How Miliband can make renewables cheaper - but there is really no alternative to renewables

giving longer term contracts to renewable energy developers will make solar and wind schemes even cheaper

In a world where the costs of building all sorts of power plants are increasing, the Government has a powerful card up its sleeve to keep down the cost of new renewable energy projects. The Government is considering extending the contract length under which new renewable energy projects receive their fixed payments per MWh that is generated. If contracts for difference (CfDs) are issued to last for 20 years instead of 15 years, this could reduce the price of power from the renewable projects by at least 10 per cent (according to my calculations). By offering lower annual returns over a longer period, the projects can be delivered for a lower fixed price per MWh that is generated.

Such a cost reduction seems likely to offset any temporary (Trump-induced) cost increases for renewables. The ‘Trump effect’ may have led Orsted to discontinue its massive 2.4 GW Hornsea 4 offshore wind project near East Anglia. However, some commentators such as Jerome Guillet argue that Orsted should have planned better to avoid this outcome (see HERE).

RenewableUK said, last September that: ‘Increasing the contract length to at least 20-years and reducing the exposure to post-CfD merchant revenues would lower the cost of capital and make a material impact in reducing strike prices, driving down costs and offering greater protection for consumers’ (See HERE) The Government issued a consultation earlier the year which contained discussion of extending the contract length of CfDs for new projects beyond its present 15 years. The results of the next ‘AR7’ allocation round for renewable energy contracts will be announced in September.

Other countries operating the CfD system for renewable energy employ 20-year contracts, and it has always been a mystery to me why the UK Treasury plumped for a 15 year period. This is an artificially short period compared to the project lifetime of 25 or 30 years. Hinkley C, by contrast, was given a 35-year premium price contract.

Net-zero sceptics have no alternative to renewables

Of course, the net-zero detractors jump on any setback (such as the cancellation of Hornsea 4) to declare the end of net zero and the Government’s clean power plan. The sceptics produce lots of disinformation about why power prices are so high. They falsely blame renewables (see my last post for more information on this, see HERE). However, the alternatives posed by these party-poopers are either unstated or are hopelessly expensive and unrealistic.

The net zero detractors seem to favour (instead of renewables and efficiency) a mix of new nuclear power and new gas-fired power stations. But these options are incredibly expensive compared to commissioning new renewable energy schemes. Whatever short-term cost increases (exacerbated by the Trump tariff effect) wind and solar projects may experience at the moment, this is a small beer compared to the cost increases and general insanity of the alternative of the new gas-fired or nuclear power plant.

Everybody seems to agree that we need new power sources to provide for increases in electricity consumption. I can see that the switch to electric vehicles, and also to greater use of heat pumps, will increase power consumption. Some lay great stress on increasing power consumption from data centres (although this may be much overblown). But we do need more power plants. However, when a serious look is made at the alternative to renewables for new power plants, there are just no serious runners. See the comparison I have drawn up in Figure 1.

Figure 1

The prices in Figure 1 consist of a) the CfD contracts issued for offshore wind, onshore wind and solar farms in 2024 uprated to 2025 prices b) the contract issued for Hinkley Point C nuclear plants in 2012 uprated to 2025 prices and c) an estimate of costs of power from a new combined cycle gas power plant based on charitable market-based assumptions (see note 1 below)¹

Honestly, I am being pretty charitable to the nuclear and gas options - costs are surging upwards in both cases at the moment. I am sure I am understating the price that would have to be offered to get the plant built. According to the CEO of the US Power Corporation NextEra Energy, the (capital) cost of building a new gas-fired power plant has tripled over the past few years (see HERE).

New gas power plants are very expensive generators

In British conditions, gas-fired power stations will, in any case, have to operate at fairly low capacity factors (which means the actual operating time compared to if it is used all the time). This tends to depress conversion efficiencies (of gas to electricity). CCGTs are not built to be constantly turning down, then turning-up generation. These factors make a new gas plant extremely expensive as an energy generator in conditions where the majority of power comes from renewable energy sources.

Really all gas plants are good for under conditions of high renewables penetration, is to balance renewable energy. This means that what is needed are so-called peaking gas turbines. Their capital costs are much lower than CCGTs, but due to their relatively low conversion efficiencies, they are suited to balancing rather than bulk energy generation. Their existence is based on providing capacity (alongside storage), and will generate only a residual amount of total electricity, say 5% on an annual basis. Indeed, as I argued in my last post, storage and peak capacity are partly interchangeable as storage reduces the need for so much capacity at peak periods. And batteries are getting much, much cheaper as time goes on (see HERE).

This dismays gas supporters, but there is no way out of their problem. That is, unless we close down half our windfarms and solar farms! Now, that might appear in some Reform Party fantasy. However, implementing it would require countless billions of compensation to be paid to renewable energy generators, not to mention the havoc wrought on the electricity system itself!

Nuclear power is virtually undeliverable

Meanwhile, the French Government is pressing the UK Government to put more money into the long-delayed construction of the Hinkley C power plant. This, it seems, is part of the price for EDF agreeing to the construction of the successor Sizewell C plant (see HERE). This is even though Hinkley C was given a contract that pays it over £130 per MWh in today’s prices. That compares to the most recent auctions of wind and solar PV, whose contracts are worth £71-£83 per MWh at 2025 prices. As I write this, there appears to be a standoff in negotiations over the terms for Sizewell C between the British and French governments.

Quite apart from the cost, the idea that nuclear power is going to be delivered anytime soon is fanciful. The idea that so-called small modular reactors are any sort of alternative to the big ones is ridiculous. They are just more expensive still! See my discussion of SMRs HERE.

Figure 2 Declining costs of renewables

At the end of the day, energy efficiency and renewables are the only real options. Bringing down electricity costs will also help deploy heat pumps which reduce gas consumption by three times the electricity used to power them. Cheaper electricity compared to gas will help more consumers convert from gas heating to heast pumps.

After all, over 90 per cent of the new generation being deployed in the world last year was renewable, almost all of it being solar or wind (See HERE). The reason this is happening is that their costs are falling and they continue to fall. Figure 2 shows the decline in solar and wind costs in the UK. The continuing decline in costs will generate much cheaper energy than any alternative. The adoption of longer-term contracts for CfDs will reduce the costs for consumers even faster than implied in the numbers in Figure 2.

Conclusion

It is a short one. Renewables are the present and future. We need more electricity to electrify transport, heating, and much else. Sceptics may rail and sneer at Miliband’s clean power programme. If it has any faults, it is because it is too mainstream, wasting money and time on carbon capture and storage and nuclear power.

Miliband is considering giving fairer contract terms to renewables. These terms include giving longer-term contracts to renewables developers. This will make it even cheaper for the consumer. He should grasp the nettle on this one, preferably in the ‘AR7’ round of renewables allocation being organised over the summer.

The anti-net-zero sneerers seem to want to leave open the possibility that we shall have more ruinous fossil-fuel crises. They certainly do not seem to care much about stopping climate destruction. However, at the end of the day, renewables and efficiency are the only realistic games in town on energy security, cost, and also on climate grounds. No amount of disinformation should be allowed to bury that fact.

1. I am assuming capital costs of around £800 per MW (it would almost certainly be a lot more under current conditions) a 40 per cent load factor (average for CCGTs last couple of years, see HERE) c) a 55 per cent conversion efficiency (perhaps optimistic given operation in current conditions with frequent downshifting of production) and fuel prices of £30 per MWh of gas plus carbon costs d) a 15 year effective contract period which is the same as 2024 renewables e) a 7 per cent discount rate