Professor Gordon Hughes, a Professor of Economics at Edinburgh University, specialising in the economics of natural resources and in public economics, has also been, until 2001, senior adviser to the World Bank on energy and environmental policy and responsible for some of its most important environmental guidelines.
In the past eighteen months he has published three research papers [two in the last six months] which together raise the most serious questions about the UK and Scottish governments’ renewable energy policies and in particular about their unhedged commitment to wind power.
It is important to note that none of these specific research pieces were published by climate change deniers nor by, say, nuclear power lobby organisations.
In September 2011 and in August 2012 Professor Hughes’ respective papers, The Myth of Green Jobs and Why is Wind Power so Expensive?, were published by the Global Warming Policy Foundation.
In December 2012, his paper, The Performance of Wind Farms in the United Kingdom and Denmark, was published by the Renewable Energy Foundation.
The focus of the first paper was on testing the substance of the repetitive claims of lobbyists and evangelists that green technology creates jobs. The second was on the impact on carbon emissions of wind power and its comparative economic viability. In the third, Professor Hughes has concentrated on the viability of wind as an energy supplier and again also on its comparative economic viability.
In the second paper, Hughes follows a wearily withering analysis of a presentation by former UK Energy Minister Chris Huhne by saying: ‘The casual assumption that expenditures on green technology represent an efficient and economic use of scarce resources is little more than a convenient fairy tale for troubled times.’ He goes on to say, with a hint of the wry: ‘It is the – perhaps unfortunate job of economists to be sceptical, subjecting such claims to detailed scrutiny.’
It is indeed – and thank God that there remain some academics who remember that.
These days the growth of the profoundly dishonest ‘consultancy’ industry means that ‘expert’ opinion can demonstrably be bought – leaving no sensible person with any security in believing in anything.
Much of what Professor Hughes has to say to the special interests of the organisations who have published these researches is off message in what we might expect them to want to see. This speaks for his intellectual independence – as his dual background of experience in the worlds of the economics of renewables and of state-level finance speaks for his authority.
Each of these papers raises issues that intellectual integrity and the responsible management of the economic future of the country require to be addressed.
The recent paper provides evidence on the performance of wind farms that cannot but demand pause for genuine thought.
In each of these three papers, Professor Hughes continually reminds his audiences that opportunity cost must be taken into account. This is about counting the cost of a chosen course of action in terms of the benefits lost from the actions not chosen.
So he says that, yes, more people will work in the construction of wind towers and turbines – but that these will largely not be new jobs but transferred jobs. Those working in these industries will move over from other industries which, with less investment in them as capital is diverted to renewables, will employ fewer than before.
Similarly, the massive capital investments that require to be made to enable the implementation of renewable energies are investments that are not being made in others aspects of economic activity, other areas of infrastructure.
And the prioritising of renewables in energy delivery policy removes the level consideration of other forms of energy. Here, in all three papers, Professor Hughes makes repeated reference to the much greater efficiency in energy delivery and in economic performance of combined cycle gas plants.
In the matter of performance, Hughes evidence in his most recent paper would suggest that almost any alternative source of power than wind would throw the opportunity cost of Scotland’s wholesale investment in this form of electricity generation into cruelly sharp relief.
The job creation issue
Professor Hughes says tartly that if job creation per se was a key issue, any state has the option of creating as many jobs as it likes – maintaining the same output and cutting the wage rates. This was, of course, the route followed by the old Soviet ‘command economy’ where everyone had a job of some description and all needs were met – after a fashion.
Hughes’ view is that ‘…job creation has no merit as a basis for judging policy’.
He notes that ‘green energy is highly capital intensive – evidencing this in saying that meeting the given energy targets via green energy: ‘…will involve a capital cost that is 9 - 10 times the amount required to meet the same demand by relying upon conventional power plants’.
In terms of the impact of this capital investment on job creation, Professor Hughes says that, with green energy: ‘about 35% of total investment is translated, directly or indirectly, into wages and salaries. He compares this with the 70% translated into wages and salaries by investment in other forms of infrastructure or government services.
Hughes says: ‘If green energy projects are entirely financed by diverting money from other forms of business investment, the immediate impact will be approximately neutral but both productive capacity and employment incomes will be lower in the medium or longer run. In practice, however, a significant part of the cost falls on the taxpayer, through a variety of disguised subsidies, with the consequence that spending on public services and capital projects will be lower. This will reduce either employment or employment incomes in the short and long run.’
He summarises the overall employment position by saying: ‘In terms of the labour market, the gains for a small number of actual or potential employees in businesses specialising in renewable energy has to be weighed against the dismal prospects for a much larger group of workers producing tradable goods in the rest of the manufacturing sector.’
Hughes also focuses on an issue rarely raised in relation to green energy targets and the impact on employment and income levels – inflation.
Noting that the Bank of England is tasked with managing monetary policy to meet given inflation targets, he cites the figure of 0.6%-0.7% per annum as what renewable energy policies will add to core inflation every year between 2011 and 2020.
