Wind Power
SCoE–
The True Price
of Offshore
Wind Power
A “Society’s Cost of Electricity”
(SCoE) c­ oncept assesses all the
costs and benefits of alternative
ways to generate electricity.
This approach reveals offshore
wind’s ­environmental, import
avoidance and other advantages.
Text: Daniel Whitaker Illustration: Kelli Anderson
A Munich utility invests in North Sea
wind power for sustainable energy.
46 Living Energy · No. 11 | December 2014
Wind Power
the
S O C I E T Y ’S
COST of ELECTRICITY
FACTORS
ENVIRONMENTAL
HAZARDS
FUEL
COST
GEOPOLITICAL
TURMOIL
JOBS
SUSTAINABILITY
FACTORS
INFRASTRUCTURE
VISUAL
POLLUTION
LEGACY
PUBLIC
HEALTH
Living Energy · No. 11 | December 2014 47
Wind Power
A
householder switches on his
light for an hour, and wonders:
What did it cost to produce that
electricity?
Perhaps he will look at his monthly
bill and see what the local electricity
supplier has charged him. But what
if our householder delves into his
memory for those economics classes
that he took at school? He might
­recall that final prices are subject to
a range of factors – taxes, subsidies,
price regulation, and retail profit
margins – all of which distract from
the fundamental cost of producing
that power and delivering it to the
­national grid for use by consumers.
Getting to the answer to his question
is more challenging than might be
imagined. But it matters a great deal,
because a fierce political and business battle is being waged in almost
every country over how electrical
power should be generated. Vested
interests, public opinion, environmentalists, and (often currently
­financially constrained) politicians
and regulators are all trying to influence the decision between generation
using traditional fossil fuels, such as
coal and gas; nuclear energy; and
­renewables, such as hydro, solar, and
wind power.
Siemens is in the fortunate position
of supplying technology and services
to all forms of generation (the company’s sales to the fossil generation
market being around seven times the
sales to the renewable energy industry). But as the choice of technology
Wind Power
matters so much both in business
terms and for the lives of future
­generations, Siemens is taking a
growing interest in getting to the
­bottom of this issue.
Jan Rabe, Siemens Wind Power’s Vice
President for Global Strategy, in Hamburg, explains that “Siemens needs to
be sure it is investing in the right generation technology, such as the wind
power manufacturing center at Hull
in England. We want to challenge our
own business strategy assumptions.”
But, more broadly, public policy decisions need a sound basis for analysis.
Rabe frames the question thus: “If
you were an impartial monarch, what
would you pick?” Siemens wants to
help develop the analytical tools and
assumes that policy makers will eventually arrive at a similarly rational
view that does not only focus on cost
of production, but takes into account
the costs and benefits of energy supply to the economy as a whole.
If they recognize that greater social
efficiency of wind, this could even
justify a more long-term regulatory
regime for this generation form to
ensure that generation decisions
­reflect true social cost and benefit.
The question of how to apportion the
burden of payment while protecting
poorer consumers is a separate issue.
Where the Wind Fits In
It is important to recognize the differences between onshore and offshore
wind generation. “The best [i.e., windiest] onshore sites have already crossed
Estimating the True Cost of Electricity (€/MWh)
the parity line [i.e., their direct gen­
eration cost is less than the system’s
average cost], and sites with lower
wind speeds will do so soon,” says
Rabe. ­Offshore wind power currently
costs double what onshore does, and
will ­always be more expensive due to
the nature of working at sea.
But it is also important to recognize
the advantages that offshore enjoys.
Generally, it is not subject to the same
space constraints as projects on land.
This matters a lot in densely populated countries like the UK, Germany,
and Denmark; less so in the USA, and
hardly at all in Russia. Those same
Northern European countries also
have big, power-hungry cities along
the coast of the shallow, windy North
Sea – meaning shorter, cheaper
transmission lines. In contrast, the
best o
­ nshore sites are often remote
from d
­ emand centers. Greater wind
speeds at sea also mean that offshore
generators operate at full load for
more of the time, which means that
less backup generation capacity is
needed for when the wind does not
blow.
