Will wind power end up costing us more?

0:02Paul Kelso:Sky News, the full story first.

0:08Paul Kelso:Coming up, the government says it's on track to meet its 20-30 clean energy targets thanks to a bumper offshore wind auction. But are the politicians spinning faster than the turbines?

0:23Paul Kelso:They might not be banging on about it quite as much as they used to But the government isn't backing away from its promise to have a clean energy grid in place by 2030 A big chunk of that will be wind generated And the announcement of eight new offshore wind farms goes some way to achieving it No wonder the Energy Secretary is sounding pretty pleased with himself This is a good deal for bill payers and it's a massive step forward for our energy security enough offshore wind to supply power to 12 million homes. It's clear that it's cheaper to build and operate than new gas, 40 % cheaper on the figures we publish today.

1:01Paul Kelso:And what's also crucial is it gets us off those fossil fuel markets controlled by petroestates and dictators. But is everything as rosy, or should that be green, as Ed Miliband would have you believe? Our business correspondent Paul Kelso is here to explain. Just explain exactly what the government has announced. Today, they've announced the outcome of an auction for offshore wind capacity. That is, energy generators bid to put offshore wind projects into the system. And effectively, they get a guaranteed price for their electricity, which has come out at just around£91 per megawatt hour. And it's produced about eight and a half gigawatts of capacity.

1:45That's about a million homes for every gigawatt. So it's a lot of power that will be installed, but exclusively in offshore wind farms, a couple in Scotland, and most of them off the east coast of the UK, but all in the North Sea. Just describe these turbines. I was at one of the places that manufactures the blades. Siemens Gamesa is the name of the company. They're in Hull, right on the Humber estuary. And they are massive. They are simply enormous. Not only do they make the turbines, and the blades are between 108 and 115 metres long, which they're making an immensely long, narrow factory, as you can imagine, but they also there put together the masts, the towers they stand on, which are over 110 metres tall.

2:31They come in bits from Vietnam, six chunks they put together, and then they bundle six of these masts together. They then put 18 blades along, plus the cells on top, the blades fixed to, three blades per mast, and then they get loaded on periodically to an installation vessel, which you can see from 10 miles away, which then takes them 200 kilometres out to sea, to dog a bank, and rams them into the seabed. It's phenomenal. One sweep of the blades will power your house for a day or more, and at the tip they reckon they go 200 kilometres an hour. It is big scale, massive scale engineering, and it's quite something to see.

3:08Paul Kelso:Massive scale business as well. So just explain the auction process. The auction is for what's called a contract for difference. In simple terms, the trick of these is that they offer a guaranteed price to the developer for a fixed number of years, 20 years in this case, up from 15 years. But it also should set a maximum that we as consumers end up paying when it goes into the electricity market. And the way the contract for difference works is it literally makes up the difference. The price agreed today,£91. If the wholesale market for electricity in future, which will include everything, not just wind, but solar power, gas, nuclear.

3:42If the price of electricity at which that is sold on the wholesale market is less than that,£90, so it's£80, the government, ultimately us as bill payers, top up the developer the£11, so they're not out of pocket. If the wholesale price is£100, the developer pays us the£9 back. So the difference is settled by whoever's benefiting from it. And the government sets a budget as to how much it's willing to commit to paying top-up charges, which will end up on our bills. What it has been very effective at is encouraging companies by subsidising these projects to build all sorts of renewables. And indeed, I mean, there's a nuclear power station that works on this basis.

4:26It's been copied around the world, but it is a fixed price for a long time.

4:30Paul Kelso:And all of this relates to the ambition that by 2030, we will have a clean power grid, doesn't it? It does. Labour's target, it's very closely associated with Ed Miliband, was in their manifesto, 2030, clean power. So they want the electricity grid to be powered by, they say clean, they mean low carbon, renewable or nuclear. 95 % of the power that's on the grid to be from those sources. It's an ambitious target, but it's also a self-imposed one, isn't it? There hasn't been some treaty sign that I've missed or some climate conference communique that's emerged stating that the world will have clean power grids by 2030.

5:09Paul Kelso:I mean, this is just Ed Miliband's pet project. It is Ed Miliband's project and 2030 is their day. It should be said that there was a very similar target set under Boris Johnson with a slightly longer end date, 2035. But no, this is absolutely an acceleration of a movement to clean power. and this came very close now, we're less than four years from 2030. And most analysts and observers have always thought it was somewhere between ambitious and wildly ambitious. Not many people expect it to be absolutely met. But clearly, the government wants to send a signal to the industry to keep these power companies investing in UK renewables.

