Hidden costs on the path to net zero emissions

Pick a point in time at random, let’s say 11am on May 9 this year. Where did Britain’s electricity come from? According to the power-wonk’s website, MyGrid UK, slightly more than half came from gas-fired stations, and a further 17 per cent from nuclear. Wind and solar collectively accounted for about 17 per cent. Coal, that old environmental bugbear, contributed nothing at all.

Measured by “carbon intensity”, that mix emitted a total of 294g of CO2 per kilowatt hour generated. That’s slightly more than the 257g average for the past 12 months.

Now consider the environmental targets the UK is preparing to shoulder. To hit net zero by 2050, or in just three decades, the electricity network will have to cut emissions to almost zilch. At the same time, it will have to grow substantially to decarbonise heating and transport, doubling its annual output from 300 terawatt hours at present to 650TWh.

Quite how this will be achieved remains hazy. But a glance at the Committee on Climate Change’s latest report gives an inkling of that body’s thinking. It suggests a vast expansion of offshore wind capacity from 8 gigawatts now to a thumping 75GW by 2050. As for the rest, there’s some mention of biomass (basically, wood chips) and gas, so long as the stations are fitted with carbon capture and storage — a technology that has yet to be proved at commercial scale. Otherwise, it’s pretty much a blank page.

The case for offshore wind runs as follows. Britain is well-sited to exploit this resource, being surrounded by windy oceans. Past subsidy-funded deployment has driven down costs. These recently hit new lows, with two schemes demanding just £57.50 per megawatt hour for output coming on stream in 2022-3. That’s slightly below the current electricity wholesale price.

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So shouldn’t we just crack on and build all those turbines? Time is clearly pressing if we are to hit our targets. Well, not quite so fast. Strike prices alone don’t tell the whole story. While Britain may be blessed by nature as a good place to site wind farms, nature also dictates the output of those farms is variable. And that imposes charges that the wider system has to bear.

These include the cost of switching off turbines when the wind is blowing too hard and calling up back-up power when it’s not blowing hard enough. Then there are the additional grid and transmission costs of running electricity along power lines from dispersed generation sites far from sources of demand. These expenses are presently passed on to all customers, rather than borne by the investors.

The costs may be relatively trivial when renewables are a small proportion of capacity. But they increase quickly as it goes up. According to a 2019 study by OECD-Nuclear Energy Agency, system costs rise from $7/MWh at 10 per cent penetration to $17.50 at 30 per cent and $30 at 50 per cent. Above that, the study suggests they can rise as high as $50 (£38)/MWh. A British study from 2017 by the UK Energy Research Centre appears to produce lower numbers at those lower penetration levels it measures, although direct comparisons between the two studies are not easy. (UKERC does not look at scenarios above 50 per cent.)

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Before going full tilt at building vast amounts of variable capacity, it’s surely worth considering what costs this might embed in the system. These could be substantial: with 75GW of offshore wind, the UK would get more than half its power from renewables. Add £38/MWh to even the £57.50/MW for the latest cut-price wind farms and you end up with a number not far short of £100/MWh.

Proponents of renewables say there are fixes, for instance using technology such as AI-enabled appliances to limit the need for back-up. Or building more cross-border interconnectors to allow wind farms to export unwanted demand. Neither is certain. Renewable-rich Germany already faces restrictions on energy exports from neighbours tired of being flooded with its surpluses on windy days.

The logical way to constrain overbuilding would be to force investors to bear the costs of their own variability. If they’re right about the technical fixes, they should be willing to take the risk. The energy economist Dieter Helm has already suggested a solution — making renewables bid to deliver so-called “firm power” to the grid (and thus buying in any nature-induced shortfall).

If subsidy costs did rise, that would at least be a clear signal to the public of the costs the system would be bearing. It might also level the playing field with other technologies such as nuclear, where the technology doesn’t require future R&D breakthroughs. Better surely than the existing model, where system costs accrue silently only to be thrust on the public as a stealth tax.

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