A summary description of two reports prepared by Gordon Hughes, School of Economics, University of Edinburgh, Wind Power Economics – Rhetoric and Reality for the Renewable Energy Foundation should be required reading for anyone associated with implementation of New York’s Climate Leadership and Community Protection Act. Professor Hughes has evaluated the wind industry performance in the United Kingdom and Denmark. His findings are directly related to New York’s plans and should be considered in the implementation process.
My thanks to the Stop These Things blog where the article, Starry-Eyed Dreams v Economic Reality: Why The Wind Industry’s Numbers Can Never Stack Up, alerted me to these analyses. I am following the implementation of the CLCPA closely because its implementation affects my future as a New Yorker. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.
On July 18, 2019 New York Governor Andrew Cuomo signed the Climate Leadership and Community Protection Act (CLCPA), which establishes targets for decreasing greenhouse gas emissions, increasing renewable electricity production, and improving energy efficiency. I have summarized the schedule, implementation components, and provide links to the legislation itself at CLCPA Summary Implementation Requirements. In this instance the relevant targets are 70% renewable energy for electric production by 2030 and 100% carbon-free electricity by 2040. Incredibly, at the same time the State is mandating the shutdown of 2,000 MW of existing nuclear generating capacity. The bottom line is that wind and solar are projected to provide most of the carbon-free electricity.
Off-shore wind is a prominent part of the CLCPA. The press conference when Governor Cuomo signed the legislation announcing the “most ambitious and comprehensive climate and clean energy legislation in the country” lead not with that news but with the news that the state had “executed the nation’s largest offshore wind agreement and the single largest renewable energy procurement by any state in U.S. history – nearly 1,700 megawatts -with the selection of two offshore wind projects”. The legislation itself mandates 9,000 MW of offshore wind by 2035. At this time the Climate Action Council is developing the Scoping Plan that will outline “recommendations for attaining the statewide greenhouse gas emissions limits in accordance with the schedule established” by the law. Estimates of the wind resources necessary have not been published yet.
The New York Independent System Operator (NYISO) is doing its own evaluation of the resources needed for the CLCPA. On September 10, 2020 the Analysis Group presented a discussion of draft recent observations as part of the NYISO Climate Change Phase II Study. That work etimates that the state will have to develop all the technically feasible wind resource potential projected by the National Renewable Energy Laboratory: 35,200 MW of onshore wind and 21,063 MW of offshore wind.
Wind Power Economics Approach
Professor Hughes presentation describes two new reports he prepared for the Renewable Energy Foundation:
Professor Hill’s main academic field is applied statistics and economics, but much of his work has been on the interface between economics and engineering. He has written or co-written several studies of adaptation to climate change.
His presentation explains that both European policymakers and investors have “accepted the claims
of dramatic improvements in costs and performance made by wind operators for new
projects now and in the future”. However, he points out that “Unfortunately, the propensity of both governments and companies to understate the costs and overstate the performance of new projects has a history that is long and inglorious.”
The presentation explains that he did not rely on the claims made by wind proponents. Instead: “My starting point is the actual data reported by companies in their accounts over the last two decades. This is possible because the standard commercial arrangement is that solar, wind and other projects are operated via legal entities known as Special Purpose Vehicles whose accounts are usually audited and are filed with Companies House. I have collected data for more than 350 SPVs responsible for wind projects that have filed accounts since 2005. The dataset is unique and provides the basis for a detailed analysis of the actual costs of wind power.”
I believe that this is the appropriate approach to evaluate the potential of wind energy. Observations always trump projections. It would be foolhardy for New York to dive into an electric system that depends on wind energy without checking to see if there is water in the pool be evaluating what has happened elsewhere.
Using the wind project accounting documents, Professor Hughes developed data that provides the basis for a unique and detailed analysis of the actual costs of wind power. Contrary to the narrative, he shows that the capital expenses have increased over time rather than decreased. He explained that this is due to installations in increasingly more difficult locations and building bigger turbines. Unfortunately, that is not the worst news. The operating expenses also increased over time due for both onshore and offshore projects.
Offshore wind operating expense is a particular issue. Using data from 6,400 turbines in Denmark he found (His Figure 6 below) that the reliability of 2+ MW turbines, like the ones proposed for New York offshore wind, deteriorates over time so that risk of failure increases sharply once they have been operating more than ten years. In both Denmark and Great Britain, the new generation of these larger turbines were accompanied by steep learning curves for organizations that had experience with smaller turbines. New York proposes to skip the smaller turbine step which does not portend well.