5:47Paul Kelso:What am I missing here? Because the cost per gigawatt with these new wind farms is more expensive than the average wholesale cost of electricity last year. How does that happen? You're not missing something. That is absolutely right. The wholesale cost of electricity last year was about£83. Remember, that's a wholesale market that includes gas-powered fire stations. It includes everything. And yes, these are more expensive. That is absolutely the critique that's levelled at this. We're fixing costs for 20 years. How does the government answer that charge? Well, it's not entirely comparing like with like.

6:19There are two factors. The most obvious one is that this is the cost of new power sources. This is the cost of building new stuff. And we're comparing it with the wholesale cost of getting stuff that's already built. Remember, of course, for renewables, we pay for the construction of something that essentially doesn't have any fuel costs, no marginal costs because the wind is free. Whereas with a gas fire power station, it's the other way around. You have relatively low build costs, but then you have to pay for the fuel. The other fact in here is that it's about the way the price of electricity is set on those wholesale markets.

6:52The majority of the time, it is set by gas, and it is set by the most expensive unit of gas. And the more renewables you put on, the less exposed we are to gas. And actually, what happens, these renewables are dragging down the wholesale cost. There's some data out this week. If you didn't have any renewables, any offshore wind, that wholesale price at£83 would have been more like£120. So it is complicated. It's hard for the consumer to see through it, but both arguments are defensible.

7:18Paul Kelso:I understand that bit, but this isn't the first auction of this type that we have had. And when you compare this auction with previous auctions, I mean, the price of offshore wind is increasing. Absolutely. And it is undeniable. And that is something that Ed Miliband and others have to defend and have to explain. The price of renewables has risen. the cost in comparable prices got as low for a megawatt hour as 52 pounds three years ago so low in fact that the next year the government put in a reserve price for an auction that was too low and got no bids at all and no capacity essentially what happened is ukraine happened the energy crisis happened inflation happened supply chain pressure happened the cost of all the commodities that go in so these are renewables but they're still based on steel and copper and the key thing is that the cost of borrowing interest rate started to rise.

8:08And these projects, because they are multi-billion power projects with long lifespans, they require financing. And the cost of borrowing grew. And that is what has pushed up prices.

8:18Paul Kelso:Despite all of that, I mean, the government, the Secretary of State responsible, all pretty happy with the announcement today. I mean, you've been speaking to Ed Miliband. I have. He had a spring in his step. Ed Miliband, you and I both know, is always very bullish about this. He's accused of ideological madness by his opponents. who can throw some of these numbers we're discussing at him, but he is extremely positive. He thinks he's gone a long way to helping him deliver his target, and he insists it is good for consumers. But along with these rising costs, there's another fundamental problem when it comes to wind farms.

8:49Paul Kelso:And these are the wind farms that we've already got. Isn't it the case that sometimes we have to pay the providers to switch them off because we don't have the cables big enough to take all the electricity? Yeah, I mean, not just sometimes, some wind farms, the majority of the time they are constrained off in the jargon. Let's explain what that means. We are building with this renewable network. We are turning the grid inside out, as someone put it. The grid as we have it today is a relatively small number of power stations. So they were coal and gas and some nuclear, quite close to where people live.

9:21And you transmit the electricity from there. But you burn a lot of fossil fuels in the process, or certainly we did. Now we're building a huge amount of renewable capacity, which because one power station produces a lot more, you need a lot more turbines for that, you have to build loads of them and they've been built a very long way away from where people live. Most of the capacity of renewables is out in the north of Scotland to the north of England off the East Coast. Most of the demand is in the South. The grid can't transmit all that electricity. So part of the deal is here, when it can't handle that electricity, we compensate the wind farms and say, please don't produce.

9:59They get paid because we've got these contracts of difference. So they get paid to switch off. Not only that, but to make up the difference, we often have to ask a gas fire power station to switch on. Why not we build in more of these things then? A very good question. And the answer is when this first became policy and the direction of the energy transition back in the early 2010s, the decision was made to encourage people to build and then deal with connection later effectively. Because would you build the grid before you knew what you were plugging it into. So that's how it's begun. Now, these constraint costs, as they've called, which get added to bills, somewhere between 50 to 100 pounds a year, it's costing you as a household.

