I’m no genius, and I have never made such an outrageous claim, but even I can see through the gaslighting that has been going on for the last few decades as we make our ‘transition’ to ‘green’ energy. I wrote previously in Chpt 19: Trade Surplus about the hazards of an energy transition that moves so fast, we ultimately destroy our ability to ever reach the target. I urge you to read that first before we talk about the economics of offshore wind power. Please consider this EROI Part Deux: Windmill Boogaloo.
For this article I will be referring to, and summarising, a talk/paper given by Professor Gordon Hughes, a former Professor of Economics at the University of Edinburgh, and a senior adviser on energy and environmental policy at the World Bank until 2001. Whilst not wanting to appeal to authority with my arguments, I feel that his take is grounded, sensible and exposes some much needed realism to the discussion.
Rhetoric vs. Reality
What are the promises of the ‘green’ energy lobby for the future of power generation and a Net Zero society? It’s simple. It’s a series of statements that sound good on paper, but fall far short in reality (like the extremes of socialism). They are pretty lies told to make you feel good without actually making any meaningful change, in many cases, making our lives worse in aggregate.
- Lie 1: Reduced Emissions – Irrelevant. UK is responsible for 0.9-1.0% of global emissions (within our borders)
- Lie 2: Economic Growth – (OBR) Forecast real GDP growth by 0.6% peaking in 2025-26, then dropping to zero
- Lie 3: Reduced Energy Dependency: The use of Oil, Gas and Coal globally has done nothing but increase
- Lie 4: Stabilised Energy Prices: “The volatility in gas and electricity prices is not going away anytime soon“
- Lie 5: Improved Quality of Life: Energy price hikes ‘hit physical and mental health’
- Lie 6: Reduced Economic Inequality: “Higher energy costs impact poorer households“
As Prof. Hughes states in the opening paragraph of his paper, “it is difficult to make predictions, especially about the future”. The only thing we can look upon (discounting future technological advance) are the trends of the past, and then extrapolate forwards. Luckily for us, we have been installing and running offshore wind turbines for several decades and we have a wealth of data to draw on. In the UK and Europe both policy makers and investors are drawing us into what is a very costly exercise for our economies and societies.
The premise, that our current crop of mid-wit politicians ascribe to, is that renewables have to be the basis around which we build a Net Zero society. Almost every single developed nation has signed up to various legally binding agreements and targets in order to achieve this. Targets for a Net Zero economy range from 2030 (Norway), all the way out to 2070 (India). This is a world wide phenomenon driven by globalist think tanks and policy proponents such as the UN, WEF and various other non-profits.
As the professor notes, it is par for the course that our governments underestimate and understate the costs, and massively overinflate the performance, of the projects being funded with public money. Your money.
“I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.“
Milton Friedman
The Sad Reality of Economics
Every industry must calculate into its profitability modelling the effects of capex (capital expenditure), and opex (operating expenditure). How much it costs to build, and how much it costs to run, versus the expected returns over time. Thus, you get an ROI figure (return on investment). This ROI dictates how willing an investor might be to put money towards a project and how long it would take for the initial investment to be returned to said investor. This is the basic economic reality for all businesses. If you do not make a profit over a long enough timeframe, or your cash burn rate is too high, you will fail without outside intervention.
I will now present two charts that are taken from the professors paper, one for offshore capex, and one for offshore opex. Please take the time to look them over carefully and see if you can notice any prevailing trends.
Figure 1: UK offshore wind: actual capex cost vs installed capacity in Europe
Figure 2: UK offshore wind: average opex costs vs year of service
If you are bright of mind, two trends will jump out at you. Yes, it’s number go up technology, on capex and opex! For multiple reasons, the install costs are increasing over time, even against the deflationary effects of technological progress. This flies in the face of almost all other technologies, which get cheaper over time, due to process and manufacturing efficiencies, and economies of scale. Secondly, over time, and due to the age of the installed turbines, the operating costs increase as well.
Original estimates on the economic lifespan of the turbines are being retrospectively and heavily revised downwards. In the case of onshore wind the economic lifespan is being reduced from an expected 20-25 years down to 10-15 yrs. In Denmark we are seeing offshore turbine blades being replaced almost a decade before expected end of life. The failure rate of components, outside of regular maintenance, has been observed at a far higher rate beyond the initial 3 years, than was previously expected.
“The average failure rate for an offshore wind turbine levels out at approximately 10 failures per turbine per year by a wind farm’s third operational year. With ~80% of those repairs being minor repairs, ~17.5% major repairs and ~2.5% major replacements.“
Failure Rate, Repair Time and Unscheduled O&M Cost Analysis of Offshore Wind Turbines
Wind turbine projects have been routinely costed, by investors and governments, on a much longer and more cost efficient lifespan. Additionally, by 10 years of age, the contribution of an average UK wind farm to meeting electricity demand has declined by a third. Investors (that includes the taxpayer by the way) expecting a return on their investment (or just cheaper electricity costs) over 20-25 years will be sorely disappointed.
In the case of offshore wind the initial average opex cost of ±£44 per MWh (2018 deep water), which is typical of the future of the sector, exceeds average revenue per MWh at market prices weighted by wind input. As age increases, reliability decreases (increase in running costs) and power generation decreases (decrease in revenue). At a definable point in time the expected capex + opex + revenue becomes negative against their liabilities. Thus the windfarm operator is bankrupt.