Finally note that there was a distinct decline in load factor with age. The high capacity factors claimed by the offshore wind developers were not maintained over ten years. As output decreases the operating expense ratio becomes less favorable. He notes that:
“If wind farms do not receive offtake prices that are higher than the market price – or very much higher in the case of offshore wind – their expected revenues will not cover opex costs after 12 or 15 years. Operators will either cease production or drastically cut operating costs leading to closure within a relatively short period. There is no way out of this trap because opex costs are linked to reliability; the decline in reliability with age means that high opex costs must be incurred to maintain production. The consequence is that the assumption made by BEIS and many investors that the expected operating life of new wind farms will be 25 or 30 years is completely at odds with the underlying economic reality. Few modern wind turbines operate for more than 20 years and many offshore wind turbines are likely to be decommissioned before they reach an age of 20 years.”
I am not surprised by these results. Offshore conditions are not friendly to any machinery, particularly electronics. The tips of wind turbine blades are going to be going pretty fast relatively close to the water so there will be direct erosion effects. Salt water is corrosive so all the electronics have to be protected. The massive rotors have to spin on bearings that must also be protected but still allowed to rotate. Finally, these are all chronic problems. What happens when a major hurricane like the 1938 “Long Island Express” brings sustained winds of 121 miles per hour to New York’s offshore wind facilities?
Wind Power Economics Conclusions
I provide italicized context and commentary on the general lessons provided by Professor Hughes in the following:
In stark terms a significant portion of wind output is expensive to produce and of no value in terms of its contribution to national wellbeing. Other than sheer ignorance there is no excuse for policymakers tolerating, let along promoting, this outcome. I will conclude with some general lessons from the study:
- Stop pretending! The projections of the costs of achieving Net Zero put out by government bodies and many others rely on cost estimates that are just wishful thinking. They have no basis in actual experience and a realistic appraisal of trends in costs. As a very broad brush calculation the cost of meeting the Net Zero target by 2050 is much more likely to be 10+% of annual GDP than the claimed 1-2% of GDP.
- Great Britain became the first major economy to pass a net zero emissions law by 2030 so their target is even more ambitious than the CLCPA. New York is smaller, 54,555 square miles, than Great Britain 80,823 square miles. New York’s GDP is $1.44 trillion USD and Great Britain is $2.87 trillion USD but the GDP per capita for New York is $72,742 compared to Great Britain’s $42,202.
- Accelerating arbitrary targets is very expensive. If the Government persists with the goal of building 30 GW of extra offshore wind capacity by 2030 the costs discussed here are likely to be significant under-estimates. This will be reinforced by the adoption of similar targets elsewhere in NW Europe. The offshore wind sector does not have the capacity to build new projects at a rate of 3 to 4 times the last decade. Any familiarity with the history of offshore oil & gas and other energy projects tells us that the consequence will be a gold rush. It is plausible to assume that capex and opex costs will rise by a minimum of 20% and probably closer to 50% above the already high costs that we observe in the audited accounts.
- New York has to build its offshore wind support infrastructure from scratch. Even though the goal of 9 GW by 2035 is smaller there is a similar concern about the buildout of projects. Given that projected costs have always been lower than the actual costs only time will tell for New York implementation.
- Bailouts of wind farms and financial institutions are inevitable. The Government is creating a situation in which it will have no option other than to bail out failed and failing projects simply to ensure continuity of electricity supply. There will be a game of pass the parcel over how the losses will be distributed but ultimately they will fall largely on taxpayers and energy customers. Any business investor outside the renewable energy sector should plan on the basis that electricity prices in 2030 will be 3-4 times in real terms what they are today.
- There is no reason to expect that the New York situation will be any different.
- Remember that not everyone has the same priorities. The UK and the EU are very minor bit players in what happens about climate change. The outcome will depend on choices made in China, the US and India. Focusing on China and India, they are only interested in options that are consistent with both economic growth and other environmental goals. Offshore wind is expensive and of limited interest in most of Asia.
- New York is also a minor bit plyer in what happens about climate change.
- As a rich country, the UK can afford Net Zero by 2050 at the aggregate level. However, it will mean allocating the proceeds of 10 or 15 years of economic growth to that single goal. Past experience shows that the UK’s political system cannot handle the structural and redistributive consequences of following that path. A strategy that acknowledges the real economic costs and difficulties of trying to make the transition too quickly is much more likely to be accepted and implemented.
- I have no reason to expect a different outcome for New York.
Professor Hughes has prepared an important warning for New York. While I have little hope that the lessons will be heeded, I hope that they are at least considered during the implementation of the rule. I will submit a comment to the Generation Advisory Panel alerting them to this work.
I conclude with his summary:
“The theme of my talk is the disparity between predictions about the future costs and performance of wind power (especially offshore wind) – the Rhetoric – and the actual evidence that is available on what it costs to build and operate wind farms and the amount of power they produce over their lifetime – the Reality. The reality of what will happen to the costs of key renewable energy and other low carbon technologies is critical. The UK Government’s strategy for meeting its Net Zero target at an affordable cost rests on the core assumption that the costs of wind power have fallen – and will continue to fall. There is, however, a major problem with all of the projections produced by official agencies, academics and other organisations. Put bluntly, they are the product of wishful thinking applied to notional projects in the future with little or no connection to commercial reality.”