The government says that onshore wind is already the cheapest electricity generation technology in the UK. Towards the end of a long and impressively transparent report on the costs of generating power, BEIS says that wind came in at £62 per megawatt hour in 2015 compared to £66 for gas-fired generation. Solar wasn’t much higher at around £80.
The commercial viability of renewables will get improve while the cost of fossil fuel electricity will tend to rise, says BEIS. By 2020, large scale solar will be at £67 per MWh, almost the same as gas. Onshore wind (very surprisingly) is said to cost slightly more than 2015 at £63 per MWh. In 2025, a new gas plant will produce power at £82 a MWh, including a substantial carbon charge, while PV and wind have fallen to little more than £60. Even ignoring the cost ascribed to CO2 emissions in the calculations, gas and its two low-carbon competitors are almost evenly matched by 2025. Even in straight cash terms, solar and wind on particularly good sites will beat gas within a few years.
Perhaps as importantly as the figures for utility scale solar farms exporting into the grid, BEIS shows that large rooftop installations on warehouses and factories produce power by 2020 at £73/MWh, much less than most businesses are paying for grid electricity today. This is, I think, the first statement that PV will soon reach ‘grid parity’ for large arrays on commercial buildings, and may be at this point already.
The reasons for BEIS’s conversion to the fundamentally attractive economics of UK renewables are two-fold. First, the Department has moved to more reasonable assessments of the underlying capital costs of PV and wind. It should be complimented on the openness with which it discusses past failures to keep up with the decline in the PV prices. Every single government and supra-national body around the world has made the same mistake but BEIS has now been more transparent than all its peers.
The second point is that BEIS is at long last acknowledging one of the key advantages of PV and wind: they require far lower rates of return than other technologies. Investors are happy with the low risk of generating assets that cost nothing to operate and the returns they now demand reflect this preference for wind and solar over gas and other plants.
Nevertheless, it can still be very strongly argued that BEIS’s assumptions are biased against wind and, particularly, solar.
· Commercial large scale PV sites in the UK do not have 11% capacity factors. These farms are generally capable of generating at least 10% more than this. (A colleague sent me data today suggesting his portfolio of Cornish solar farms actually manage more than 13%). A 10% underestimate of yield means a 10% overestimate of the cost of producing power from solar.
· BEIS assumes that solar farms in 2020 will be paying capital costs of £1,000 per kilowatt. This is a mistake. The actual cost today is no more than about £800 in most locations. It will be less by 2020. Because a solar farm is, in effect, cost free to operate, the implicit price for generating electricity is entirely geared to capital costs. We can make another near-£20 reduction here.
· The final unfavourable assumption is the cost of capital for PV developments. BEIS says this is 6.5% before inflation for PV, the lowest of all generation technologies and 8.5% after assumed inflation of 2%. This seems slightly high. A large farm built by a solid developer will be able to attract debt finance at little more than 3% real and I doubt that the returns to shareholders need to be more than 7% nominal. Weighting these two suggests a figure of about 5-5.5% real is a perfectly reasonable assumption today. Once again this change would significantly reduce PV’s implicit costs.
· On the other side, the costs of CCGT generation are understated. A plant built in 2020 will not work 93% of the hours in the year (excluding outages). On a sunny, and windy summer day in 2020 even a new CCGT that is cheapest to operate will not be working. Turbines, nuclear and PV will provide all the power that is needed. A better estimate might 75% or so. (Older and less efficient plants will work far less than this). This means that the capital cost and the running expenditures of the power station will need to be spread over a lower level of output, raising the implicit cost of production.
All new substantial generating capacity now needs some form of subsidy or price support to operate. Today’s wholesale prices come nowhere close to covering the underlying costs of new generating capacity. These figures from BEIS make an unshakeable case that a fair and balanced subsidy scheme should mean that large amounts of new onshore wind and PV are encouraged onto the UK grid. Even if a GW of gas turbines have to be build to support each GW of renewables, low-carbon sources are now close to, or at, grid parity.