Where is Gov’t Energy Strategy Going Wrong?
by Pilita Clark
Financial Times 13/14 Oct 2012
Ill-wind for UK blows some good for other European GroupsIt is mid-morning in Liverpool and a drizzle is falling on a sprawling shipyard near the city where a slice of British industrial history is being made.
Huge piles of kit have been shipped here for the Gwynt y Môr wind farm being built eight miles off the coast, one of 16 wind parks dotted around UK seas that have quietly turned Britain into the Saudi Arabia of offshore wind over the past decade.
Thanks to its shallow waters, strong winds and green energy subsidies, Britain is now, as David Cameron, the prime minister, told the Conservative party conference on Wednesday, “number one in the world for offshore wind”.
The UK has more offshore wind capacity than the rest of the world combined – 2.7 gigawatts compared with a global total of under 5GW. But there is a catch. The UK may have the farms, but the Germans and Danes are building them, a fact Mr Cameron neglected to mention.
This is very evident at the Gwynt y Môr project, which is being developed by the renewable power division of Germany’s RWE energy company.
“Those are from Germany,” says Toby Edmonds, Gwynt y Môr project director, pointing to an enormous stack of steel tubes, or “monopile” turbine foundations soon to be driven into the seabed.
“So are those,” he adds, as we pass another vast pile of steel structures, this time bright yellow painted “transition pieces” that fit over the monopile foundations and act as a base for the turbines.
The 160 wind turbines due to go in at Gwynt y Môr, are being built by Germany’s Siemens, the world’s biggest offshore wind turbine supplier, whose main wind factories are in Denmark.
More than half of the 796 turbines already embedded in UK waters have come from Siemens and around a third from Denmark’s Vestas. The rest came from RePower, a German subsidiary of India’s Suzlon group.
Among the developers, big Danish, German, Swedish and Norwegian energy companies such as Dong, Vattenfall, RWE, Eon and Statkraft have a combined market share of more than 70 per cent while the UK’s Centrica and SSE together have less than 20 per cent.
The nationality of the developers may not matter that much, but the fact that so much equipment is being built abroad is a growing concern.
For all its offshore wind supremacy the UK had only generated 3,200 jobs in the sector by 2011, according to the wind industry trade group, RenewableUK.
“The brutal truth is that UK energy consumers have been paying substantial subsidies to import a large amount of costly, foreign-made equipment in a recession,” says Ian Temperton, head of advisory at Climate Change Capital, a London-based investment manager. “Any serious investor has to ask if this can really be a sustainable situation.”
Part of the problem is offshore wind is hugely expensive. Until 2005, farms were built in shallower waters and cost about £1.5m per megawatt. But as they started to be built further out to sea in deeper waters, and as commodity prices rose, costs increased to about £3m per MW.
RenewableUK estimates £8bn was spent getting the first 2.7GW of offshore wind power up and running – less than one-fifth the capacity that the UK has been aiming to build to meet its share of European Union targets that require it to acquire 15 per cent of its energy from renewable sources by 2020.
The industry is trying hard to drive down costs, but until they do, investors in a weak eurozone economy plagued by tight credit conditions are understandably wary.
On top of that, the UK is in the throes of reshaping its renewable energy financial incentives just as George Osborne, chancellor of the Exchequer, is questioning the cost of wind power and enthusiastically embracing gas generation.
“That knocks confidence,” says Paul Coffey, chief operating officer at RWE Innogy, the RWE division building Gwynt y Môr.
“If George Osborne stands up and says ‘I’m not sure we should be spending money on renewables; I think gas may be more interesting’, I can guarantee we will get a call from RWE asking ‘Is the UK government really serious about renewables?’ ”
If developers are hesitant, that makes it hard for turbine suppliers to commit to building new plants abroad.
At least half a dozen turbine makers have been looking at building new factories in the UK for some time, including Siemens and Vestas, but none has taken a final investment decision.
But just across the channel, France’s Alstom has gone a big step further.
In April, it said it would build four new wind turbine factories in its home country, creating 1,000 direct and 4,000 indirect jobs, even though France barely has an offshore wind industry and Alstom is better known for building trains than windmills.
France awarded four projects earlier this year to consortiums chosen partly for their ability to establish local supply chains – a condition UK developers have not faced.
Alstom teamed up with France’s EDF, which won three projects. Alstom says that guaranteed it turbine orders worth more than €2bn over several years, making the decision to build four factories relatively simple.
Such a strategy is not without risks. “The French were explicit about wanting to support a local supply chain,” says Aris Karcanias of Navigant’s BTM wind consultancy. “But the risk in this tender structure is that it locks you into a single turbine supplier strategy with an unproven technology that is still at the prototype stage.”
Still, for a UK offshore wind industry eager for its local job numbers to start matching its global stature, it is the sort of risk some may find increasingly attractive
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Fear the boom and bust for green energyThis article in today’s Herald by Colin McInnes ,Professor of Engineering Science at Strathclyde University, is thought provoking on 2 accounts:-
Its subject matter and conclusion .
The Herald’s tendency to be uncritical of SNP policy.
The reference to “ ..encourage an almost immediate and efficient switch from coal to gas, with less than half the emissions per unit of energy produced” , is in effect UK ‘s adopted energy strategy, but not Scotland’s.
www.heraldscotland.com/business/markets-economy/fear-the-boom-and-bust-for-green-energy.19115967For those who missed it, or are pushed for time, the Keynes versus Hayek debate is compressed down to eight minutes of gangster rap in a well-known YouTube video, Fear the Boom and Bust. If you’re not seen it, watch it.
