The UK Needs to Take a More Serious Look at Importing Renewable Electricity
Imported solar electricity looks likely to be cheaper than nuclear in the UK by the early 2020s when new nuclear is due to come on line. Solar and other imported renewables deserve a closer look as one means to decarbonising the UK power sector.
The recently agreed Contract for Difference (CfD) for new nuclear power at Hinkley Point in the UK fixes the price of electricity at £92.5/MWh ($149/MWh) for 35 years, indexed to inflation. This is expensive compared with the average market electricity price in 2012 of £45/MWh ($73/MWh) (see the end of post for notes on data and calculations). It is also expensive abatement, at around £136/tCO2 ($217/tCO2) against a gas plant at current market electricity prices. This compares with the UK carbon price planned for 2020 (including the UK’s own carbon price support levy) of £30/tCO2 ($47/tCO2).
The price for new nuclear compares more favourably with the prices for alternative sources of low carbon power in the UK at the moment. It is cheaper than the current going rates for offshore wind, solar and onshore wind in the UK (£155/MWh, 125/MWh and 100/MWh respectively). It is also lower than the cost of Carbon Capture and Storage (CCS), which is estimated at around £160/MWh at the moment (with an abatement cost of about £400-600/tCO2 avoided after taking account of the residual emission from power plants with CCS).
However, solar electricity in Germany and Italy can be produced for around £90-95/MWh, close to the price of electricity from Hinkley,based on the Feed In Tariffs in the first half of this year for ground-mounted systems. (The Feed In Tariff in Germany has since been reduced to £83/MWh but it is not yet clear how much capacity will be built at this price).
A number of adjustments need to be made to obtain a like-for-like comparison between the prices solar and nuclear. (The calculations of these adjustments are indicative, but precise numbers are anyway impossible to derive given the long timescales and uncertainties involved.)
First, the cost of back-up capacity and system balancing increases the cost of solar compared with nuclear. There is some increase in system balancing costs. Together these are estimated to add £13/MWh to the cost of solar. Any offsetting adjustment for the costs of the system capacity effects of nuclear is excluded from this number (see notes).
Second, nuclear and solar have very different patterns of output with correspondingly different values. Solar runs only in the daytime, with output higher in summer. Nuclear output is largely constant, typically running at full output almost all of the time. With present wholesale market price patterns in the UK the additional value of daytime power for solar outweighs the additional value for nuclear from supplying winter evenings when prices are highest, leading to a premium for the value of the solar production pattern on average over the year of 6/MWh. (This includes crediting the full value of winter peak hours to nuclear, which may to some extent double count the value of capacity if the above capacity premium is also included in the comparison.) However, price patterns may change in future for many reasons, for example because large amounts of solar generation may reduce daytime prices. Summer daytime prices in Germany already show some weakening due to the amount of solar on the system, although they remain generally above overnight prices.
Finally the length of the contracts also differs. The solar Feed In Tariff in Germany runs for 20 years whereas the Hinkley contract is for 35 years, inflation indexed in both cases, making the Hinkley contract more valuable. The additional value is estimated as £7/MWh or more (this is the additional price that might be needed if the Hinkley contract were to run for only 20 years).
The adjustments thus offset each other (with, coincidentally, no net effect) leaving the costs of UK nuclear appearing very similar to the present costs of solar in Italy and Germany. In addition of course transmission costs to the UK would need to be paid for imports of solar from continental Europe.
But it is more appropriate to compare the price of the nuclear contract with the price that solar – which can be installed very quickly – will require when the nuclear plant comes on line a decade from now (assuming it is completed on schedule). Solar costs look almost certain to fall over this period. Prices for solar in Germany are roughly a quarter of what they were a decade ago and are expected to fall significantly again over the next decade. Imports to the UK from sunnier regions in southern Europe, such as Italy or (especially) southern Spain could be cheaper still. It is impossible to be certain how far costs will fall, but a mid-range estimate (based on long term historical trends) is that prices of perhaps as low as £50-60/MWh or less could be attained for imported solar delivered to the UK by the time Hinkley comes on line, even allowing for the costs of transmission. Solar would then have a clear cost advantage over nuclear. Even new solar in the UK appears likely to be available at below the cost of power from Hinkley by then.
Solar alone will not be a complete solution to decarbonising the UK power sector. But there are also other options for importing renewable power to the UK, including onshore wind from Ireland and Scandinavian hydro, which can provide considerable flexibility. While they may lack some of the employment and industrial policy attractions of building capacity within the UK, imports can allow access to a scale of renewable electricity supply that the UK, with its poor solar resource and (at least in England) exceptionally high population density, may otherwise struggle to reach.
There are also other advantages to importing renewables. A diversity of locations, with varying demand and production patterns linked by adequate transmission capacity, can help balance the system, and ensure that power is available at lowest cost.
Policy has an important role to play in making such imports of power viable. Policy can enable and incentivise the construction of transmission capacity, more flexible system design and operation, and appropriate commercial arrangements.