This means that for the Bank to deliver at or below the overall inflation target, allowing for the pressure of increased inflation from this source, it will have to deflate non-energy targets with more severe monetary policies than would otherwise have been the case. This, Hughes says, will bring about ‘…a significant loss of GDP over the period’. [Ed: 2011-2020]
The cost of wind
Hughes’ core arguments here centre on the unavoidable vulnerability of wind power – its intermittency.
Because this form of energy generation is capital intensive, it is in competition for investment with conventional means of generation from coal fired plants [with or without carbon capture capacities] an d nuclear plants.
But, in the context of a national policy heavily committed to wind, the resulting system would have to see nuclear and coal fired plants being run to enable their outputs to be matched to fluctuations in demand, according to what wind, in the moment, could or could not deliver. This imposes inefficient and expensive management of nuclear and coal fired resources. It means that the substantial investments in wind actually ‘undermine the economics of investment in nuclear or coal fired capacity.
Yet wind cannot reliably deliver baseload nor contribute predictably to peak demand periods.
Of course this weakness can be countered by parallel investment in pumped-storage hydro electricity; using an extended grid to enable wind power input from distant sources experiencing different weather conditions; or using price mechanisms to manipulate demand away from peak usage.
But, as Hughes says, if these devices worked, they would already be in in use because the increased supply of power or the smoothing out of demand peaks is already an issue in the energy context in which we currently operate.
Two key paragraphs in Hughes’s argument describe the rock and the hard place of the scenario.
‘Meeting the UK Government’s target for renewable generation in 2020 will require total wind capacity of 36 GW backed up by 13 GW of open cycle gas plants plus large complementary investments in transmission capacity – the Wind Scenario. The same electricity demand could be met from 21.5 GW of combined cycle gas plants with a capital cost of £13 billion – the Gas Scenario. Allowing for the shorter life of wind turbines, the comparative investment outlays would be about £120 billion for the Wind Scenario and a mere £13 for the Gas Scenario.
‘Wind farms have relatively high operating and maintenance costs but they require no fuel. Overall, the net saving in fuel, operating and maintenance costs for the Wind Scenario relative to the Gas Scenario is less than £500 million per year, a very poor return on an additional investment of over £105 billion.’
In dealing with the issue of emissions, Hughes says that: ‘… there is a significant risk that annual CO2 emissions could be greater under the Wind Scenario than the Gas Scenario.’
He says that, because of wind’s intermittency: ‘… wind power combined with gas backup will certainly increase CO2 emissions when it displaces gas for base load demand, but it will reduce CO2 emissions when it displaces gas for peak load demand.’
Coming to the detail of the relative cost of emission reduction, Hughes says that: ‘Under the most favourable assumptions for wind power, the Wind Scenario will reduce emissions of CO2 relative to the Gas Scenario by 23
million metric tons in 2020 2.8% of the 1990 baseline – at an average cost of £270 per metric ton at 2009 prices.’
He goes on to point out that this average cost ‘… is far higher than the average price under the EU’s Emissions Trading Scheme or the floor carbon prices that have been proposed by the Department of Energy and Climate Change (DECC).’
The overall picture emerging here is that: ‘if this is typical of the cost of reducing carbon emissions to meet the UK’s 2020 target, then the total cost of meeting the target would be £78 billion in 2020, or 4.4% of projected GDP, far higher than the estimates that are usually given.’
In summary, Hughes puts the reality of the position of the Wind Scenario thus:
‘The key problems with current policies for wind power are simple. They require a huge commitment of investment resources to a technology that is not very green, in the sense of saving a lot of CO2, but which is certainly very expensive and inflexible. Markets have to be rigged in order to persuade investors to fund the investment that is required. The economic cost of fixing markets in this way, especially if there is a possibility of making mistakes, is very high. Before proceeding along this path, any Government ought to be very sure that [a] the economic and environmental benefits outweigh the substantial costs incurred, and (b) the risks of preempting better options that may emerge in future have been minimised.
‘In reality, neither of thee conditions is close to being satisfied. To misquote another aphorism, unless the current Government scales back its commitment to wind power very substantially, its policy will be worse than a mistake, it will be a blunder.’
The performance of wind farms
In his most recent paper – for the Renewable Energy Foundation, Professor Hughes has researched data from the UK and from Denmark to evaluate the historic performance of wind farms in both countries.
One of his typically succinct conclusions in this paper says: ‘Wind power is a highly capital-intensive technology for generating electricity. Its merits rely entirely upon a substitution of capital for fuel inputs. The same is true for hydro or tidal or wave power. In comparison with hydro power, wind is a low quality resource because of its variability and because it cannot be stored. So, the economic case for wind power must rest on obtaining the most out of the wind that is available.’
Hughes’ overall conclusions here demand profound rebalancing of current governmental policies in the UK and in Scotland.
He has found a picture where, in the relatively mature technology of wind energy, one would expect to see the achievement of a fairly reliable level of operation in ageing plants – but where the reverse is the case. Wind turbines today are less reliable as they age than was the case a decade ago. He says: ‘…there is strong evidence that the average normalised load factor for new onshore wind installations in the UK has fallen significantly over the period from 2000 to 2011.’
