A Policy Brief on wind power has been sent to Westminster MPs, aiming to counter recent criticism of the economics of wind farms. Prepared by the Grantham Research Institute on Climate Change, backed by Lord Stern, it contains a spectacular omission which wholly undermines its case. And the omission is so elementary, and on such a scale, that it is difficult to see the Policy Brief as anything other than a deliberate attempt to muddy the water.
Those who follow the climate debate will remember The Stern Report on climate change, which famously concluded that “the cost of inaction exceeds the cost of mitigation”. Just about every other serious economic study reached the opposite conclusion, yet the Stern Report became the basis of UK climate and energy policy, and was used as justification by successive Prime Ministers. The Stern Report contained errors that an undergraduate economics student would have been ashamed of — exaggeration of downsides; failure to discuss up-sides; an absurd and distorting discount rate. Yet it has driven one of the most damaging policy initiatives I can remember.
For those interested in these matters, the Stern Report was splendidly rebutted by inter alia David Henderson: http://www.katewerk.com/temp/sda_WE.pdf
The Grantham Policy Brief follows a common wind industry practice of looking at the cost of energy generated by a wind turbine in isolation, and concludes that while still more expensive than conventional generation, the extra cost in justified by (A) the need to “fight climate change”; and (B) the likely future increase in fossil fuel prices. Both these points are open to debate, but that is not my key concern here.
You cannot assess the economics of wind in isolation. Because wind is intermittent, you have to provide back-up, or the lights will go out. The Grantham paper recognises the back-up issue, and undertakes a general discussion of it, flagging up various proposals to cover intermittency, such as “smart grids”, interconnectors between electricity markets and so on. However most serious energy economists do not regard these methods as likely to provide the scale of back-up needed, and the Grantham paper fails adequately to build in the cost of back-up.
It is perhaps ironic that Grantham issues its misleading policy brief now, shortly after two excellent studies by serious economists. Professor Gordon Hughes of Edinburgh University has published (with GWPF) “Why is wind power so expensive?”. He concludes that the capital costs of wind plus gas back-up are up to ten times that of gas alone; that the net reductions in CO2 emissions are trivial or zero, and that even on the most favourable assumptions, the return on capital invested in wind plus back-up is around a derisory 0.5%.
The reasons, briefly, are first that for technical reasons the wind back-up cannot be modern combined-cycle gas, but has to be the older through-cycle gas, which uses nearly twice as much gas per unit of output. Worse, the gas facility is used intermittently to balance wind, so it is even less efficient in both cost and emissions terms. And because demand on the gas back-up is skewed to peak demand, most of the gas used will be bought at the highest price. Indeed operators will be unlikely to see a return on such back-up gas plants, which may therefore never be built. Over-commitment to wind risks very serious supply shortages.
A second report by Ruth Lea and Civitas makes essentially the same case: “Electricity costs: the folly of wind”.
The rational conclusion would be to build more modern combined-cycle gas capacity, and to forget the wind entirely.
These facts are widely known, commonplace amongst energy economists, frequently discussed. It is really disgraceful that the Grantham Institute chooses to circulate to MPs what amounts to propaganda for the wind lobby: deeply misleading and out of touch with reality.