The cost of wind (ctd)

Referring to my earlier remarks about an ESRI paper, here’s the verbatim conclusions of the paper.

Seán Diffney, John Fitz Gerald, Seán Lyons, Laura Malaguzzi Valeri, “Investment in electricity infrastructure in a small isolated market: the case of Ireland”, Oxford Review of Economic Policy, Volume 25, Number 3, 2009.

The new All-Island market structure appears to have performed broadly as expected. The rules provide for a transparent and efficient operation of the market, encouraging plant availability. Investors are clearly relying on the capacity payment regime to ensure that electricity is priced at long run marginal cost in the future. Lyons et al. (2007) suggest that the calibration of the capacity payments regime is broadly appropriate. The one area which may need further consideration is the handling of wind generation within the capacity payments regime.

In this article we evaluate the costs and benefits to the Irish system of meeting the government’s target for 2020 for 40 per cent of electricity to be generated by renewables, primarily wind. We find that high wind generation is economic when fuel prices are high and that a high level of wind penetration will occur without further expensive incentives. Unless fuel prices or carbon prices are low in 2020 consumers are likely to benefit from a high level of wind generation on the system. This is consistent with the results in DCENR and DETINI (2008) and CER and NIAUR (2008). The target for a high level of wind generation in the Republic will not adversely affect consumers in Northern Ireland and may actually benefit them in the case of high energy prices. While low fuel or carbon prices could see consumers in both jurisdictions paying a higher electricity price, this premium would be likely to be small. A high level of wind generation would provide a hedge against high fuel prices.

To be sure of the net effects of wind generation it would be important to not only measure its positive externalities, but also its negative externalities. In this study we have internalised part of the negative externalities wind generation imposes on existing thermal plants by curtailing wind generation to limit thermal plant cycling. We have not however attempted to estimate the possible negative environmental externalities of wind farms.

We find that investing in a lot of wind generation is economic only if there is also parallel investment in interconnection. This allows wind to generate whenever it is available instead of being curtailed at times of low demand or imposing additional costs on thermal plants by making them ramp up and down. This implies that the total capital costs associated with an investment in high wind generation will be substantial. Therefore, in order to minimize the cost of the system to the consumer policy should concentrate on minimising the cost of this investment. One measure to achieve this is already in place, regulatory certainty: because the establishment of the new market required co-ordinated legislation in two jurisdictions it will be difficult to change. This should provide additional reassurance to investors.

Second, given the comparative youth of the SEM, avoidance of regulatory risk is at a premium. The regulators should avoid making unnecessary changes to the framework or parameters while market participants gain confidence and knowledge about how the system works.

Third, the financing of the essential network infrastructure, including interconnectors should be done on the basis that it is part of the regulated asset base of the state owned (or in the case of Northern Ireland mutual owned) company. As such it should attract a low cost of capital which will be crucial to ensure that the costs for consumers on the island of Ireland are minimised. In any event, merchant interconnectors would be unlikely to supply the socially optimal level of interconnection, given their higher cost of capital and decreasing returns to investment. It should be noted that these results are based on the assumption that interconnection operates as a perfect arbitrageur, allowing electricity to flow from the low price to the high price jurisdiction when ever there is a price difference. In practice this is unlikely to hold, so studying the specific behaviour of interconnection flow is important to assess the returns to the system. If the interconnector does not operate optimally a much larger infrastructure investment could be needed to obtain the same effect, possibly causing the high wind scenario to become too expensive. This highlights the importance of implementing an appropriate regulatory regime to cover all of the interconnectors between Ireland and Great Britain.

Finally, to facilitate the continued development of competition, the ownership of the transmission system in the Republic should be transferred to EirGrid, the government-owned operator of the electricity system, and the Irish government (as shareholder) should ensure that appropriate pressure is put on operating costs in the ESB.

29 thoughts on “The cost of wind (ctd)”

  1. @Richard

    This is a thorough and objective analysis produced by ESRI. I agree it is best for the nuanced conclusions to speak for themselves rather the attempts made to hijack them for particular agendas as we have seen over the past days.

    Re: your point on “import substitution” in the previous post, are perhaps missing the point?

    We not talking about import substitution, we are talking about risk management. Even if you are correct that markets will continue to perform in the event of an energy crisis (as has not always been the case historically, why do you ignore these obvious historical analogues?) the price that would be charged for that energy is the key issue.

    It makes sense for the current high levels of dependence on imported energy to be unwound to some extent, especially now that the IEA is warning of a period of increased uncertainty in energy markets in the coming years.

    Obviously renewables can play only a limited role in meeting this policy objective (the same too can be said for energy efficiency), and I would therefore agree with your colleagues in ESRI when they say:

    “To some extent the renewables objective can be seen as one instrument promoting reduced dependence on imported fossil fuels”.

    http://www.esri.ie/UserFiles/publications/20091217095811/WP334.pdf

    Personally I’d prefer to rely on human efforts to address these challenges now rather than rely on the divine intervention of the invisible hand if crisis strikes.

  2. @jc
    A model maps assumptions to conclusions. If the assumptions change, so should the conclusions. Capital is dearer now, and gas is abundant.