This research also shows that wind farms are unlikely to operate for longer than 12-15 years, rather than the 25 years used by the UK and Scottish governments in their calculations.
It shows too that performance in large scale wind farm installations declines faster than in modest sized ones.
The decline of performance in offshore wind is even more marked but the evidence here comes only from Denmark, is not seen as centrally reliable by Professor Hughes and may be attributed to the relative immaturity of offshore wind technology.
The data available from both countries in the study is not such as to point to any secure identification of the cause of the decline in performance but the increased incidence over the years of mechanical breakdown is seen as a likely major contributor.
The performance figures cited by Hughes show:
- ‘The normalised load factor for UK onshore wind farms declines from a peak of about 24% at age 1 to 15% at age 10 and 11% at age 15.’ Yet, as Hughes says: ‘ our governments have assumed that the average load factors for both onshore and offshore wind farms will either remain stable or increase in future.’
- ‘The decline in the normalised load factor for Danish onshore wind farms is slower but still significant with a fall from a peak of 22% to 18% at age 15.’
- ‘For offshore wind farms in Denmark the normalised load factor falls from 39% at age 0 to 15% at age 10.’
Hughes says: ‘Analysis of site-specific performance reveals that the average normalised load factor of new UK
onshore wind farms at age 1 (the peak year of operation) declined significantly from 2000 to 2011. In addition, larger wind farms have systematically worse performance than smaller wind farms. Adjusted for age and wind availability the overall performance of wind farms in the UK has deteriorated markedly since the beginning of the century.’
Hughes elaborates on the size issue in saying: ‘Not only are recent plants less efficient than the average for the whole period, but the plants which are below-average in efficiency are typically larger than the more efficient ones and account for a disproportionate share of the recent additions to generating capacity.’
He concludes that:
- his findings indicate that wind generation policy in the UK is providing an ‘extremely generous’ subsidy regime if investment in new wind farms is profitable ‘despite the decline in performance due to age and over time’;
- meeting the UK Government’s targets [Ed: and the even more ambitious targets of the Scottish government] for wind generation ‘will require a much higher level of wind capacity – and, thus, capital investment – than current projections imply’;
- ‘the structure of contracts offered to wind generators under the proposed reform of the electricity market should be modified since few wind farms will operate for more than 12–15 years’.
Key paragraphs we see as germane to the policy failures identified in Hughes work are:
‘…80% of the discounted cumulative output of a new wind plant is likely to be produced in the first 10 years of its life and 90% in the first 14 years. This is consistent with the structure of Danish subsidies for onshore wind farms which extend over a typical period of 12.5 years. Since sites for wind farms are scarce and involve the payment of significant rents that may be linked to output, it is very unlikely that any new installation of wind turbines will have an expected life of more than 15 years. Instead, as has happened in the past, wind operators will have a strong incentive to decommission plants after no more than 15 years and replace the turbines with newer equipment.
‘As a consequence, any economic assessment of wind generation should not be based on an expected life which is longer than 15 years. In recent work reported in evidence to the House of Commons Select Committee on Energy and Climate Change I assumed that wind plants would have a residual value equal to 20% of their initial cost in real terms at the end of 15 years. The analysis in this paper suggests that this is too favourable an assumption. Given the costs of decommissioning old turbines the residual value is likely to be well below 10% of their initial cost and the decision point may be at 10 rather than 15 years.
‘The corollary of this observation is that it makes little sense to offer long term contracts for 20 years or more that guarantee prices or feed-in tariffs (FiTs) to wind operators. A contract length of 10 to 12 years would be sufficient to remove most of the market risk associated with investment in wind generation. In this respect the subsidy arrangements implemented in Denmark are better designed.
‘At the same time, the offer of subsidies and/or guaranteed prices may have serious adverse consequences for the efficiency of wind generation. Returning to the unit fixed effects measuring the performance of wind plants commissioned after 2005, only 28 out of 159 units have an operating performance that exceeds the average for the period. Those 28 units account for 360 MW of capacity whereas the remaining 131 units account for 2,810 MW of capacity. Not only are recent plants less efficient than the average for the whole period, but the plants which are below-average in efficiency are typically larger than the more efficient ones and account for a disproportionate share of the recent additions to generating capacity.’
‘Whatever the reasons, the deterioration in initial performance means that the expected returns from the expansion in wind capacity, both for investors and in terms of the reduction in CO2 emissions, have been falling without a concomitant decrease in the private and social costs that are borne by customers and the general public. Clearly this is unsatisfactory at best and it suggests that the benefits claimed for current policies cannot be taken at face value.’
We recommend reading the full text of these papers – accessed as downloadable pdfs here:
- The myth of green jobs Professor Gordon Hughes
- hughes-windpower-1 [This is the file for Why is Wind Power so Expensive?]
- The Performance of wind power in UK and Denmark REF.Prof Gordon Hughes 19.12.12