Dissecting a Wind Project: An Introduction to Bad Economics (and political correctness)

From MasterResource

By Bill Schneider

“My own personal experience turned me from being ‘mildly agnostic’ about intermittent renewable power to being a strong opponent of such schemes. And outside of some ephemeral political argument about ‘saving the planet’ … intermittent power schemes, whereby the generation capacity is linked to either a regional grid or large power user that relies upon predictable energy, should be avoided at all costs.”

This is an energy story, a personal one – and it begins back when I first saw the option on my utility bill while living in a suburb of Boston back in 1999. I could elect to pay more for “green” power, about 20 percent more. “Buying a cup of coffee to save the planet” seems reasonable. I checked the box.

This was how an “Average Joe” thought~23 years ago. By some reckoning, that’s an entire generation. Since then, media have literally carpet-bombed the internet, airwaves, and print, with story after story after story of how, if we don’t DO SOMETHING!!!™ the world will heat up, the oceans will rise, and all the poor island nations in the Pacific will flood and cease to exist.
My views have changed a lot.

So how did I go from being mildly agnostic towards the notion of man-caused global warming climate change – but still friendly towards various “green energy” schemes such as wind, solar, and tidal power – to become a staunch defender of dense energy, including <shudder> fossil fuels? And a foe of items labeled “green energy” by media and advocates?

A Wind Power Project

In early 2008, I was asked by the Asset President of the steel mill I worked at in New Zealand to review a proposal for a PPA (power production agreement). At a high level, the proposed PPA was straightforward. Key terms included:

  • Term: 15 years, with renewal clause
  • Cost per delivered MW: NZ$79, with escalator clause
  • Supply basis: take or pay, 100% of generation site power
  • Proposed generation site: 21 turbines at 2 MW nameplate capacity each, total nameplate capacity 42 MW
  • 12-month wind study result: “less than pristine” ranking; anticipated annual average generation capacity, 14 MW
  • The task was deceptively simple: review this proposed PPA.

100 MW total demand, sourced as follows.

  • 60 MW delivered from two melter gas-powered cogeneration plants
  • 20 MW contracted under a hedge agreement
  • 20 MW remaining, sourced via the spot market

The 14 MW average capacity from the proposed site seemed like it would be able to replace the spot requirement, with a little left over that would have to be onsold to the grid. Easy! My company gets to tick the box of being seen to support renewable energy. Oh, and the site the wind farm was to be built on, was adjacent to a mine site that the company leased from indigenous people (Maori) and was owned by the same people that leased the mine site.

Let’s review how the stage is set.

  • At 100 MW power demand, the mill was one of the largest power users in the country
  • Political pressure from government for large energy users to support renewable power was palpable
  • The generation station development site was owned by an indigenous group from which the mill also leased a mine site (more political pressure to ink a deal with the PPA developers)

But that starting price is far higher than the site annual average. I started reviewing the proposal documents, instantly realizing I needed help.

Wind Project Review

I engaged two knowledgeable folks: one who had worked at the site for 16 years and was available to consult on the project from a site demand perspective (“internal demand consultant”); and another who had experience in both building and operating various types of generation stations (“external supply consultant”).

Each of us tore into our respective portions of the proposal. I reviewed commercial terms, and the two consultants reviewed project risk, cost risk, and supply risk issues. A persistent pair of headaches were pricing & escalator clauses, and security of supply risks. This review took almost four months to complete and included several meetings with the developers of the wind farm (the same folks who proposed the PPA to my employer).

Problem 1: “Sole Client” and “Take Or Pay” From a commercial perspective, being the only “customer” to a seller comes with significant risk. What happens if the seller experiences financial or operational challenges? From an operational perspective, we’d go back to buying on the spot market. Politically, however, the seller would be tied to us, like a David being tied to a Goliath (for anyone reading this who knows about the ANZ Bank/Opes Prime incident that happened in Australia during the GFC, you will of course relate). So perhaps this arrangement could be considered to be operationally “ok”, but politically it carried a considerable negative in the court of renewable energy public opinion.

