Electricity bills could double to bail out new wind farms, report claims

Electricity bills could double to bail out new wind farms that have massively underestimated their operating costs, a former adviser to the World Bank has claimed.

Two offshore wind projects secured contracts to supply renewable energy at reduced costs in 2017 and it was hailed the result of huge strides made in technology and engineering, sparking hopes of a green jobs boom.

But Gordon Hughes, a professor of economics at Edinburgh University, claims that almost no attention had been paid to whether the contracts were sustainable and what would happen if they were not.

In a report for the Global Warming Policy Foundation, a climate sceptic thinktank, he argues that the possible outcomes were “stark”, likening the Moray East project in Scotland to a “very high stakes game of poker” and questioning how it could possibly be profitable.

“Either a consortium made up of large overseas energy companies and financial institutions is deliberately planning to lose money, or UK electricity customers will find themselves having to pay much higher prices so as to permit lenders to recover their loans and the developers to earn some kind of return on their equity,” he claims.

At the Government’s Contracts for Difference auction, companies bid for a “strike” price they will be paid for electricity generated. Those who submit the lowest bid secure the deal.

Subsidies in 2017 fell 50 per cent on the previous round in 2015, to £57.50 per megawatt hour for projects delivered in 2022/23.

Denmark’s Dong Energy secured the deal for the second phase of its Hornsea project off the Yorkshire coast while EDP Renewables and Engie, formerly known as GDF Suez, was granted the same size contract for Moray East.

The developers argue that they take on all the financial risk of delivering the Government projects and no costs will be passed onto consumers.

However, Prof Hughes claims that even if the Moray East project performed well above long term averages, it could only earn a reasonable return on equity if the revenue per megawatt hour was 50 per cent higher than the strike price.

“That in turn will require a market price for electricity that is slightly more than double the market price in the first half of 2019,” he notes.

“Readers can reach their own conclusion. One view is that a group of large and sophisticated overseas investors have convinced themselves to tear up large numbers of bank notes in the cold maritime conditions of the northern North Sea.

“An alternative view is that investors are prepared to bet that the UK Government will force through a large increase in the wholesale price of electricity, perhaps through a large increase in carbon taxes, thus allowing the investors to make a reasonable return. In that case, the ultimate patsy at the poker table is the British public.”

The report warns that operators will face “unpleasant shocks” in the costs of running a wind farm in the hostile North Sea and accuses officials and politicians of being “naive” in assuming that because the project is being built, it will operate on the terms stated.

Prof Hughes suggests there is more at stake with the Government pressed by lobbyists to adopt low-carbon policies on the back of auction prices that are “patently unsustainable”.

He says that having committed to the future of offshore wind, it will eventually have to bail out the industry with a high carbon price to “save face”.

The Global Warming Policy Foundation, a lobby group set up by Lord Lawson, a former chancellor, and Dr Benny Peiser, has written to the directors of the Moray East project and its auditors, PriceWaterhouseCoopers, expressing concern about how profit can be made and requesting further disclosures.

It noted that the low strike price was of central importance to the formulation of energy policy in the UK and that its financial affairs were therefore “of vital public interest”.

Renewable UK, the UK's leading not for profit renewable energy trade association, said the industry has worked "tirelessly" to bring down costs of offshore wind.

Dan Finch, director of EDPR, said: "The UK as a whole, and Scotland in particular, has a fantastic offshore wind resource and has lead the way in innovation and cost reduction in the industry worldwide.

"Offshore wind remains the most cost effective way for delivering large scale low carbon energy for the consumer. There's a continuing improvement in the delivery of low cost low carbon energy. Due to the government contracts, the risk lies with the developer to deliver the project. There is no facilities to come back and ask for more money there is no alteration capability or back up facility.  

"The Moray East construction activities employs thousands of people and the project is currently under construction and will continue to employ hundreds during its operation phase for the next 30 years. "The project remains on budget and on time. We are planning to deliver low cost energy to 150,000 homes early in 2021."  

A spokeswoman for Dong Energy, now called Orsted, said: “With over twenty years’ experience in developing and building offshore wind farms, and eleven operational offshore windfarms in the UK, we have a strong track record of delivering projects on time and within budget, and we are confident we will also deliver Hornsea Two as planned, providing great value for UK consumers. 

"Construction is progressing well, with onshore works well underway and most of the major contracts now awarded. We expect offshore construction to start next year and by 2022 this project will be delivering enough clean electricity for well over 1.3 million homes in the UK.”

Renewable UK's Head of External Affairs Luke Clark said: "Offshore wind is one of the lowest cost options for new power in the UK, and the industry has a record of delivering infrastructure, on time and on budget, that is second to none. Contracts awarded by Government protect consumers and taxpayers from any financial risk in developing and operating an offshore wind farm.

“The prices we're seeing for new offshore wind in the UK are in line with those in international markets. Industry has worked tirelessly to bring down costs over the last decade, investing in innovative new technologies and our supply chain.

“By 2030, offshore wind will be the backbone of a clean, reliable and affordable energy system. With at least 30 gigawatts installed, offshore wind will supply a third of the UK's power needs and support over 27,000 jobs."