The UK government has one of the most ambitious climate targets in the world with a 2050 goal of cutting greenhouse gas emissions by 80% from 1990 levels. It also has a 2020 target to meet 15% of Britain's energy consumption requirements from renewable sources, such as wind, solar, biomass and marine energy sources.
To achieve these goals, Britain has been aggressively building onshore wind farms and now offshore ones. There has developed a vocal minority of citizens who are highly critical of these wind farms, which forces the wind industry to launch media efforts to re-establish its popularity.
Recently, RenewableUK, a wind and marine power lobby group, reported that onshore wind farms are the least costly source of low-carbon energy, however the opposition by people to the look of wind turbines has slowed its development and raised the cost for the UK to achieve its climate targets. The lobby group commissioned market research firm Ipsos MORI to conduct a survey among British citizens about their view of wind power.
By surveying online 1,009 adults between the ages of 16 and 64 across the United Kingdom, the market research firm found 57% gave a score between seven and 10 in response to a question about their view of wind farms on the landscape, where one meant completely unacceptable while 10 was completely acceptable. Seventeen percent of the participants were opposed while 22% were neutral and 4% did not know.
RenewableUK officials believe that it is "undemocratic" for a "vocal anti-wind minority to derail the UK's plans for renewable energy." One of the latest to rail against wind farms, although not English, was Donald Trump who appeared last month in Scotland's parliament demanding that the country end plans for an offshore wind farm he fears will spoil the view at his exclusive new $1.2 billion golf resort. Mr. Trump attended a hearing on how the Scottish government can achieve its green targets for 2020. The plans call for installation of 11 200-foot tall wind turbines off the coast near the golf course.
Mr. Trump claimed Scottish leader Alex Salmond and his predecessor Jack McConnell gave him verbal assurances a wind farm would not be built off the coast of his resort. "They wanted my money," said Mr. Trump. "I was lured into buying the site, after I spent my money they came and announced the plan."
The dispute over wind power and its cost has spilled into a debate about the amount of and need for subsidies between two green organizations -- RenewableUK and the Renewable Energy Foundation (REF).
RenewableUK believes that the contribution of wind power technology is an important factor in the UK's security of energy supply. REF argues that this is a "simplistic" analysis as government wind power subsidies have distorted the wind market and will ultimately result in strengthening the UK's reliance on natural gas, particularly at times of peak power demand.
REF relies on the work of Paul-Frederick Bach, the author of The Variability of Wind Power that shows there is little wind 'smoothing' across Northern Europe wind fleets. He also demonstrates that prolonged periods of low wind conditions at times of high electrical demand are to be expected as regular occurrences. This has been the pattern of wind energy in Denmark, the leading wind power developer in Europe. The country has been able to ship surplus wind power to Norway and then receive clean energy back when needed. The UK doesn't have this flexibility.
To help counter this argument, RenewableUK has been pointing to data released from UK energy regulator Ofgem in its Renewables Obligation (RO) annual report for 2010/11. It shows that support for onshore wind added just GBP4.68 ($7.40) to household annual energy bills. Supporting all renewables under the RO -- including offshore wind, wave, tidal, biomass and landfill gas – costs consumers GBP15.15 ($23.97) each.
Renewables firm, Ecotricity, pointed out that according to Ofgem's December 2011 Electricity and Gas Supply Market Report the rising cost of imported natural gas added about GBP120 ($189.82) to residential energy bills last year. Ecotricity noted that this increase in the cost of gas added more than 10% to energy bills, while support for onshore wind added less than 0.05%. Because the UK has moved from a gas surplus status to now having to import gas, it is subject to high liquefied natural gas (LNG) prices. Those prices are rising so much, given that most LNG contracts tie their price to that of crude oil, that the UK's big six electricity companies have actually mothballed gas-fired power plants in favor of coal-fired ones. That is obviously not a positive for the country's efforts to reduce carbon emissions.
We found the comments about the impact of rising natural gas prices and the impact of renewables on energy bills very interesting. It is even more so when one understands that only 63% of a homeowner's electricity bill is related to the wholesale price of energy. As reported by Ofgem, the medium annual electricity bill in the UK is GBP424 ($670.70), based on 3,300 kilowatt-hours (kWh) of consumption, or about 0.1285 pounds ($0.20) per kWh. Given the average bill, GBP267.12 ($422.54) represents the fuel component.
The incremental costs for wind and renewables seem reasonable, but we are hard pressed to think that gas prices have contributed nearly half of the electricity fuel bills. If, however, we add the fuel component of electricity to the share of the gas bill, then we are talking about a total fuel component equal to GBP656.24 ($1,038.07), which says that the high cost of gas impacted the bill by nearly 20%. That doesn't fit with the statement from Ecotricity that the impact was 10%.
We conclude that Ecotricity related the gas cost to the combined gross electricity and gas bills, which is the wrong analysis since there are components of customer bills that are unrelated to commodity market forces such as the cost of distribution and transmission (regulated by Ofgem), meter costs and valued added taxes. The environmental component relates to the government programs to save energy, reduce emissions and deal with climate change. According to Exhibit 8, environmental program costs account for 10% of gross electricity bills and 4% of gas bills. Combined the environmental component impact on the consumer's energy bill is 6.5% of the total.
However, if we add the wind and renewable amounts impacting consumer bills as reported by Ofgem (GBP4.68 + GBP15.15) ($7.40 + $23.97), the impact is only 2% of total consumer energy bills but 3% of the fuel component.
So how does this compare with the Ofgem percentage breakdown that translates into 6.5% of the consumer's gross energy bills and 10.2% of the fuel component? We are at a loss to explain the discrepancy other than to suggest the lower percentage figure makes the environmental impact cost more acceptable to British citizens. The discrepancy, however, makes us skeptical about the claim of the impact of rising natural gas prices on consumer energy bills.
Just to be clear, the Ofgem figures and the Ecotricity claims were reported on an environmental web site, although we have verified the Ofgem figures from their web site. This suggests to us that the web site writer never used a calculator to verify the claims. The ultimate hypocrisy of the web site article is that the writer claims clean-energy subsidy critics are basing their arguments on outdated and inaccurate data. We would caution that one should know your sources and verify their accuracy record before blindly accepting claims.
G. Allen Brooks is Managing Director of Houston-based investment banking firm Parks Paton Hoepfl & Brown. This article originally appeared in the May 22, 2012, issue of PPHB's newsletter "Musings from the Oil Patch."