Next, let’s consider the requested contract term, 15 years. The proposed power purchase agreement (PPA) is a long-term one, where my company has been solicited to purchase all of the energy the counterparty has to offer – on a “take or pay” basis. For those of you who are not familiar with the contract term, this means that if the seller has electricity to offer, the buyer must either buy all that is offered or pay the value of what was offered but not accepted, at any given time. Therefore if the generator is offering all 42 MW at a particular time and the site cannot accept more than 20 MW (given the other supplies and obligations listed above), we would either have to onsell it or else pay for the quantity that we were not able to accept.

If we do not accept all the available electricity generated by the supplier at a particular time, we pay out for energy not used – potentially a significant overspend issue – and if we do not receive enough energy (again at a particular time), we have to source it from the spot market. Or, we could accept the surplus energy and attempt to onsell it, quite likely at a significant loss.

In any case, this means we would have to employ a person who would manage power deliveries and possible sales against this PPA, or else risk paying significant fees where “too much” power was generated. Most regional grids manage power deliveries in five-minute increments or less, and of course, wind velocity varies. So on this issue alone, there would be significant potential for overspending and/or having to deal with overhead costs of at least one (1) FTE.

Problem 2: Generation Efficiency/Wind Profile What about that “less than pristine” ranking of the 12-month wind study? It meant that despite the wind farm generation site having a nameplate capacity of 42 MW, the annual average it could generate was ~14 MW. On an annualized basis, the capacity factor for the site was ~33%. Not very efficient, but the contract only requires the customer to pay for power delivered, right?

But the cost of building that facility has to be amortized across its anticipated power sales. A 33% capacity factor means that there are far fewer electrons to earn back the investment to the consortium and allow the developers to earn a profit – hence the high initial strike price.

Here’s where the next discovery comes up. Often, one sees wind farm developers and advocates claiming that wind is a good backup if other power sources fail (for baseload generators, this means that there is an “unscheduled outage” where for whatever reason, the generation station is supposed to be online but is not sending power to the grid).

But for the country of New Zealand, its baseload power was over 60% hydropower, in schemes varying from small river-based hydro all the way up to the massive Manapouri Power Scheme in the South Island near Fiordland. In 2008, at the time this proposal review was conducted, NZ was experiencing a significant drought, and spot power prices were >NZ$500/MW. Upon examination of meteorological data, our team learned that in New Zealand, “wind follows rain” – meaning, if it isn’t raining, the wind isn’t blowing much either.

Rather than being able to rely on wind acting as a reliable alternate source of power during drought conditions, it was statistically very likely that the proposed wind farm would not be generating much power during a drought.

Given that “wind follows rain”, our company would have been at considerable risk of being forced to pay contract rates for power generated from the wind farm far in excess of the 14 MW average, while losing practically every single dollar of these overpayments by selling into a flooded spot market. Oh, and don’t forget, that initial strike price included an annual escalation clause, which had no bearing on market prices.

Of course, this was because the project needed to make a profit for its investors, and even with an NZ government program that allowed it to treat costs as tax losses, a review of investment data showed that the project would not break-even for the first ~7 years of its existence, and would not be profitable at an investment level without government tax subsidization until the end of the contract term.

Final note: when our team met with the developers, we asked them what they were prepared to do (if anything) to manage downside supply risk. The one and only answer we received at each discussion was a variation of, “well you can always buy power on the spot market”.