Figure 3: Prospective cash flows for Triton Knoll project
In the case study of the Triton Knoll wind farm, operating profit, gross revenue minus opex, is less than the finance charge in every year under the scenarios as listed above, rising opex and a much reduced lifespan. The project is clearly a dud for both lenders (investment groups, banks, pension funds etc) and investors (ESG funds, PE, taxpayers) if we base projections for revenues and costs on actual experience and data.
The sad reality of economics. You have to actually make a profit to survive. Especially if you have debts to pay.
“I find my life is a lot easier the lower I keep my expectations.”
Bill Watterson
Risks, what risks, Mr. Stark?
The stark reality of this paper shows that within 12-15 years it is highly likely that a lot of wind projects (offshore especially) will be bankrupt, still with debt on the books. Offtake prices (CFD in the UK) need to be much higher than the market price in the case of offshore wind, or very quickly the opex will cripple the project. The operators will cease production or need to cut opex drastically to remain profitable.
This, in and of itself, is a self fulfilling prophecy, a doom loop, if you will. As operators reduce opex and maintenance budgets the turbines will fail more frequently and generate less power, reducing reliability. This, along with an aging fleet, leads to a decline in overall income for the project. The assumptions made by governments and the original investors are completely at odds with the realities we are witnessing now. Few modern turbines will operate for more than twenty years and many offshore turbines will be retired long before that. The sea is a cruel mistress, even more so for anything metal or with moving parts.
Many governments have underwritten these projects. Again, for emphasis, that is your money. They have taken a huge speculative gamble on the market price of power and the ability for these projects to deliver in lowering costs for the end customer (also you, for emphasis). None of these things are happening. The UK has some of the highest commercial electricity prices in the world, the domestic price is only kept in control by a price cap (price controls hello). However the actual costs of financing the turbine projects is being borne through ever increasing levels of direct and indirect taxation, as well as standing charges for all customers.
“Taxation is theft, purely and simply”
Murray N. Rothbard
Towards the end of the paper the professor is very clear that we have a far larger structural financial crisis within the renewable energy sector than might be realised. Even as these projects overrun on capex and opex, the central banks, the government, and financial regulators are demanding that more and more money from the private sector is pumped into these projects. The so called green finance sector. They do this under the guise of ESG, your wider social responsibility to the environment. It is guilt tripping and gaslighting of the highest order. Thankfully, capital goes where it is respected best. In Q1 of 2024 a record $8.8b was pulled from US Sustainable (read ESG) funds. Sadly, as the private sector pulls away from ESG investments, it means that central banks and governments will be forced to use more public monies (again, your money) to fund the green energy expansion and meet their own wild and unachievable targets.
These projects are highly risky as a financial investment. They are economically unsound, hugely speculative, and based on false data and wild expectations. That our governments throw our money at them is hugely immoral for many reasons. Their primary purpose should be as stewards of the tax take, spending it wisely and prudently. Inevitably, a lot of financial institutions have been doing as they are told (guilt tripped by activists who hand out ESG credentials and scores) and put their customers hard earned money into loss making investments. In a decade, by the professors estimations, the large future losses of these projects will become apparent and asset write downs and debt write-offs will jeopardise many regular people’s supposedly safe investments in the future of energy generation.
Governments will cast blame on the private sector for poor risk management and irresponsible behavior, the big players will get bailed out, and the resulting costs will again be born by the taxpayer (that’s you, again). The ultimate victim is always the end consumer and the bill payer.
Conclusion
If you’ve made it through all that waffle, I appreciate it. Perhaps it’s changed your mind on the viability of the so called net zero transition using renewable energy. In particular, wind farms. I will finish off with some bullet points that summarise the good professors points succinctly enough for anyone to grasp.
- Cost and profitability estimates used by our governments are wildly out of line with observable reality.
- If we persist with extremely short term targets for Net Zero the estimated costs are significantly under misjudged.
- The UK and the EU are but bit players in the overall picture, the only ones that matter are the USA, China and India.
- Net zero by 2050 only happens if we allocate the entire proceeds of 10-15 years of economic growth to it.
- Bailouts of wind farms and the financial institutions that finance them is inevitable within a decade.
- The taxpayer will ultimately bear the costs for these bailouts as we did in the 2008 Global Financial Crisis.
- No one will go to jail or be held accountable for this ruinous farce.
Ideological puritanism over a long time frame would be impossible for a political system like the UK’s to achieve. In China, or in another top down centralised power structure, perhaps, but the costs would still be ruinous. We see this now, as China whispers meaningless woke shibboleths into the ears of European conference delegates whilst continuing to do the exact opposite. The build out of cheap coal fuels their economic powerhouse, the nuclear build out screams ahead, and they hold a huge proportion of the worlds renewables manufacturing and also the rare earth minerals they require.
China knows that the transition to non-hydrocarbon based power generation will happen in time, that is inevitable, but that the real route will be through a solid combination of nuclear base load generation, and localised renewables as a supplement, over a much longer timescale.
Also apparent, is that despite best intentions (read; hopes and prayers), the stability of our grids will likely worsen, energy costs continue to increase, and economic activity will continue to stagnate, for any country that is determined to follow the Net Zero path.
If only our politicians accepted the reality of the situation rather than driving us over the cliff.
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Wind Power Economics – Rhetoric and Reality Professor Gordon Hughes
Lifetime prediction of turbine blades using global precipitation products from satellites
Failure Rate, Repair Time and Unscheduled O&M Cost Analysis of Offshore Wind Turbines