    I agree that energy would be a good candidate for import substitution.

  3. 1. “We find that high wind generation is economic when fuel prices are high and that a high level of wind penetration will occur without further expensive incentives”

    Is the ESRI implying that current incentives are expensive ? If so what should they be ?

    2. RE: Interconnection
    “Therefore, in order to minimize the cost of the system to the consumer policy should concentrate on minimising the cost of this investment”

    This is not the case at present. There is no will to seek value for money in constructing the current EWIC. Imera claim they can build the Eirgrid interconnector for a third of the price.
    http://www.independent.ie/business/irish/eirgrid-defends-8364600m-cost-of-power-connector-1695006.html

    3. “It should be noted that these results are based on the assumption that interconnection operates as a perfect arbitrageur, allowing electricity to flow from the low price to the high price jurisdiction when ever there is a price difference.”

    This assumption features in all the studies performed to date. Why can’t the non-ideal scenario be modelled. We seem to design for best case rather than worst case scenarios.

    The Bremer Energie Instistut in Germany have published a working paper on interconnection and analyse the business case for the EWIC. It deals comprehensively with a lot of the assumptions behind the EWIC. In conclusion they state “Because of these flaws in the business case, the overall conclusion that the East-West Interconnector is socially attractive does not stand up to scrutiny.”

  4. @ Tucemseh

    You say:

    “Imera claim they can build the Eirgrid interconnector for a third of the price”

    But from a quick read of the article we find that this is untrue:

    Imera “which is planning to build two separate smaller interconnectors” said that “its own Ireland-Wales interconnector will cost one-third of the EirGrid-sponsored link”

    Imera is an industry rival, Ergird’s response was

    “EirGrid said yesterday that the contract it awarded for the development of its own interconnector was the result of an open, competitive tender process and expressed confidence that the price is the best available”.

    The Eirgrid interconnector may well be costing more than it should but you have certainly not provided any evidence to suggest that this is the case, and your claim that they could build it at 1/3 the price is clearly a little outlandish.

    Even though I disagree with most of your posts, you are clearly a very well informed poster and your posts have often made me question my own assumptions. But I would also say that you seem to have an agenda and I wonder at times if you have skin in the game.

    I work in climate change and energy policy as a consultant, so you could argue that I do. Just wondering like….

  5. Are small scale peat power stations using blanket bogs uneconomic when compared to isolated windmills in the west ?
    I remember a small 1950s era peat power station in cahersiveen that provided income for local farmers.
    If we get a serious reduction in the standard of living to maybe 1970 levels such peat cutting activities may again become viable again and would redistribute some income to the local peasants rather then a international wind company.
    Whatever the true cost of such ventures they do provide more reliable power generation.

  6. @ Richard

    We are talking about a difference of €400 million. The difference in cost can clearly be accounted for by the fact that Imera plan to build two “smaller” interconnectors, and that it is THESE that can be build at for €200, not the Eirgrid interconnector. The article was misinterpreted, no big deal….

  7. @jc
    http://www.iae.ie/site_media/pressroom/documents/2009/Jun/24/Review_of_Irelands_Energy_Policy_-_June_2009.pdf

    Section 1.2.3
    “In July 2006, the Irish Government decided to construct an interconnector from Ireland to Great Britain. It would appear that this decision was taken without the benefit of a robust techno‐economic study or cost benefit analysis.”

    It showed that EWIC was twice the price of the BritNed interconnector – and the BritNed is 4km longer. Mr.O’Brien who featured on Prime Time presented this report to the Oireachtas Committee.

    Still outlandish ?

  8. @jc

    Fair enough the EWIC is a bargain !!!

    We just need 2 more to reach the 1900MW required according to the ESRI with GB to make wind economically attractive.

    Anyone got EUR1.2bn to spare to help our wind industry ? It’s for a good cause – it was originally intended to save the planet but now it’s a hedge against gas. We definitely won’t be exporting at a loss to the mainland and rest assured all the subsidies will stay at home. Even better the Brits have loads of spare capacity on standby to give us a “dig out” when the wind drops over here. It’s a win win situation !

  9. @Richard

    It seems to me that the cost of capital in Ireland and other peripherals will remain high for the foreseeable future. Whether we remain in a eurozone or not, the cheap money of the early years of the euro will come to be seen as irrational exuberance or market failure, not to be repeated.

    Ireland’s wind policy is a relic of the era of cheap money. Some people are going to have to learn to accept this fact.

    If we accept this new reality how are the conclusions of the ESRI report impacted?

  10. Just to further complicate the issue, the ESRI paper that the Minister was referring to was Working Paper 234, upon which the above paper was based, but which, presumably, might be worded slightly differently…

  11. @bg
    Wind is attractive if carbon if expensive, if gas is expensive, if coal is expensive, and if capital is cheap.

    The price of carbon and gas are down; capital is up. Structurally, not incidentally.

  12. @ Richard

    I’m glad your crystal ball is working again after it’s brief glitch in MAy 2008.

    As far as I am aware, the issue of structural V incidentally is far from resolved in relation to carbon or gas.

