Cost Competitiveness


December 16, 2011

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The conclusions of the report from the Adam Smith Institute released this week, were not a surprise.

The free-market think tank argues that renewable energy is neither cost competitive, nor able to provide any form of energy security. It also argues that renewables would be entirely uneconomic if the traditional forms of energy that have to support base loads are included in project costs.

Naturally the report was rebuffed by many, with counter arguments from DECC claiming that the drive to renewables was to promote a realistic energy mix, rather than relying on fossil fuels that are ‘expensive to import’.

And unless we’re mis-representing the facts, the institute’s argument seems to be on the grounds of costs, rather than say, broader debates on climate change. So is there a common ground?

In short, if renewable energy is to answer the critics, are we doing enough to lower costs?

The answer is yes – probably. Onshore wind is unlikely to get any cheaper unless the planning process is significantly overhauled. Turbines are susceptible to changes in steel price, and the cost of foundations depends on concrete supply – that’s without factoring in legal costs from planning disputes.

Offshore wind, we know, is very expensive. But it has a plenty of merits. There are a large number of firms that can get involved in the supply chain, thereby increasing jobs, and it removes many of the ‘nimby’ debates that afflict those operating onshore.

Yes, solar energy has been generously supported, but it was unlikely to see an established market were it not for the FIT. And despite the warnings from a number of solar businesses, there is some evidence to suggest that the continuing fall in solar equipment will drive the sector’s growth in the long term.

So, supposing for example that we do suspend investment in renewables, what are the alternatives? Well, we still mine 18 million tonnes of coal a year for our ageing power stations. However, the market price of coal is starting to reach a level where its UK extraction will have to be subsidised in order for us not to exclusively rely on overseas imports.

If we continue to burn coal, our low carbon climate agreements will force us to invest in carbon capture storage – which really isn’t cheap – and we still haven’t solved the energy security debate.

Then there’s nuclear. No one can deny the benefits. Despite the notable incidents, it still has a relatively low accident rate, and is a clean burning fuel. It can, however, take up to ten years to commission a new plant. We’d still be looking at an energy gap.

And then there’s oil and gas. Fuels that currently supply an estimated 60% of UK energy needs. In the UK, ‘local’ North Sea reserves are dwindling, leading to gas exploration through the as yet environmentally unproven hydraulic fracturing. And oil, according to most commentators, will increasingly have to be imported.

When it comes down to it then, the argument is a political one. Energy is expensive. We are moving into an era where we will pay more to power our homes and businesses than ever before.

And if we do find the high costs of renewables unpalatable, then Government can do more than act as a taxpayer-funded cash point. For many, that means ensuring Whitehall provides commitments beyond 2020. These would assist the renewables industry in working harder to lower costs.

If we’re to really address the issue though, there needs to be demand side actions – through legislation – that ensure that the consumer thinks more carefully about the way in which they consume energy in the future.

Either way, there are some very hard decisions to be made.

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