Tag Archives: economics

Chop off the tail?

The cost of installing a PV system has fallen dramatically since the introduction of the Feed-in Tariff for the UK three years ago. With some very serious wobbles, the FIT rates are now low but crucially relatively predictable and still high enough to give a good rate of return.

Still, with the FIT rate for a domestic (<4kW) system now down to 13.9 p/kWh (effectively 16.2 p/kWh including the 4.64 p/kWh export payment on 50% of generated electricity) the annual FIT payment is no longer such a head-turning amount for what is quite an intrusive installation. If you were to install a 3 kW system now, you would get back on the order of £500 per year for 20 years.

Given that you might be dead in 20 years (let’s hope not) or more likely you’ve moved house, you really don’t care about the money in the last 5 years. Economists call the time-value of money the discount rate,  basically ‘a bird in the hand…’ which for most people shakes out at around 10% per year. So what if we change the game? Let’s still give you the same amount of money (net present value or NPV – everything in the future is translated back into ‘today money’) but let’s do it over a shorter period so you get a bigger annual payment.

As an aside, The Stern Review on the Economics of Climate Change was a ground breaking work and argues that the rationale for higher discount rates is the expectation that things can only get better. If you take climate science as a given (for the purposes of the review, Stern took the prevailing scientific view, mostly from the IPCC at face value), this presumption may not hold and so a much smaller discount rate is necessary. Of course, the effect of this is to raise the significance of long-term elements in your economic model so that, for example a climate-induced London flood in the 2050-2060 period actually has does some economic damage instead of being discounted away to almost nothing. Besides ‘Climate change is a scienco-communist hoax perpetrated on the world’, this is one of the main criticisms of Stern from the laissez-faire types at the GWPF etc.

So anyhow, the reason for this front loading of the FIT scheme idea is to make it more attractive to consumers and drive uptake. All well and good, more solar, lovely stuff but playing devil’s advocate for a moment let’s look at it from the point of view of the Treasury or the Daily Mail. Here’s where things get trickier.

Germany has started to get into quite large problems with the scale of the payments they are making over the odds for the electricity delivered through their FIT which got underway just over ten years ago. By some estimates, the cost of FIT electricity is around 20 billion euros where wholesale electricity would have been down around the 3 billion euro level. This is causing quite a lot of carping about paying over the odds for energy, having some of the highest prices in Europe etc etc. What this doesn’t acknowledge is that once the FITs expire and systems are still running (PV will certainly outlast the FIT in many cases) the cost of this electricity will drop to almost zero giving Germany a tremendous competitive advantage over rival countries still doing the burning old dead things game.

Now what we want is to have similar levels of renewable power to the Germans, but for less money. Well, we will get it for less money automatically because we’ve delayed for around a decade during which prices fell sharply, allowing us to introduce FITs at lower levels of support from the outset. Using a 10% discount rate and a few other assumptions – 3% inflation, a fixed 15p/kWh for grid electricity and a 30% annual reduction in PV costs (reflected in falling FIT rates), the peak in the total annual cost of a PV FIT scheme comes in around year 5-6. after that it starts to fall away with a reasonably long tail until the year zero systems reach the end of their payment period when there is a second, sharper drop off in FIT payments. Looking at this keeping the NPV steady and changing from 25 years (the original scheme length in the UK) to 15 years, the peak in the total costs for a single year increased by around 25% which, given 2 GW of installed PV per year would mean that every household would be paying £45 instead of £33 per year for PV electricity. I played around with these figures in an Excel spreadsheet, trying to find a way to make my idea of bringing forward the payments into a shorter window work, both for the consumer and for the scheme as a whole. Needless to say, this was a futile venture, no matter how you cut it, front loading the tariffs is always a winner for the consumer and a loser (in terms of peak payments) for society.

It was only after going away and thinking about it some more did I realise that I was thinking along the right lines but wasn’t quite there. My first postulate was that nobody cares about the final years of their FIT installation. I stand by this. My second was that by paying out the same amount of money over a shorter period to sustain higher annual payments would make the scheme more desirable. It would; if you are the one getting the payments. If you are making the payments, you might prefer not to raise the maximum outlay for a single year which this approach undoubtedly would. Which brings us back to the original postulate which I believe is correct…

Nobody cares about the last few years FIT money, it probably won’t go to them anyhow. So why not do away with them. The FIT will still drive interest, you could even put a small bump on the FIT rates though not enough to cover the loss of the money from the final years, lowering the NPV of the FIT scheme while maintaining the attractiveness of the scheme overall. It means that we can get to the nirvana of FIT-free PV faster and steal a march on the Germans who are still going through the FIT time-bomb.

We can chop off the tail. We’re apes after all, we don’t need it.

