The Department for Business, Energy and Industrial Strategy (BEIS) in the United Kingdom has recently released its predictions for the costs of electricity generation. The last time the last version of these estimations was predicted was four years ago and in that time the electricity generation landscape across the UK has changed greatly.
In this most recent report, the technologies that are covered are large scale solar power, offshore wind power, onshore wind power, combined cycle gas turbines (CCGT) and combined cycle gas turbines that use carbon capture and storage (CSS) technologies.
The costs of generation run for 20 years, until 2040, and there is a wide variety of costs for all the different technologies depending on the construction costs and how useful the characteristics are of local renewable resources (for the case of wind and solar power).
Unlike similar reports, the BEIS does not use a fixed interest rate across all the different technologies. Instead, it uses ‘hurdle rates’, these rates show the expected risk that is associated within each technology. The report defines hurdle rates as ‘the minimum financial return that a project developer would require over a project’s lifetime on a pre-tax real basis’.
Using the hurdle rate technique, solar PV has the lowest rate of just 5 per cent. This represents how attractive investing in this technology is for an investor. Onshore wind power has a similar rate of just 5.2 per cent which shows it is another viable option for investors. On the other hand, CCGT without the use of carbon capture and storage technologies has a noticeably higher hurdle rate of 7.5 per cent.
The report also gives estimations of the cost of generating electricity from each different technology. The estimates predicted that solar would be marginally the cheapest technology at £44 per megawatt hour and onshore wind power would cost £46 per megawatt hour. Offshore wind power is the next cheapest at £57 per megawatt hour and CCGT is the most expensive at £85 per megawatt hour (both with and without CCS).
Most noticeably in the most recent report, coal and nuclear power are hardly mentioned and for statistics readers are referred to the previous version which estimated nuclear power an electricity generation cost of £95 per megawatt hour (at 2014 prices).
This price is in line with the price for the Hinkley Point power station which is estimated to be around £97 per megawatt hour. Even though this is noticeably more expensive than the renewable alternatives, the report does note that the UK government aims to deliver a 30 per cent decrease in the cost of nuclear power projects by the end of the decade.
The report also notes that by 2035 the generation costs of onshore wind power will be more expensive than their offshore counterparts. This is because offshore wind power has the potential to expand to 63 per cent by 2040 whereas onshore wind power will consistently stay at 34 per cent of capacity. Offshore wind farms also are able to benefit from economies of scale as they can include a large number of massive wind turbines. Onshore projects are not able to benefit from this as there is a physical restriction to their size.
There are further issues that go beyond the estimated costs of electricity generation and hurdle rates however these give a good overview of the predicted costs and they clearly shows the benefits of both solar and wind power to be used in the future to reach the net zero target.