    The IEA is predicting a gas glut ’till 2015, perhaps it will last beyond that, perhaps not. Carbon prices in Europe will depend on economic recovery in Europe, and the outcome of international negotiations (20 or 30% reduction).

    Medium to long-term strategic decisions should (and will) be made within the context of medium to long-term trends. Surely we have learnt not to ignore warning signs on the horizon if nothing else from our experience with the current crisis?

  13. @fergolah.
    Most of us are peasants wether we like it or not.

    Anyhow I believe the old station I described was a very small 5 MW plant – a modern efficient maybe 7 Mw plant with the same amount of fuel use from the 200 farmers involved would I imagine be viable in that area and provide local employment in rural areas.
    I just hope we have not sold every digger in the country to maintain our much vaunted export numbers.

  14. @ Richard

    A number of other posters to the site use a system where long posts get folded and only the beginning is visible on the landing page. In deference to those of use who lead busy non-Irish Economy focused lives and want to be able to check in on the ongoing discussions of the macro-economy only, could you also follow this procedure, please? No offense intended, it would just make things simpler. Thanks.

  15. Nice to see the energy question ratcheting up the scale of interest. How about we think about oour energy requirements in ‘island terms’ and there are two of those close by each other. Interconnect the two. Farm out the job to the military engineers. Forget about PP cosortia, estimates, quotes and CB analysis. We are staring into a very bad predicament if we lose energy capability. Neorealist anarchy and all that. Just get those connectors in place – PDQ. Legislators can handle the paperwork.

    For now, Gaz is ‘cheapish’ but when Ivan figures out the decline rate of his reserves!!! Fancy only one hot meal per day and 6 hour rolling blackouts? No, I thought so! We had a brief taste of no electricity Tuesday mid-day. Very, very inconvenient.

    Build-out sufficient on-shore turbines to provide the base-load from 30% running at 80%. Try to reduce peak usages.

    Reflecting on the conservation issue. Not so easy as it appears. Need to get the Behavioural Economists on the job. Normative models are unlikely to be successful.

    BpW

  16. @fergolah
    “You should see modern turf cutting – local peasants it is not”
    Erm, that’s the cutting. There aren’t machine to turn it, foot it, heap it and load it to transport. It’s back-breaking work and it is done by hand…

  17. PS not that I think it’s a good idea; probably drying with excess heat and using blown peat dust would be a better bet.

  18. 1. IMERA can still build their interconnecors. They even have an exemption from normal regulatory rules to facilitate them in doing so.
    2. The crucial question in building the required new interconnection infrastructure will be the how the costs of the transmission system are allocated between generation and load. This is fiendishly difficult – but put simply new interconnectors built to facilitate wind exports should be paid for by wind generators
    3. Risk premiums should be paid according to risk. It is quite possible for the Irish government to be a riskier prospect than investing in new interconnection based on a regulatory approved rate of return (especially if that is supported by an EU legislation framework – quite likely at some point). This changes Richard’s points from 3.27 slighly (I am also not sure that the gas glut is structural, in fact I think a change by 2015 is quite likely, but that is another topic)

  19. Hi Richard,

    Good study, based on objective analysis. The Poyry study on wind intermittency reached similar conclusions on interconnection in particular.

    One thing I am not sure on is whether wind penetration will continue to grow without further incentive. A recent UK government study put the levelised cost of onshore wind at £90/MWh … so I don’t see how 70ish Eur/MWh generators get from REFIT will enough to support further development.

    Wind turbine costs & financing costs have increased and many of the best sites have already been exploited.

  20. “Surely we have learnt not to ignore warning signs on the horizon if nothing else from our experience with the current crisis?”

    @jc surely we have learned not to subsidise industries

  21. @Pongo
    If we did not subsidise industries you would be waiting on the dock in Queenstown for the next sailboat to Boston.
    The world is a hodgepodge of fiscal and monetory subsidises – some create something new , many fail spectacularly.

    Who knows what the future brings but if it is wind it will be mainly dark and cold with occasional flashes of light.

  22. The reality is irrespective of the current price, that fossil fuels are a limited resource. In the future whether it be 10 years, 50 years or 100 years, we will have to rely on alternative sources of power.
    Wind power is one such option, similarly wave\tidal energy, nuclear is another. None of these are ideal, but to pretend that we should base our future planning on the notion that gas is currently cheap is foolish.
    Wind intermittency is of course the major problem with wind. Interconnection is offerred as the solution but again this is not without its downsides, such as cost plus if every country moves to wind power then where does the power come from when the wind is not there.
    Energy storage is another possibility, but equally there is no ideal solution on that front.
    Energy management, whereby loads reduce in accordance with supply offers another. Perhaps a combination of all three might offer a reasonable solution – I don’t know.
    Scientists and Engineers continue to work on all these solutions.

    So whilst economic models may offer some guidance on whether it is appropriate to invest capital sums now, they are simply that models which in turn are based on a series of assumptions.

    The one assumption I would suggest with absolute certainty that should be factored into all models is that it will not be an economist that solves the world’s future energy problems…

  23. @ Tristen deCuna
    “… it will not be an economist that solves the world’s future energy problems…”

    Perhaps not but economics will certainly play a major role.

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