Imagine a sausage factory – the luckiest, most profitable sausage factory in the world. Its machines crank out their sausages, and lorries carry them to supermarkets. So far, so normal.
But this particular factory makes as many sausages as the management and staff choose. If they feel like taking the day off, the lorries and shelves stay empty. If they want to go a bit wild, they sometimes make so many sausages that there aren’t enough lorries to take them away. Or they carry on cranking out sausages even if the shelves are already full.
And here’s the really amazing thing: even when the lorries can’t cope or there is no demand for sausages, the factory gets paid. Indeed, they get paid more for not sending the sausages to the shops than for sending them. This is such great business that the factory is actually building an extension, so it can threaten to make even more unwanted sausages.
Does all that sound completely mad? Of course, it does. But it’s what happens in the British electricity industry – where the blackmailing, money-printing sausage factory is a wind farm in Scotland.
There are currently about 750 wind farms north of the border, with roughly 3,000 wind turbines. Their total generating capacity amounts to 5,700 MW. The actual amount produced varies according to the weather. But at its maximum, that wind capacity is more than the 5.5 GW peak demand on the Scottish grid.
What this means, of course, is that the output from Scottish wind turbines is often more than the Scottish system can absorb. That requires the surplus energy to be exported to England and Wales. But that isn’t as easy as it sounds.
The wind farms are distributed across Scotland, sometimes in very remote regions, so there is a real problem in getting their energy down to the English border – let alone getting it across. For some years now, Scotland’s total export capacity has been only 3.5 GW, well under the peak output of the wind farm fleet.
So, reinforcements and new links are being introduced. These range from the hugely controversial, and to many environmentally unacceptable, £820 million Beauly-Denny upgrade, to the massive Western Link, a subsea connector from Hunterston to Deeside that is set to come online this year at a cost of more than £1 billion – and will entail a standing charge on energy bills across Britain of about £100 million a year for 35 years.
Yet in spite of the cost, these upgrades cannot completely address the problem: there is still more wind power in Scotland than can be reasonably and affordably absorbed into the system, or exported to its neighbors, partly because the wind fleet keeps growing.
Why has so much been built? Partly, it is because of income-support subsidies. This top-up of nearly 100 per cent over the wholesale price – funded, of course, from consumer bills – makes wind farms very attractive, at least until they wear out (by which time developers hope to have sold them on to naive pension funds and investment trusts).
There is also the political situation. In England and Wales, onshore wind is effectively dead, due primarily to the strong local resistance the turbines tend to attract, to which government eventually responded.
In Scotland, the story is different. The country is intensely urbanised, with most voters located in the cities. Rural objectors were simply too few in number to have much influence, no matter how strong their environmental or economic arguments.
Subsidies to onshore wind in the UK now cost a little under £600 million a year, with Scottish wind taking about half, yet the Scottish government continues to ignore the protests and consent to new wind farms as if they cost almost nothing at all.
Which as far as Holyrood is concerned, is in fact true. Part of the attraction for Scottish politicians is that the subsidies that pay for Scottish wind farms come from consumers all over Great Britain. Scottish consumption is about 10 per cent of the British total – so when the Scottish government grants planning permission to the wind industry, it is simply writing a cheque drawn overwhelmingly on English and Welsh accounts. Taxation without representation, in fact.
But a careless government and a lucrative subsidy system don’t explain the full flourishing of Scotland’s wind industry. Bizarre as it may seem, the fact that the Scottish grid cannot physically absorb all this wind power is also an attraction – because subsidised wind farms can actually earn more per unit generated when that unit is thrown away than when it is sold to consumers. In other words, they really do get paid more for not making sausages than they do when selling normally.
The explanation is simple. A wind farm receives roughly half of its income from the wholesale price and half from subsidy, the infamous Renewables Obligation Certificate (ROC). When the grid is either at or close to capacity, National Grid stops the wind farm from generating, in order to prevent damage to the overhead wires and, at worst, a major system disruption.
When this happens, the wind farm will keep its wholesale income – which is fair enough, since it was contracted into the system. But it loses its ROCs because those are only issued for electricity actually sold to consumers.
What happens then, however, is that the wind farm will ask for compensation for the lost ROCs. The euphemism for “being paid for not producing sausages” is “constraint payment”. And often – and this is the crucial point – they will ask for more compensation than they are losing in income.
When one of us, John Constable, first exposed this problem back in 2011, the average compensation being paid was nearly four times the lost income. One wind farm, Crystal Rig, was asking for (and receiving) £991/MWh in compensation when it was losing about £50/MWh.
Naming and shaming worked, and prices fell. But they are still well above the income lost, with onshore wind farms regularly asking for between £60 and £90/MWh in compensation when they are only losing about £45/MWh.
The result is that wind farms in Scotland have a higher average income per unit of power generated because local demand is low and the grid system is hopelessly congested – leaving National Grid no option but to buy them off at any price.
For National Grid, this is just a pass-through cost, so they don’t care much about it – they simply increase the amount they’re charging consumers. But for consumers, it’s a truly terrible deal. Since 2010, we’ve paid £328m to wind farms not to generate – mostly to onshore Scottish wind farms, though England’s offshore farms have also started to get into the act. Last year, the total was £82m. This year, it’s already reached £50m.
Read more at CAPX
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