodsites. Most public support mechanisms sufferfrom this problem, but the important point tonote here is that this makes the RO a poorindicator of the cost of wind energy. Whilegeneration costs are likely to be lower than theRO implies, other costs (such as networkreinforcement and additional balancing services)are outside its scope.Bringing all these together is not astraightforward process. While we are confidentin the estimations of the net additional cost ofwind (the ‘system cost’), this is unlikely to bethe cost that is actually paid by UK consumers. Itseems likely that the actual cost will be acombination of public support mechanisms(which will be paid regardless to support allrenewables), and the system costs that do notfall within the scope of the RenewablesObligation. The likely cost of the RO in 2020 isunknown, as it is possible it will have beensubstantially revised by then to take account ofthe lower cost of wind power. On the otherhand, the system cost of wind energy in 2010 islikely to be far lower than in 2020, as Figure 11shows, and could be close to zero if gas pricesare high.The costs of current policies on encouragingrenewables, which are leading to a rapidexpansion of wind energy, are well understood,and do not appear to be excessive. The cost ofwind power itself, often assumed to be high,seems likely to be lower than the cost of thesepublic support mechanisms, and a calculation ofthe net system cost does not present anyexcessive price increases.Comparing the alternativesGovernment support for renewables should beviewed within the context of current energypolicy, as outlined in the 2003 Energy White42 Wind Power in the UK sustainable development commission