The Hinkley nuclear deal signals that the UK Government is serious about meeting the need for new low carbon power. The CfD mechanism provides a new way to finance new nuclear power, and it makes the costs of the project transparent. And the UK does appear to need new nuclear plant if it is going to meet its ambitious decarbonisation objectives.
But options for importing renewable power do not as yet appear to have received the same degree of policy focus as new nuclear. Imports of renewables may have a significant role to play in diversifying supply and limiting the total costs of providing low carbon power. They deserve much more serious and ambitious attention than they have yet received.
Adam Whitmore - 13th November 2013
Notes on calculations
Price of the Hinkley C announcement is taken from the DECC announcement https://www.gov.uk/government/news/initial-agreement-reached-on-new-nuclear-power-station-at-hinkley The quoted price excludes the reduction of £3/MWh if another similar plant is built. Other UK prices for low carbon power are draft prices for CfDs. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209361/Levy_Control_Framework_and_Draft_CfD_Strike_Prices.pdf
No adjustment is made for any of the other features of the contract. In particular no adjustment is made for the value of the loan guarantees for which the project is reported to qualify.
The price for CCS is taken from the report of the UK’s CCS cost reduction task force. There is an aspiration to reduce costs of CCS to around £100/MWh by the 2020s, but it is not clear whether such a large reduction can be achieved given the slow progress in developing CCS in the power sector globally. There are similar aspirations to reduce the cost of offshore wind.
Calculations of abatement cost are based on a comparison with emissions from a CCGT of 0.35 tonnes/MWh, using the current market price of electricity, with emissions from plant with CCS at 0.07 – 0.15 tonnes/MWh depending on fuel type and capture rates.
The cost of solar in Germany used is the 2013 feed-in tariff for ground mounted systems less than 10MW of 11.02€c/kWh in April 2013. The feed-in tariff in Italy was at a similar level.
The estimated cost of back-up capacity is based on a study from the solar parity project. http://www.pvparity.eu/fileadmin/PVPARITY_docs/public/PV_PARITY_D44_Grid_integration_cost_of_PV_-_Final_300913.pdf The calculation excludes the cost of system capacity associated with nuclear that arises because the proportion of total capacity it accounts for is lower than its proportion of energy it accounts for. This leads to an additional capacity cost associated with nuclear which to some extent offsets the additional capacity cost of solar, so the capacity cost of solar should in reality be estimated as the difference between the capacity costs of nuclear and solar rather than the full value for solar quoted here.
The price premium for solar is based on 2012 price patterns. The wholesale electricity spot price in Great Britain is weighted by solar output in Germany over 12 representative days (one per month), allowing for the one hour time difference between Germany and the UK to get the output pattern for notional imports (data was Italy or Spain would yield slightly different results, but the general pattern would be the same). This is compared with the time-weighted average over the year, which is assumed to be the price received by nuclear power.
Peak prices during winter evenings contain an element of payment for capacity. This is added to the value of nuclear relative to solar in this calculation. However an element of capacity value has already been included as a separate item in the adjustment (see above). As noted in the main text, there is potentially an element of double counting here, with the value of capacity for nuclear being available at the peak included both in this and the capacity adjustment itself. This calculation combined with the capacity cost above may thus understate the present premium value of the solar output pattern, and so the assumption is somewhat favourable for nuclear.
Adjustment for contract duration is based on comparison of cash flows from a 20 year and 35 year contract. The calculation assumes the 2012 baseload market prices prevail in real terms in years 21-35 of the contract (approximately 2044 – 2058), but adjusted to allow for a carbon price of £30/tCO2, based on the government’s stated price target for 2020. There is a stated goal of increasing the carbon price beyond this level, but the achievability of such a high carbon price remains unclear, and is not regarded as a base case for the purposes of this calculation. The calculation assumes 8% real terms discount rate (real, pre-tax). A further adjustment could be made to take account of the lower risk of the revenue stream from the fixed price contract, which would further increase the value of the longer term nuclear contract.
Another study by the Solar Parity Project estimates a likely reduction in the cost of solar by 2023 of around 40%. Costs of solar power from southern Europe in 2013 can readily be estimated as anywhere between around £35-65/MWh or depending on rates of deployment, technology learning rates, how much of present low cost of panels is due to cyclically low prices, whether installation costs can match German levels, and what load factor is achievable. Corresponding costs for UK solar seem unlikely to be greater than around £80/MWh, although the UK government’s own estimate for 2020 is much higher, at around £100/MWh, for reasons which are unclear (see solar roadmap document https://www.gov.uk/government/publications/uk-solar-pv-strategy-part-1-roadmap-to-a-brighter-future).
If solar gets cheap enough it is possible that the UK’s poor solar resource would be less of a problem considering cost only – the extra output in southern Europe might be offset by the extra transmission costs at very low cost levels. However this seems a distant prospect, and anyway land availability and the high population density in England would continue to favour imports.
Exchange rates used are $1.61/£ and €1.19/£.
Photo Credit: Importing Energy in the UK/Wikimedia Commons
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