The ills of uncertainty

With more customers for wind turbines than production lines can satisfy, onlookers could be forgiven for assuming the industry has little left to worry about beyond ramping up its supply chain. But a dizzying level of demand today is no guarantee for tomorrow. Not in the world of wind power. Market uncertainty still rules, witness the chaos in Spain caused by the sudden removal of the basis for wind power pricing (Windpower Monthly, September 2006), the overnight stop to the thriving wind market in the Netherlands (page 31), the fast approaching cliff-edge in Australia, Denmark's decline from role model to full-stop, and the perennial on-off market support in the US. Politicians have a lot to answer for.

The common thread running through this tale of woe is lack of political conviction that wind power really can deliver and that people want it. The result has been a plethora of often ill-devised support measures, which if they are not short term in nature are at serious risk of a government suddenly changing its mind. That wind power continues to survive these best efforts of politicians is a strong signal that adding large volumes of it to our electricity mix makes sound economic sense. But the history of government mismanagement is taking its toll: consumers are paying more than is necessary for their wind power.

Prices are higher than they should be for two main reasons. First, the short term nature of wind's markets has prevented the steady evolution of a supply chain capable of delivering the raw materials and components required. Demand now outstrips supply, with prices responding to market forces. Second, continuing market uncertainty means continuing high risk. The option of long term power purchase contracts is only available in policy bright spots. Everywhere else investors have less time to repay debt, or will demand higher rates of return to cover the risk of market collapse, or both. With up to 80% of wind generation cost tied up in financing, telescoped payback times and hikes in rates of return hit consumer bills hard.

Nowhere is this more so than in Britain, which like Canada hosts its annual wind power conference this month. Indeed, the British and Canadian wind markets are an interesting contrast. While both are growing fast, the dynamics driving them are very different. Britain is a market of uncertainty with the short term power purchase contracts and high wind power prices that follow high risk; Canada is a shining example of comfortable long term contracts and some of the lowest wind prices going.

In Britain, the uncertainty built into the Renewables Obligation (RO) by short term horizons and recycling of the large pool of penalty payments (pages 49-54) means that power purchase contracts are seldom signed for more than 12-15 years and investors expect rates of return of 18-22%. Contract prices are confidential, but on the spot market current prices come in at around £100/MWh (EUR 149/MWh), probably the highest in the world. Contrast that with the 20 year contract prices in Canada of around C$84/MWh (EUR 59/MWh), suggesting that investors are so comfortable with the market that rates of return of 12-15% are acceptable. Installed costs for wind plant, by the way, are running about the same in both countries.

LessonS from Canada

The relative certainty of the Canadian market has much to do with the nature of how its electricity industry is structured. The provinces either own utilities or exercise a deal of control over their behaviour. Since most provinces have clear renewables targets, provincial government policy is a major driver in wind power procurement. That lessens the influence of central government policy, diluting political risk in the process. Provincial policy looks stable too, since it is based on a variety of drivers: climate change, clean air, economic development, volatile fossil fuel prices, energy independence, supply diversity and expansion, and optimisation of hydro resources, depending on the jurisdiction. Long term wind power purchase contracts are a natural corollary. So are jobs (page 44 and pages 56-57).

Nothing could be further from the truth in Britain, where developers whistle for contracts the length of those in Canada and wind turbine manufacturing jobs are being axed. Fortunately, the British government's ongoing energy review process is an opportunity to improve matters. A package of cures, prioritising greater value for money for customers and getting a wider range of renewables online, is part of the process. But while the government's aims may be laudable, the contents of the review document are already looking like a missed opportunity to seriously crunch the numbers and prove how cheap wind power can be. For starters, "The Energy Challenge" uses financing and cost assumptions for nuclear that conveniently make it look cheaper than almost anything else. At the same time, the assumptions used for wind power make it look more expensive than nuclear (highly doubtful), even before burdening it with the RO's uncertainty factor.

For 21 years this magazine has consistently argued that political will is the most important single factor for market certainty. That remains as true today as it did two decades ago. Political will to see wind developed has steadily grown stronger. It now needs to be applied to forging sound policy and passing intelligent legislation. The consumer will benefit from far greater value for money.

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