In a flurry of official documents, Britain’s Department of Energy and Climate Change (DECC) announced “strike prices” for a host of renewable technologies and confirmed prices for renewable heat.
Britain will pay more for wind energy--on and offshore--than any other country in Europe despite having a better wind resource than most other European countries. Why they are doing so will be the subject of much discussion among energy analysts for months to come.
And in a precedent setting move in the English-speaking world, Britain has established geographically differentiated tariffs for wind energy on land. Similar policies have been used in Germany, France, and China for many years. Whether DECC realizes it has done so will also be the subject of much debate.
The strike prices will be used with Contracts for Differences (CfD), a key component of Britain’s so-called Energy Market Reform. Some have likened strike prices to feed-in tariffs, however, critics such as Dave Toke at the University of Aberdeen note that they differ markedly from feed-in tariffs used on the continent and in Britain’s own feed-in tariff (FIT) program for microgeneration.
The multiple announcements have no effect on the existing FIT program for projects less than 5 MW. Tariffs under the program are subject to normal review and degression. However, the announcements confirmed proposed tariffs for domestic (residential) renewable heat and non-domestic (commercial) renewable heat. These tariffs, called “incentives” in the British program, remain the most comprehensive in the world.
Analysts have been warning for some time that the strike prices for wind would be surprising high relative to other European countries, such as Germany and France. DECC was charged with arriving at a strike price comparable to payments under Britain’s existing Renewable Portfolio Standard (RPS) known as the Renewables Obligation (RO). CfD will replace this program.
For nearly a decade, academics, such as Toke, have been estimating the prices paid for wind under the RO. Critics of Britain’s quota program noted that these payments were exorbitantly high in comparison to simple feed-in tariffs in continental Europe. However, total payments were never transparent because of the RO program’s complexity. Payments were the sum of several components and this masked the total price paid for wind on land and offshore. DECC’s announcement makes the prices that will be paid for wind energy in Britain more transparent than ever before.
However, the prices for wind energy are much higher than those in Germany and France where feed-in tariffs have been in use for a decade. Prices for wind energy on land will be at least 25% higher in Britain than just the initial price in France and Germany. Prices for offshore wind in Britain will be 40% higher.
Great Britain is one of the windiest countries in Europe. Strong winds would normally translate into lower costs for wind energy—if the objective is fair value to both wind turbine owners and ratepayers. Equitable feed-in tariffs, as French renewable energy analyst Bernard Chabot calls them, limits profits at high wind sites and, thus, would reduce payments for wind energy in windy parts of Britain.
That Britain will be overpaying for wind becomes even more apparent when comparing the strike prices to the tariffs for high wind sites in Germany and France. Both Germany and France use a two-tier feed-in tariff system: the initial price, and a secondary price. The initial tariff is paid to all installations for the first few years. Subsequently, the initial tariff is dramatically reduced at windy sites. This is to avoid overpaying for wind energy. The intent is to pay what is fair, but no more.
Incredibly, Britain will be paying two to four times more for wind energy at windy sites on land than the Germans and the French. Britain will be paying five to six times more for wind sites offshore.
That’s not all. The strike prices for wind energy in Britain will adjust with inflation. Germany has no inflation adjustment. France adjusts only a portion of the wind tariff with inflation.
One reason for the price differential may different contract terms. Contracts in Britain are for 15 years, in Germany for 20 years. However, this doesn’t explain all the difference in price as contracts in France are only 15 years as well.
Critics of the CfD program have suggested that the high prices for wind were determined politically so that they would appear higher than the strike price for nuclear. The coalition government has been determined to build two new reactors and it has been difficult to justify the cost to voters. Wind energy in particular is cheaper than new nuclear and this may have caused consternation at the highest reaches of the British government.
The announced strike price for wind energy on land just happens to be slightly more than the proposed strike price for new nuclear.
The contract term for nuclear CfD is twice as long as that for wind and other renewables. Both nuclear and renewables are protected from inflation. Consequently, this further inflates the price of both technologies, but because the duration of the nuclear contract is so much longer than that for renewables (35 years to 15 years), it makes nuclear much more expensive. This difference is non-transparent. The concept is difficult to comprehend without using a spreadsheet or calculator, and most journalists will ignore this aspect and focus only on the initial price. Critics suggest this is exactly what the coalition government intends.
One of the hallmarks of a well-designed feed-in tariff program is the differentiation of the tariffs by the cost of generation. If a technology or application is more costly, it is paid a higher price. Conversely, if the cost of generation is less, such as for wind energy at windy sites, the price paid is lower than otherwise.
Unlike solar, wind energy is very site specific. Consequently, countries such as Germany, France, and China geographically differentiate the tariffs they pay for wind energy. The German and French wind tariffs are the most sophisticated in the world and adjust the tariffs by wind resource intensity. No English-speaking country has yet to adopt such a policy.
Nevertheless, Britain’s EMR will offer a different strike price for wind energy on land in the Scottish Isles than on the mainland, beginning in 2017. The reasoning is that it is more expensive to install wind energy on the islands and transmit the electricity to the mainland and, therefore, the strike price needs to be higher than elsewhere. This is no doubt true. But is also true that Scotland will vote soon on dissolution from the British Crown. The Scottish Isles’ strike price may well be the world’s first “politically” differentiated wind tariff.
As with the strike price for wind elsewhere in Britain, the price for wind energy in the Scottish Isles is higher than anywhere else in Europe.
The announcement also confirmed the domestic solar thermal tariff of ₤0.192 per kilowatt-hour ($0.31USD/kWh) and commercial solar thermal tariff of ₤0.10/kWh ($0.16/kWh).
Britain is in the process of implementing a series of complex and overlapping policies governing renewable energy, renewable heat, and combined heat and power that exceeds what any other country has done before. Yet it has chosen to use an overly simplified pricing system for wind energy, a technology that calls for greater sophistication. This has resulted in the highest prices in Europe. Much will be made of DECC’s announcements, especially the comparison of the strike price for wind energy with that for two new nuclear reactors. Few will understand what lurks behind the numbers, and even fewer will realize that a less ideologically-bound approach would reveal that wind energy is cheaper for British ratepayers than new nuclear.