Issue Summary

For the “privilege” of buying renewable energy, our company was going to have to manage the following costs/risks:

  • High initial strike price, with annual price escalation (and the initial strike price was “significantly higher” than either the cogen power contract, the hedge contract, or the long-term average spot price)
  • A “less than pristine” wind source that on average would generate ~33% of nameplate capacity
  • A “take or pay” clause that could, in five-minute increments, have our company paying for anything between 0 MW supply and 42 MW supply, where anything less than 20 MW would have us exposed to buying on the spot market, and anything in excess of 20 MW would have us exposed to selling into the spot market (or else just paying for power that we didn’t use)
  • Managing wind power supply shortfalls in a spot market that would be driven up by lack of rainfall
  • Employing an FTE to manage deliveries and purchases/sales from undersupply or oversupply
  • Zero responsibility on the PPA counterparty to assist with oversupply or undersupply

Political Correctness Issues

But saying “no” to the proposal came with both renewable power political risk and indigenous relationship political risk. So there was no way our team could suggest the company simply decline. The company was a member of the NZ Major Users Energy Group (MEUG), comprised of the country’s largest energy users. MEUG members were under enormous political pressure to support renewable energy.

Yet as was alluded to above, the proposed strike price of this PPA was far and away “out of the money” (which in those several discussions between our team and the developers, the latter flatly refused to budge on either strike price or cost escalator metrics, citing this pricing as absolutely necessary for the project to gain financing from investors).

Truly, we were in a bind. But we had to deliver a recommendation to the Asset President that would both split these very fine hairs, and at the same time be something that would gain approval from him and his leadership.

And recommending “Yes” to the proposal, or recommending “No” to it, was not in the cards.

This quandary is a classic negotiating challenge, where at first glance one finds themselves in the strange position of neither a negotiated proposal nor a BATNA being achievable. So our team turned to see where we could potentially create leverage despite not having anything obvious.

Planning the Escape

The team began with the fundamental question, “Why Our Company?” Why not anyone else?

The answer: because there was no other single company in the region large enough to be able to take that much power (assuming of course, their site was generating at or above the wind profile projection).

Approaching us was therefore not only logistically easy (selling 100% of their generation to one customer) but also had the perceived “insurance” of our site being a large enough power user to be exposed to the political risk of not being “seen to support renewable energy”.

In that regard, the site selection was equally shrewd, since their site would be leased from the same Indigenous group that our company leased a mining site immediately adjacent to that facility (side note: this facility was later sold in the wake of the GFC, but at the time there were no plans to offload it).

But consider: upon review of this situation, we surmised that the developers went to so much trouble to try to force my company to go along with the proposal, because, as it turned out, they had no other viable option:

  • No other company large enough to stitch together a single “deal” in the region
  • Demand and grid limitations and line losses meant that the developers would have to approach several other possible clients to sell their power if we said “no” to the scheme, and those smaller companies would neither face political/reputational risks of “saying no” to renewable power or generation from indigenous-controlled land
  • Smaller companies would not be able to afford the asking price, which the developers absolutely had to codify in contract across the entire potential supply to gain funding
  • And finally, selling into the spot market came at a significant downside risk over the long term (which was why my company allowed itself to purchase 20% of its requirements on the spot market)

Still, we needed something to provide cover to take advantage of this vulnerability from the counterparty, rather than “just say(ing) no”.

Enter the sole source/sole provider arrangement and “Supplier Management 101”: every single purveyor of supplier management and supplier risk management principles will say, in unison, that being a supplier’s sole source of income is never a good position to be in, especially as a larger company being the buying party.

Counter-Proposal

I took inspiration for the counterproposal that I offered up to the Asset President from one of the famous Trials of Hercules: in this example, Hercules was told to drain a little cup of water. What Hercules did not know was, the cup was linked to the Seven Seas, so no human could possibly drain the cup.

So when the time came, I sat down with the Asset President and outlined a summary of all of the above, along with the possible political and indigenous reputational harm/risk that would go along with “just say(ing) no”, as well as with an acknowledgement that from both cost and security of supply points of view, neither could we “sign on the dotted line”.

Next, I outlined the developers’ position, as to why they were essentially married to our company as a client and no one else.

Finally, I requested his permission to offer up the following counterproposal, on the basis of avoiding the 100% sole customer risk.