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The Anti-Wind Lobby: Classic NIMBYism

In the renewables industry we have a perjorative, NIMBY which stands for Not In My Back Yard. It conjures the image of small minded, irrational opponents of renewables based solely on narrow, local objections.

A week or so ago, it was widely reported that 106 MPs (almost entirely tories) have written a letter criticising subsidies for wind power. I have reproduced this letter below (italics) with my own comments added.

“The Rt. Hon David Cameron MP
The Prime Minister
10 Downing Street
LONDON, SW1A 2AA

30th January 2012

As Members of Parliament from across the political spectrum, we have grown more and more concerned about the Government’s policy of support for on-shore wind energy production.

In these financially straightened times, we think it is unwise to make consumers pay, through taxpayer subsidy, for inefficient and intermittent energy production that typifies on-shore wind turbines.

1. These are financially straightened times. Well observed. Consumers pay, not through taxpayer subsidy but through levies on energy tariffs. According to Ofgem’s breakdown of household bills, this currently amounts to 10% of electricity and 4% of gas bills (for all environmental subsidies of which wind energy is only a part).

2. Wind energy is inefficient and intermittent. Really, this old tosh hasn’t died yet?!
These MPs obviously haven’t been reading their POST Notes as #315 states that, over winter, wind has a load factor (defined as percentage of time at maximum capacity) of 70%. Over summer this is lower with figures for favourable onshore locations given as 25-30%. Geographical diversity will help to smooth out the variability of the UK wind supply. RenewableUK, the trade body for the wind industry claims that wind turbines are typically generating for between 70 and 85% of the time. The issue is that for much of this time they are not generating at full power so over a year they produce about 30% of what they would produce if they were operating at their maximum output all the time.
With large quantities of wind power we do need more electricity plant for when the wind output is lower but this does not mean we have large amounts of idling plant waiting for the wind to die down.
Electricity is bought and sold close enough to the time of generation that we have a pretty good idea of how much wind will be available. What this does to the economics of electricity generation is interesting because once the wind turbines are up, any generation is virtually free. We don’t need to provide fuel. What large amounts of wind generation do is reduce how much of the time we need gas power stations to run. This hurts their economics so electricity from gas becomes a bit more expensive per unit but electricity from wind costs virtually nothing once the turbines are up.

3. Efficiency is a concept that hardly matters when your fuel source is free and harmless. But for the record, wind energy is on the same order of electrical efficiency as a conventional gas power station.

In the on-going review of renewable energy subsidies, we ask the Government to dramatically cut the subsidy for on-shore wind and spread the savings made between other types of reliable renewable energy production and energy efficiency measures.

Damian Carrington made a really good point about this one better than I ever could. Wind is the cheapest form of renewable power generation in the UK. If we want X amount of renewable energy (and we do), getting it from anywhere else will cost more money.
What he didn’t say which deserves a mention is that wind energy is getting cheaper. The right level of subsidy is the lowest one that makes industry install the level of wind power that we want and that level is probably lower now than it was when we last decided how much subsidy each form of renewable power gets. A report from Bloomberg New Energy Finance last November projected that onshore wind energy will be fully competitive with gas power by 2016. There will still need to be a subsidy at this point because everything being equal, energy companies want to build gas power stations. They are a technology they know and understand and they slot neatly into the electricity system as they think of it.

We also are worried that the new National Planning Policy Framework, in its current form, diminishes the chances of local people defeating unwanted on-shore wind farm proposals through the planning system. Thus we attach some subtle amendments to the existing wording that we believe will help rebalance the system.

Isn’t this the point of the national planning policy framework? To ensure that when a project is of strategic national interest (so major energy, transport etc projects) then it is less likely to be derailed by local issues. But rebalance away, good luck.

Finally, recent planning appeals have approved wind farm developments with the inspectors citing renewable energy targets as being more important than planning considerations. Taken to its logical conclusion, this means that it is impossible to defeat applications through the planning system. We would urge you to ensure that planning inspectors know that the views of local people and long established planning requirements should always be taken into account.

Perhaps, renewable energy targets are more important than planning considerations?
On a more conciliatory note, here’s a great promo from Ecotricity which shows what we stand to lose and to gain from switching more of our electricity supply over to renewable sources.

It’s not entirely correct as for each gigawatt of power station (say four cooling towers), you would need at least 50 wind turbines to replace them and this is the part which these MPs are really complaining about. It is the part they should be complaining about. It really is a difficult issue to discuss whether large proportions of the upland areas of our country should be covered with wind turbines and we need to consider the effect on the landscape. What annoys me is that they seem to think that this isn’t enough and that they need to offer a flawed economic argument against wind turbines.

Yours sincerely,

CHRIS HEATON-HARRIS MP AND 105 OTHER MPs”

PB

Update (27 Feb): Adair Turner says much the same as my last paragraph in the Guardian. Aesthetic concerns – Yes, Made-up bollocks about effectiveness – No.

 

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