In addition, it happens that Northern
European coastal areas are often economically depressed (e.g., due to the
decline of shipbuilding). So the jobs
that offshore wind power brings (in
maintenance as well as in construction) are especially welcome. The employment benefit is very different in
the case of solar power components,
incidentally, which can be completely
manufactured in China and imported
LCoE
“Ex-turbine”
cost 2013
SCoE
Society’s cost
2025, incl.
CO2 cost
Peter Höppe, Head of Geo Risks Research, Munich Re
48 Living Energy · No. 11 | December 2014
Photo: Munich Re
“Economic losses from weather-­
related natural catastrophes are
­increasing dramatically […] and
climate change is partly to blame.”
in containers. Finally, the larger scale
of offshore compared to onshore sites
means that a single planning application may cover 500 megawatts rather
than just 50 megawatts. Whatever the
pros and cons, however, any serious
transition from fossil fuel generation
will require both offshore and onshore wind power as parts of the final
energy mix.
Until now, generation costs have been
compared using an approach known
as the Levelized Cost of Electricity
(LCoE). This involves estimating the
capital and ongoing costs of new investment in various alternative forms
of generation. Doing this for the UK
market for 2025 yields the following
costs per megawatt-hour of power:
Onshore wind’s LCoE has come down
by an impressive 40 percent per
decade over the past 30 years. Less
data exists for offshore, a newer technology (see box on p. 50), but it is
widely thought that costs are falling
here at a similar rate. If this tendency
continues, and the UK DECC (Department of Energy and Climate Change)
fuel price and carbon tax forecasts
are accepted, then onshore wind
will have the lowest LCoE of generation sources within the UK in 2025,
while offshore will remain pricier,
but with a declining premium over
onshore, compared to the present.
However, using LCoE, it can be seen
that offshore wind power currently
appears to be a high-cost technology
and not yet competitive with gas or
nuclear power (which don’t suffer
from the intermittency of wind or
solar power).
The Fuller Picture
But recognition has steadily grown
that the LCoE fails to account for several important aspects of cost. A more
comprehensive measure – labeled the
“Society’s Cost of Electricity” (SCoE)
– has been proposed by Siemens
instead. This would provide the more
rational basis that Rabe is searching
for as a basis for decision making
about the relative cost of new investment in different ways of generating
power. The SCoE approach starts from
LCoE, but then adds in the further
true costs borne by society: transmission reinforcements, variability of
supply, environmental costs, social
costs, employment effects, and geopolitical effects. For example, the OECD
states that nuclear power receives
large hidden subsidies in most countries, where governments provide
implicit insurance against disasters
and guarantee spent fuel disposal
(gas and coal also receive smallerscale policy subsidies). There are also
geopolitical risks involved when depending upon imported fuels, which
add further true cost to fossil fuel and
Living Energy · No. 11 | December 2014 49
u
Wind Power
Wind Power
Scaling Up: the Rise of Offshore Wind
1990s
2010s
Offshore wind has attracted support for its
lack of CO2 emissions; its avoidance of
3,000 MW
­import dependency; the possibility to install large-scale farms; strong public acceptance; and local economic stimulant ef-
3 MW
fects. But until now, objections against
Capacity installed annually
wind power have been raised based on
cost grounds, given traditional narrow
views of how to calculate such costs.
6 MW
Offshore wind is still a fledgling industry,
but has grown steadily from around
3 megawatts of capacity installed annually
0.5 MW
when the technology first appeared in the
Typical turbine size
1990s to around 3,000 megawatts at present. The UK, Germany, and Denmark are
300 MW
the leading locations, though significant
investments are planned in the USA, China,
and elsewhere. Typical turbine size has
also steadily grown, from less than
6 MW
0.5 megawatts in the 1990s to more than
6 megawatts today. At the same time, av-
Average project size
erage wind farm (project) sizes have scaled
up from around 6 megawatts to more than
30 meters
300 megawatts. Ever-improving technology has also meant that these can be placed
in 30-meter-deep water, rather than just
5 meters
5 meters of depth as in the early days.