  • Our company would be willing to purchase 50% of power generated from the scheme
  • We would honor the previously proposed strike price, price escalator, and take or pay requirement (of 50% of their generation)
  • But with this caveat: they would have to on-sell the other 50% of their capacity first, and show us copies of duly executed agreements with other counterparties covering that entire 50% prior to our company signing up for the remaining 50%.

This counterproposal was approved by the Asset President, as stated above, as we were quite certain that the developers would never be able to meet the test contained in the caveat.

Outcome and Epilogue

In mid-Q2 of 2008, our team presented the counterproposal outlined above to the developers of the Taharoa Block C Wind Project. We shook hands with their team and left the meeting not long after.

An online search of this project will turn up several attempts to develop this wind farm, but to-date none have done so much as broken a single spade of dirt on the site.

As our team met with the developers of this project over the term of the review, it became clear to me that their entire business case rested on the presupposition that, as a large energy user, we would be forced to “sign here please” and essentially be the large corporate victim of a scheme of energy graft. Like so many proposals where companies are led to believe that “supporting” the current government zeitgeist (one can name any number of poisons here, from environmentalism to renewables to diversity) will give them some kind of reputational advantage, where the real advantage is limited at best and the downside – never talked about up front – is considerable (in both financial and reputational damage).

There are many other reasons why so-called “renewable power” – that is, intermittent power schemes where the “fuel” is purported to be “free” and “clean” but cannot be stored or controlled by humans – are unreliable and utterly wasteful as capital investment programs, except by various mandates and subsidies doled out by governments. Perhaps I will write more on these items in the future.

My own personal experience turned me from being “mildly agnostic” about intermittent renewable power to being a strong opponent of such schemes. And outside of some ephemeral political argument about “saving the planet” (that comes long on belief but very short on detail), intermittent power schemes whereby the generation capacity is linked to either a regional grid or large power user that relies upon predictable energy, in my opinion and experience, should be avoided at all costs.

——————

Bill Schneider is a Procurement and Contracts leader with more than 30 years’ experience across multiple industry verticals and countries. With dual citizen of the United States and New Zealand, as well as a permanent resident of Australia, his career has involved assets owned and operated by Procter & Gamble, Boeing, Rio Tinto Aluminum, Bluescope Steel, BHP Billiton, and Glencore, as well as companies in the banking, power generation, and facilities management spaces.

A native of New Orleans, he originally studied Christian Education at East Coast Bible College as an undergraduate, later attending Tulane University to earn an MBA in General Management.

His comments represent his own opinions and not those of any company, contract firm, or client with which he may be associated.

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Tom Halla
November 14, 2022 6:13 pm

How to not get rolled 101?

John Hultquist
November 14, 2022 6:38 pm

Unanswered: Did the boss ever hear from the government and others?

Great post. Thanks.

wilpost
November 14, 2022 6:40 pm

Absolutely great write-up.

The cost of evaluating the “deal” must have been enormous

I am glad the company proposed to buy 50%, because that meant a significant additional burden on the wind developer, who decided to scrap it all and try his evil scheme elsewhere

Janice Moore
November 14, 2022 6:59 pm

Superb analysis!

This should be published in “The Wall Street Journal” and all the other major financial/market analysis publications of the world.

In one line:

Wind is an investment for crooks.

Gums
Reply to  Janice Moore
November 15, 2022 7:27 am

Salute!

Agreed, Janice. Strongly.

This is an outstanding example of capitalist economics at work and all I see is win-win for all involved.

The “renewable” concepts seem to work O.K. ( not great) for small projects such as living off the grid and having some storage scheme to last you two or three days, but even then you better have firewood for cooking or heating or both.

Gums sends…

BLS1965
Reply to  Janice Moore
November 19, 2022 11:40 am

Thanks, Janice 🙂

Christopher Chantrill
November 14, 2022 7:48 pm

I wonder if Greta Thunberg could understand this…

Grahame
Reply to  Christopher Chantrill
November 14, 2022 8:57 pm

How dare you talk about cost.
The “renewable energy industry” are saving the planet.

