United Kingdom

United Kingdom

Tracking the downward trend

The competitive nature of wind power in the UK provides the most accurate indication anywhere of the real market price of electricity from wind plant--and that price continues to fall. On the eve of the UK government's announcement of contracts under the fifth Non Fossil Fuel Obligation, this article examines the latest figures.

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The quoted price of wind energy is expected to take another dive once contracts are announced under Britain's latest round of the Non Fossil Fuel Obligation -- NFFO-5. The deadline to bid for a NFFO-5 contract was last month and the government is expected to go public with its selection of projects in the next two months. Prices have steadily dropped since the first NFFO in 1992, and NFFO-5 is not likely to break the trend. The magnitude of the drop may be less this time, however. NFFO-5 will follow NFFO-4 after a gap of less than two years, whereas the gap between the two previous rounds of premium price contracts was over two years (chart). The NFFO legislation obliges retailers of electricity to buy a fixed portion of their electricity from renewables, with suppliers bidding competitively for contracts. British prices thus reflect a true picture of the price of wind with no capital subsidies.

The fall in prices between NFFO-3 and NFFO-4 was about 25%. Broadly speaking NFFO-3 contracts will secure about £0.04/kWh; NFFO-4 contracts about £0.03/kWh. The competitive nature of NFFO makes precise price comparisons difficult. The average price depends on the size of the order, as the larger the order, the higher the price. Comparisons of minimum prices may be more reliable, but they assume that the projects with the lowest bids are actually built.

The downward trend in the price of wind energy in Britain has been dramatic. Ignoring prices in the first two rounds of NFFO, which were unrealistically high as a consequence of contracts running for only seven years at most, the price per installed kilowatt of wind power capacity fell by 22% between 1993 and 1998, from around £1135/kW to £900/kW, and the price of an annual megawatt hour fell by 46%, from £429 to around £234 . Energy prices -- which include the costs of finance and operations and maintenance -- fell even faster, mainly because money became cheaper to borrow as confidence in the technology grew. Moreover, wind farm construction is becoming increasingly concentrated in the hands of large developers, such as National Wind Power, or Powergen Renewables, backed by utilities. These are able to finance the construction themselves, or may have access to capital at lower rates than the smaller developers.

Another influencing factor is test discount rates, loosely referred to as the interest rate and an expression of the rate of return a bank (or developer) seeks for its investment. Under the British system, these are chosen by the developer and can be as low (or as high) as the developer chooses. Most of the large utilities, however, have similar costs of capital, so test discount rates in practice, probably average around 10%, or 7.5% in real terms.

Thin veil

A factor which may cloud the way for making direct international comparisons of the price of wind energy is a recent decision in Britain to allow transmission capacity payments to be credited (in a roundabout way) to renewable generators. Regional Electricity Companies in England and Wales are required to pay the National Grid Company capacity charges, which depend on the power demand at peak times. Wind farms which are generating at these times reduce the load drawn by the RECs, which until recently quietly pocketed the resulting savings. Claims by wind farm operators that these savings should at least be shared with them -- in recognition of the capacity credit the REC was in effect getting -- were eventually heeded by the electricity regulator. Thus larger developers may allow for this added potential income by lopping around £0.003/kWh off their bid for a NFFO contract.

Another peculiarly British factor to take into account with NFFO contract prices is the cost to developers of navigating through the enormously cumbersome building permit process -- the planning permission system. Many wind farm planning applications only secure approval after lengthy bureaucratic trials. These can involve developers in high expenditure. Although the costs dwindle in proportion to the increasing size of a development, they may still add a few percent to the overall cost.

Bidding into the NFFO is an art. Developers can specify construction dates up to four or five years ahead of gaining a contract, so bids can be framed in anticipation of continuing price reductions. Furthermore, with the free floating pound, possible changes in the value of sterling must be taken into account, since most turbines are bought from Denmark. This is not a major stumbling block for larger developers, who can buy foreign currency in advance, but there is still the tricky business of guessing how ex-factory prices may change.

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