It is a fast-developing field, and Siemens
has been proud to play a leading techno-
Water depth
logical role.
50 Living Energy · No. 11 | December 2014
sources. David Elzinga is Senior Proj­
ect Manager for Energy Tech­nology
Perspectives at the International
Energy Agency (IEA) in Paris, man­
aging the modeling of energy-sector
emission reduction in line with global
climate goals. He concludes that
“to reach a situation in 2050 where we
have increased global temperatures
by a manageable 2 degrees ­Celsius
rather than a more catastrophic 6 degrees, fossil fuels will have to ­decline
from over 80 percent of the energy
mix at present to around 40 percent.”
At insurer Munich Re, Peter Höppe,
Head of Geo Risks ­Research, agrees
that “economic losses from weatherrelated natural catastrophes are increasing dramatically […] and climate
change is partly to blame.”
The truth is that there will be inevitable debate about the value of many
or all of the components of SCoE. External, independent analysis has been
used wherever possible, and wherever
there was doubt, Siemens has tried
to be conservative in its assumptions.
So, for example, wind power generation units are assumed to have a life
of only 25 years, though some are
already more than three decades old
and still functioning fine. Similarly,
two years’ hedge cost is applied to imported fuels, even though the import
dependency stretches out over the life
of the generation asset of 30–40 years.
Also, it is not assumed that there will
be any means to store power – something that would at a stroke overcome
the problem of wind’s intermittency –
even though it is likely that there will
be developments in this area, possibly
using heat.
While different assumptions produce
a range of final SCoE estimates, the
ranking order of generation technologies seems clear. This ordering has
wind as the most efficient technology, and gas as the most attractive
base-load generation to address the
intermittent nature of wind speed.
What matters, Rabe believes, is
that these aspects are brought into
discussion, so that transparency
may lead to an approximation of
our best estimates. Whereas, in the
past, support for wind power tended
to be based on (environmentalist)
Wind Power in Numbers
Offshore wind generation cost as a percentage of gas generation cost in the UK in 2025,
­traditional measure (LCoE)
63%
114%
Offshore wind generation cost as a percentage of gas
generation cost in the UK in 2025, ­improved measure (SCoE)
40%
Approximate rate of decline in offshore
wind generation costs per decade (estimate)
6 MW
Typical offshore wind
farm size, 1990s
80%
Typical offshore
wind farm size, today
300 MW
Fossil fuels share of energy mix, today (IEA)
Fossil fuels share of energy mix, 2050 for realistic
chance of avoiding catastrophic ­climate change (IEA)
40%
siemens.com/energy/wind/scoe Offshore Wind for Munich’s Green Energy Mix
Offshore wind makes Munich’s
energy mix greener.
siemens.com/living-energy/
dantysk Photos: Private, Siemens
nuclear power in most countries. The
value of this can be approximated by
applying the cost of hedging the price
of oil, gas, coal, or uranium. Further
analysis shows employment intensity
to be higher for offshore wind than
for any other generation technology – 21,000 new jobs for a year in the
EU for each billion euros invested.1
Support for recognition of these
additional factors comes from many
“The policy
­environment
must evolve
alongside the
technology
­environment.”
David Elzinga, Senior Project
Manager for Energy Technology
Perspectives, International
­Energy Agency (IEA)
ideology, something not shared by
all, he is confident that increasingly
economics alone may be a sufficient
and more objective lens to allow decision making. Elzinga echoes the need
for focus on policy decisions and the
rationale that underlies them, saying
that “the policy environment must
evolve alongside the technology
environment.” Surely, the far-sighted
householder will agree with him. p
1
Ernst & Young: Analysis of the valuation creation
potential of wind energy policies. July 2012.
http://www.ey.com/Publication/vwLUAssets/EY_
Acciona_EDP_Value_creation_of_wind_policies_
summary/$FILE/EY_Acciona_EDP_Value%20
creation%20of%20wind%20policies_summary.pdf
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Daniel Whitaker is a London-based freelance
journalist who has followed the energy and
­environmental sectors for many years. His work
has appeared in the Financial Times and The
Economist magazine.
Living Energy · No. 11 | December 2014 51