Scarecrow Repair
Reply to  Grahame
November 14, 2022 10:10 pm

Yes, saving the planet from the scourge of humans living beyond a stone age lifestyle.

Fred Haynie
November 14, 2022 7:53 pm

If nuclear is out of the picture, both wind and solar will end up being backed up with natural gas.
The “greens” will someday recognize it as the ultimate clean burning “renewable”. It is being produced and used in sewage treatment plants and in garbage land fills. Anything containing carbon can be converted to CH4 (hog farm waist, Feed lot waist, yard waist), When you burn methane you get energy from four hydrogen atoms and only one carbon atom, There is no ash to worry about, Then in some counties like the US, nature has created and stored for our use more than we can burn in a lifetime.

MarkW
Reply to  Fred Haynie
November 14, 2022 8:33 pm

waste, not waist
More gas than we can burn 4 or 5 lifetimes.

Last edited 2 months ago by MarkW
sturmudgeon
Reply to  MarkW
November 16, 2022 6:27 pm

I see lots of people with far more than a yard waist.

abolition man
Reply to  Fred Haynie
November 14, 2022 8:41 pm

Fred,
What you say is quite true except for one glaring faux pas.
The “greens” will NEVER recognize that natural gas is clean and “renewable,” just as they will never recognize that nuclear is safe and dependable. Their religious beliefs will never allow them to accept anything other than their nihilistic mantra; Carbon is Evil, Humans are a Plague upon the Earth, and without them our world will once again revert to being Paradise.
Few of them have the mental capacity to recognize that, without intelligent intervention, ALL LIFE on Earth will likely die due to lack of CO2 during the next period of glacial advance! I keep hoping that some form of intelligent life will develop here to avert this Fate; but when I see the effects of social media and our modern indoctrination system, and the changes being made by Western political elites I sometimes despair.

Keitho
Editor
Reply to  abolition man
November 15, 2022 12:10 am

Point them at “The White Cliffs of Dover” and ask them if they understand what made them. CO2 is always removed from the atmosphere, we in our own small way are helping living things survive.

Great article by the way. Too complex for the “greenies” to understand but still worth spreading far and wide.

Redge
Reply to  Fred Haynie
November 14, 2022 9:38 pm

The “greens” will someday recognize it [gas] as the ultimate clean burning “renewable”. 

Greens don’t even recognise gas is reliable, yet believe wind is reliable.

Duker
November 14, 2022 8:19 pm

Just checking NZ electricity production shows they are already at 80% plus renewable with mainly hydro sprinkled through the long narrow country, which is good for frequency stability from those big 50hz generators and voltage support for the long distance HVAC grid lines. There’s also an interconnector between the two islands which is DC and runs down to the lower population South island center of hydro generation. Seems to be around 900MW of geothermal steam generation peak output at the center of North Island.
Wind power production is quite minor even though the narrow country is astride southern ocean wind zones plus the existing grid network passes close to optimum wind production areas.

Pushing the last of the gas generation and one remaining coal generator out seems foolish in extreme as the hydro is steady generation but the water storage can vary greatly from southern oscillation/El nino dry periods

Patrick MJD
Reply to  Duker
November 14, 2022 8:31 pm

Nuh Zilund is exceptionally well placed for hydro. The Clyde dam is quite impressive.

Duker
Reply to  Patrick MJD
November 14, 2022 9:24 pm

The wind main ultity is at night when the hydro dams can be reduced to a trickle, and for demand generation for peak hours they can only rely on hydro , steam geothermal and gas and coal

BLS1965
Reply to  Duker
November 19, 2022 11:48 am

Duker, at the time of this story (Q1 & Q2 2008), NZ was ~61% hydro. Geothermal was mainly located in the area around Rotorua, but there were a few small geothermal facilities in other places. The important thing that we learned, was that when the rain wasn’t falling, the wind wasn’t blowing either – so backing up hydro with wind was practically useless.