What YouTube captures, but 60 minutes of BBC doesn’t quite unpick, is the insightful and elegantly delivered rap lyric, “malinvestments wreck the econo-mee”. This is Hayek down to a single line.
So what are these malinvestments, and just what have they got to do with our current economic predicament? Well, everything.
For Hayek, malinvestments are the result of easy credit, resulting in what should be tomorrow’s prosperity creating today’s debts. But malinvestments aren’t just about easy credit, they’re about how poor investments can undermine wider economic productivity, which is of course the ultimate engine of prosperity.
Let’s take energy as an example, where malinvestments are at present all too common. Politicians of most hues, perhaps with the exception of the Chancellor, enthuse that Green energy is an industry of the future, a driver of economic growth and creator of jobs.
The argument goes like this. Due to its diffuse nature, Green energy is more labour intensive than compact thermal energy, so it’s good for boosting employment. And so to ensure growth of this new industry Government needs to provide support by steering significant sums into production subsidy.
So, if Green energy requires more jobs per unit of energy produced than its competitors, is this an inherent advantage? No, of course it’s not. Job creation isn’t the issue, it’s delivering low-cost energy that can drive the economy and generate genuine prosperity for the future.
Prior to the industrial revolution much of the population worked the land to grow biofuels – simply food for human labour. With the advent of energy dense steam power, the fields emptied and cities filled, ultimately leading to the historically unprecedented prosperity we now enjoy. The labour intensity of energy production plummeted, as energy became cheap and labour expensive.
So Green energy, as it’s currently being pursued, looks like a good example of a malinvestment. If it’s jobs we’re interested in, we could ban the use of tractors on farms and return to the fields, but this hardly constitutes any reasonable norm of human progress.
Similarly, if it’s carbon that concerns us, switching from coal to gas can deliver more immediate impact for every pound we spend. Last year wind saved about five million tonnes of CO2, but at a cost of £750 mil-lion in subsidy, so that’s £150 per tonne of CO2 saved.
However, simply ramping up our relatively clean gas turbines and ramping down coal a little would have delivered the same carbon saving, but perhaps for as little as £100m more for the extra gas, or a more reasonable £20 per tonne of CO2 saved. So what could we have done with that extra £650m we put into production subsidy? Well, we could have left it in the pockets of consumers. Or importantly, we could have invested it in basic energy research and innovation to bring down the cost of clean energy for the future, rather than skewing markets by subsidising inefficient production.
And if we want to deal with negative externalities such as carbon, we could perhaps guess that Hayek would have favoured a simple carbon tax. One that starts low, so we don’t dent the economy, but with a clear upward slope to focus minds on the long term.
This would certainly encourage investment in clean energy, but particularly technologies such as nuclear, with a long 60-year design life. It would also encourage an almost immediate and efficient switch from coal to gas, with less than half the emissions per unit of energy produced.
Rather than picking winners, a flat carbon tax takes decisions out of the hands of a small number of officials and puts decisions into the hands of the many engineers, economists and project planners in the energy sector.
To be clear, this isn’t libertarian politics, it’s simply the mass democratisation of decision making from the few to the many. Some companies will make the wrong call and lose out, while others will get it spectacularly right, as can been seen with those who took an early punt on shale gas in the US.
At its best, Hayek’s freed market is a distributed optimisation algorithm. It allows rival ideas and technologies to measure up against each other, with the most efficient and productive gaining markets share. That’s of benefit to us all.
Finally, let’s not forget, there’s only one thing more important than Hayek’s sound money in a developed economy, that’s cheap energy. Without it everything stops.
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Energy companies warn on green subsidiesBy Pilita Clark, Environment Correspondent
©Charlie Bibby
Millions of pounds of investment in wind farms and other power plants risk being delayed unless ministers extend the system of green subsidies by as much as three years, say leading energy companies.
The warning from RWE Npower and SSE, two of the so-called Big Six energy companies, comes as ministers prepare to iron out long-running coalition differences over
Senior ministers are to discuss reforms in an energy bill due before parliament next month that has triggered open disagreement between Liberal Democrat and Conservative MPs.
The reforms will dictate the extent to which the UK will encourage the renewable power many Lib Dems favour, and the gas plants that George Osborne, the Tory chancellor, is eager to back.
The coalition row has unnerved big wind turbine makers, such as Germany’s Siemens, Denmark’s Vestas and Spain’s Gamesa. They wrote to Ed Davey, the Lib Dem energy secretary, this month to say the coalition row had “caused us to reassess the level of political risk in the UK”.
These groups and other prominent companies including Microsoft and PepsiCo back Mr Davey’s plans to include a 2030 target for the decarbonisation of the electricity sector in the energy bill.
Such a target would probably rule out a big expansion of gas power, depending on how rigidly it was enforced. That means Mr Osborne may want some form of trade-off if he backs the 2030 target, say people familiar with the discussions.
Proponents of carbon capture and storage technology funding, which is also to be discussed this week, hope they will not become victims of any horse-trading over the shape of the final energy reforms.
This week’s meeting has triggered a flurry of lobbying, including a study commissioned by the E3G environmental think tank showing power sector costs could balloon by up to 98 per cent if ministers encourage more gas plants. This is because companies would have to build so many zero-carbon plants to stay inside carbon limits. Costs would rise 8 per cent at most beyond what was expected by 2030 if renewable energy continued to be steadily deployed, the study says.
The energy bill proposes closing the main renewable energy subsidy system for large green power plants such as offshore wind farms to newcomers from 2017, replacing it with a form of financial support featuring long-term price contracts.
The existing system, in place since 2002, requires electricity suppliers to get a certain portion of their power from renewable source
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