Viewpoint: The high cost of the lowest energy prices

WORLDWIDE: We are living in straitened times. The financial crisis and ensuing austerity programmes have raised the status of cost-saving above that of a means to an end: often it has become a virtuous end in itself.

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In the energy sector this new wave of cost-conscious short-termism and the myths of cheap fossil fuels have combined to create a compelling narrative in which the cheapest option always wins. In this environment the cost of wind energy is under greater scrutiny than ever before.

The fact that wind plants receive non-market support often leads to the conclusion that wind energy is an expensive extravagance. Policymakers are scrambling to implement market-based solutions such as auctions in place of feed-in-tariffs.

But the search for the lowest price at any cost misses two important points. First, onshore wind has cut cost faster than predicted and now competes with new gas plants on cost of energy in many places. Second, many of the so-called subsidies for onshore wind exist in order to level the playing field in a badly distorted energy market.

Onshore wind costs have reduced by more than 10% in the past seven years. By investing in research and development, and continually working to push down costs, wind-turbine manufacturers have managed to match, or beat, this reduction. In fact, the collapse of markets for new turbines in some countries in the wake of the financial crisis created an oversupply. To keep the European factories running, some suppliers cut prices. Turbines in European markets cost less than EUR 860,000/MW and prices are still falling. When combined with stabilising commodity prices and balance of plant costs, these low turbine prices are leading to all-in, per-megawatt project costs at the lowest level in the sector's history.

All energy sources are subsidised

One of the major differences between renewables support and other energy subsidies is their complete transparency. It is easy to see, in most markets, what the policies are that support renewables and how they work. The support that exists in many cases is designed to redress an existing imbalance in the energy market.

In one way or another, through various interventions, energy from every major source is subsidised. Whether it is the failure to fully reflect the impact of pollution in pricing, or the underwriting by governments of the uninsurable risk of a nuclear accident, the electricity sector is rife with subsidy. In 2012 European Commissioner for Climate Action Connie Hedegaard said: "For every euro spent on renewables subsidies, a further six are spent on fossil-fuels subsidies.

Integration advances

It is sometimes argued that the variable nature of wind energy brings its own system management costs, but these costs are small. While wind is undeniably variable in output, it is eminently forecastable and forecasts are getting better all the time. The level of integration in Spain, for example, has been staggering. In 2013, 21.2% of the electricity generated was supplied by onshore wind, making it the largest single contributor to meeting demand. At times wind made up 68.5% of production.

And besides, government support of wind power has always been about more than producing cheap energy. Tackling climate change by cutting emissions and diversifying from dependence on a handful of fossil-fuel exporters are powerful arguments in favour of onshore wind. Wind energy is also a force for positive social change. Wind and other renewables naturally inhabit smaller scales. By making wind add up financially, government support has allowed energy transition in places like Germany to be led by millions of small private investors, small-to-medium-size enterprises and energy cooperatives that are strengthening the rural areas of the country by having clean energy activity in their back yards.

The worst of the global financial crisis may be behind us, but new concerns about energy supply are looming, particularly in Europe. Step back and look at what has already been achieved by supporting the development of wind energy. It has allowed a serious new industry producing cost competitive energy to come into being; it has given more choice when faced with belligerent fossil fuel exporters, it has promoted the role of communities in the energy system and played a part in changing an industry traditionally dominated by vested interests. No doubt it has the power to continue doing so.

In the meantime, we should think about where the majority of tax payer subsidy for the electricity sector ends up and what it means for our energy mix, society and future environment. A frank and open discussion about energy subsidy is the starting point for a level playing field. The sooner it begins the better.

Carlos Albero is a senior adviser in the energy division of DNV GL.

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