Friday, 8 November 2013

Providing the right incentives

I came across this report a while ago, but never quite got round to reading it properly until this week.  It suggests that the actual life of wind farms might be only 10 to 15 years rather than the 25 years generally assumed.
At one level, a shorter life might not actually matter very much; if the economics still stack up over a shorter period, and if they still achieve the planned emissions reductions, they’d still be viable.  At another level, “re-powering” them more often brings its own costs (and unpopularity) in terms of traffic disruption, and the carbon cost of construction.
The detail of the report, however, is not quite as black-and-white as the conclusion some might draw from it.  And it raises a few other interesting questions as well.
It’s based on looking at already installed capacity in both the UK and Denmark.  It may well be the case, as some detractors of the report have claimed, that the performance of new technology will be better, and so conclusions cannot be drawn based on previously installed equipment.  Perhaps; but it’s one of those things about which we won’t be certain for some years.
The big question for me was what actually causes the observed degradation in performance.  As the report itself makes clear, the answer to that question is by no means straightforward.  The performance of individual turbines seems to vary greatly, and there is a significant disparity between the situation in the UK and that in Denmark, both in terms of overall averages and in the disparity between the best and worst performances.
This suggests to me that there is something else at work here other than merely wear and tear and maintenance schedules.  And that brings us to the nub of the question.  Much of what the report is dealing with isn’t actually the mechanical life of the turbines, but the economic life.  For sure, the economic life is impacted by the technical life; poor maintenance and excessive wear and tear will shorten both.  But they are not the same thing.
The economics are affected greatly by the financial regime under which the wind farms operate – and it may well be that the differences in financial arrangements between the UK and Denmark explain, partially at least, the differences in performance.
Two things about the UK’s ROC regime leapt out at me from this report in relation to the financial framework.
  1. The report makes the point “the subsidies provided by ROC’s are sufficient to underwrite investment in inefficient plants…  Those subsidies are extremely generous for plants that operate close to the efficient frontier.  As location is likely to be the main factor that determines the performance of a specific plant relative to all the plants, the inference must be that many wind plants have been developed on sites with poor characteristics...  In effect, the financial regime appears to be encouraging investment in plant which is installed in suboptimal locations”.  (It seems to me that the opposition to siting them in the most optimal locations is a significant part of what drives developers to those suboptimal locations.  It’s somewhat ironic that windfarm opponents are not succeeding in preventing wind developments from taking place, merely in driving them to the wrong locations.) 
  2. The financial framework means that “wind operators will have a strong incentive to decommission plants after no more than 15 years and replace the turbines with newer equipment”.  That again is an economic driver not a technical one.
In summary, the report is not so much an argument for not building turbines – as some have inevitably claimed, seizing on the headline – as an argument for reviewing the financial framework to ensure that we incentivise the “right” windfarms in the “right” places, and incentivise maximising useful lifespan rather than premature replacement.
It’s hard to disagree with that principle.  This is a useful contribution to debate – it’s not the killer argument against wind that some have claimed, but neither should it be simply dismissed.  I’m not at this stage convinced what the right financial framework might look like but it certainly does seem that there is cause for reconsidering the nature of the current financial framework.


G Horton-Jones said...

Good point
Your article implies that Wind turbines once erected have planning consent in perpetuity. This clearly cannot be in the public interest for as you clearly state their existence is based on a purely financial calculation which may be suspect or dramatically change with the passage of time and usage

Anonymous said...

This has reminded me consider buying a new car. Whilst there's probably another ten years practical use in my existing one, there comes a point where trading in for a newer model exposes me to less car tax because of a more modern engine and the annual service is less likely to throw up some expensive surprises. It would be cheaper to dive it mainly on motorways, but my location dictates that's not possible and there is little prospect of them building a friendlier road through the national park. Surely the same consideration is at work with these turbines.

John Dixon said...

"Surely the same consideration is at work with these turbines"

Well, yes it is. But the factors which lead to the decision as to whether it makes more sense to buy a new car (or turbine) or keep the old one running include not only the sort of factors which you describe - maintenance costs, newer technology being cheaper to run - but also the fiscal regime under which you make your decision - tax rates, available subsidies etc. My point was largely about considering whether the current regime is encouraging the best decisions; I'm not convinced that it is. I've nothing against the idea that governments should set regimes which distort what the 'market' might otherwise do; but the nature and extent of that distortion needs to be kept under review to ensure that it's achieving the desired effect and not some other less desirable effects.