Give offshore a level playing field

Offshore wind is under fire. The apparent cost gap relative to more conventional power (including onshore wind) remains substantial, and we are at least a decade away from wholesale grid parity.

There is a risk that some countries might say: we like the concept, we want clean, stable energy, but we cannot afford offshore wind.

From society’s perspective, the selection of electricity sources should be based on their true costs. Unfortunately, the standard measures of electricity costs reveal only part of the picture.

Today, we use the levelised cost of energy (LCOE) as our yardstick. It is calculated as the ratio of the lifetime sum of discounted capital and operating costs, including fuel, divided by the lifetime sum of discounted energy output.

However, to arrive at a better estimate, more factors need to be considered. The total direct cost of electricity is the sum of the LCOE, plus:

  • CO2 costs. Current carbon prices are very low, but long-term predictions are typically €40-50 ($55-68) per tonne.
  • Subsidies. Everybody knows that renewables are openly subsidised. But fossil fuel-powered energy and nuclear receive “ hidden” support in many countries through tax breaks or government support for coal mining.
  • Grid costs. With higher shares of renewables, grids need to be reinforced on the transmission and the distribution levels, as renewable sources are either not located centrally (solar, biomass, onshore wind) or are remote (offshore).
  • Intermittency costs. These are payments to keep gas power plants on stand-by as a backup; this is mainly a cost factor for renewables.

These direct costs of electricity are still not a complete measure of the cost to society. To arrive at what might be called Society’s Cost of Energy, or SCOE, additional aspects have to be considered, such as:

  • Social costs, including health or environmental expenses caused by pollution from fossil power plants. The decline in property prices near power plants — including wind farms — also falls into this category.
  • Economic advantages, mainly job creation and the resulting extra growth and consumption.
  • Geopolitical impact — principally hedging against future fuel price increases.
  • Assuming that we can take a significant stride in the infrastructure part of the offshore wind value chain, and if turbines continue the classical trend of a 40% cost reduction each decade, by 2020 offshore wind will have an LCOE of less than €100 per MWh. A big improvement, but still leaving a gap with conventional power or onshore wind.

If, however, we consider the SCOE, it becomes a completely different matter. We have done the calculations at Siemens, and we were surprised by the results. Taking into account the above factors, offshore wind will come very close to onshore wind in Europe in 2025, beating nuclear, coal and solar hands down, and only marginally beaten by gas.

The big differentiator is that offshore wind creates higher social benefits and lower social costs than other power sectors. It has more potential to create local employment and positive GDP impacts than almost any other energy source — and in structurally weak areas where jobs and investments are urgently needed. External costs for offshore, such as pollution or falling property values, are negligible. If such calculations can be substantiated, the result is a paradigm shift.

So, what now? Well, we could ask external institutes to verify our calculations and publish reports detailing the methodology and results. However, experience shows that this will typically lead to the publishing of counter-reports from parties with opposing interests, then a period of debate... and then the issue is forgotten. Meanwhile, the myth of cheap conventional electricity and expensive renewable energy will prevail in the public domain.

The problem is that the argument for an SCOE view is quite complex. At the same time, increases in household electricity prices send a clear signal to consumers and are mainly blamed on the growth of renewables and their direct and visible subsidies.

But we have good arguments that the SCOE is the best estimate of the true costs of electricity. We need to convey this simple message to decision makers and the public: societies should make their choices of electricity sources based on the true social costs. Perhaps this could be a question to all Recharge readers: how do we get the message across?

Henrik Stiesdal is chief technology officer of Siemens Wind Power

This piece was published as part of the Thought Leaders series. Recharge’s Thought Leaders’ Club brings together leading thinkers and participants from the renewable-energy sector to examine the key challenges facing our industry