10:37About one and a half billion pounds last year going on to bills. Some forecasts could be as high as eight billion by the end of the decade. Now, if we get on and build the grid as rapidly as possible, they won't get that high. But those costs are a crucial part of why opponents of this say that when you're talking about this price that has been announced today, it doesn't take in the whole system costs and that renewables actually are fixing in higher prices, not lower.

11:06Paul Kelso:But I'm old enough and ugly enough to remember when Ed Miliband was promising us energy bills would be coming down. They're not. They're going up. And part of that is we are subsidising these wind farms, aren't we? You and I and everyone else who pays. We can absolutely call them subsidies for renewable power, but in the same way that the The money that's been added to bills to fund Sizewell C is a subsidy for the nuclear industry. These technologies are expensive to roll out. The idea is once they're up and running, there's no ongoing fuel costs. And yes, the public, we are absolutely subsidising the building of these renewables.

11:40Paul Kelso:That was a pretty daft promise for Ed Miliband to make that. Well, he was basing it on analysis that they stuck to. I've asked him the question today. He absolutely stands by it. He says 100 % bills will fall. Now, they have done something to bring down bills already, but it's got nothing to do with the cost of generating electricity today or in future. They have cut some of the taxes covering social costs, basically helping people who struggle to pay their bills. They've cut some of those. The hard bit for him to deliver is for these prices to fall. And it will become harder if gas falls. And the price of gas, the bet would be is that gas is going to remain cheap and perhaps get cheaper.

12:23There's lots of supply. There's people built up supplies after the Ukraine war. Should Russia, Ukraine move to something approaching peace, you could see Russian gas coming back on stream. Of course, what we're not talking about in any of this is the emissions. But if you're talking purely about price, put it this way. I had one eyebrow elevated when Ed Miliband was absolutely adamant that bills would come down.

12:46Paul Kelso:I'm sure he'll let us know when that will be happening. But until then, it strikes me that there's probably plenty of red meat for his opposite number to get into. Yeah, absolutely. Claire Coutinho, who was Energy Secretary prior to Ed Miliband, and has essentially shifted Conservative policy away, and they are absolutely prioritising price. Her analogy, she thinks this is every bit as bad a deal for the country and for consumers, as Ed Miliband thinks it's a good deal. Her analogy is that if we think about these contracts like a mortgage, if we start with the gas as the main setter of our electricity price and the market that changes every day, we're on a floating mortgage rate at 4%.

13:26What Ed Miliband, through these contracts, is doing is tying us into a 10 % mortgage for 20 years. It's a very effective analogy. One argument Ed Miliband deploys against it is that it's all very well, but the mortgage rate, let's pick a number, went to 30 % after the invasion of Ukraine. The virtue of fixed is you don't have the volatility when the state has to step in and pay everyone's gas bill.

13:52Paul Kelso:I was going to ask you when I might start to expect my bills coming down, but given that the Energy Secretary can't answer that question, it would be pretty difficult for you to do so. But what of the 2030 target? Well, certainly the offshore wind bit of it has got a lot closer today. Close enough, frankly, that if they don't meet the absolute minimum of 43 gigawatts of offshore wind, it shouldn't make that much difference. The chance of a 95 % clean grid in just four years, I would tether a small bit of my minor reputation to the fact that is not going to be the case. But what it is doing, and I think it's undeniable, if we set aside price, which many people say you shouldn't, but you set that aside, today is a very good day for Britain's renewable industry and it is a good day for its renewable targets and ambitions.

14:34The government has secured a whopping big chunk of new capacity at a price I don't think they thought they could get. And interestingly, they think it ultimately is in neutral for the bill payer. Let's go back to bill payers. They have analysis, a couple of independent bodies, albeit one of them funded by a company that got a contract today that says anything under£94 will be neutral for the bill payer. because the cost of topping up that contract for difference would be more than offset by the easing of our exposure to gas prices in the market. There is confidence around that calculation, but it depends on prices in future.

15:17And for now, what we know is the cost of delivering this renewable ambition is going up. No question.

15:23Paul Kelso:Paul, many thanks. The politicians will, of course, continue to disagree, whilst the consumers continue to pay. We were told that as the turbines went up, bills would come down. Instead, the only thing that seems to be falling is the public's patience. The Sky News Daily is back again tomorrow.