Side note: the geothermal operators discovered in the early 2000s that “hot rocks” only gave off so much energy. This was tested by literally flooding injection wells until the volume of water was so great that it quenched the “hot rocks” down to a point where steam raising was no longer possible.

One more side note: while hydropower is the best “renewable” resource, the reason we don’t see new hydro projects anymore (with very few exceptions in places like Africa where there are still decent areas to develop) is, despite over a century of effort, hydro still exerts a significant negative impact to riverine ecosystems downstream of a dam – not to mention the size of the reservoir required to operate a properly sized dam.

Natgas and nuclear (especially SMR nuclear) are our friends…

Patrick MJD
November 14, 2022 8:30 pm

Germany: The poster child of wind (Renewables) is dismantling a huge wind farm to expand the coal mind it sat on top of.

sturmudgeon
Reply to  Patrick MJD
November 16, 2022 6:30 pm

Is that ‘coal mind’ thinking black, evil thoughts?

MarkW
November 14, 2022 8:31 pm

If at first you don’s succeed, get government to subsidize you.

pillageidiot
Reply to  MarkW
November 14, 2022 9:20 pm

THAT is the study that gets published in the Wall Street Journal, not this study!

Duker
Reply to  MarkW
November 14, 2022 9:27 pm

Ahhhh…there were no government subsidies on offer and the project fell over all on it’s own

barryjo
Reply to  Duker
November 15, 2022 6:32 am

There should be a lesson in that somewhere.

Kevin Kilty
November 14, 2022 8:37 pm

Great essay. Will bookmark it.

abolition man
November 14, 2022 8:49 pm

Excellent post! Once again the Unreliable Energy scam is exposed when you look under the hood! Maybe someday an adequate system for storing energy will be developed that can compete with the hydrocarbons and nuclear fuels we currently use.
I’m sure, like fusion power, it’s only 20, 30, 40, or 50 years away!

Rod Gill
November 14, 2022 9:51 pm

As a Kiwi who ys products from your steel works, many thanks for your efforts. You’ve saved us all some money.
“You can always trust governments to do the right thing, but only after they’ve tried everything else first.”

Duker
Reply to  Rod Gill
November 15, 2022 11:08 am

The steel works has its own iron sand mining, is further north. Kaharoa iron sands is mostly export through a pipeline to an offshore moored bulk carrier. An interesting technical challenge to avoid having port infrastructure even though its adjacent to a shallow estuary

RickWill
November 14, 2022 10:33 pm

Insightful story. It is a large customer perspective that has eliminated the wholesaler from the equation.

Intermittency was accepted into the Australian wholesale market without any oversight. By the time the initial problems were emerging it had created a powerful lobby through rooftop rollout.

It is not going away in Australia. There are far too many reputations now riding on it working and there is wide acceptance that it will eventually get cheaper. Households with rooftop solar are doing OK riding the Ponzi scheme in the current phase.

The only way out of this mess for consumers is to make their own electricity. It is not practical for residential consumers to generate power from coal, gas or even wood. But households can produce solar power with storage in Australia at lower cost than any network that has to add transport on top of the cost of intermittency. So the options in Australia are to pay ever higher prices for grid power or install your own rooftop solar and eventually battery when the economics are favourable for storage.

RickWill
Reply to  RickWill
November 15, 2022 12:07 am

Just learnt that there has been a board takeover at AGL. Greens are now in the driver’s seat.

This is good news for Australia because it should turn a slow burn into a real mess real fast.

I dare them to close down the remaning three sets at Liddell in April.

PCman999
Reply to  RickWill
November 15, 2022 11:46 am

Wouldn’t it make more sense to wait – either for the price of panels/inverters/storage to get cheaper, more efficient and reliable, or for the whole ponzi scheme to collapse?

Based on real world numbers, in your area, what kind of investment would you have to make to cover your electricity needs, and how long before it pays for itself? Are you planning on living there that long?

There’s a third option, buying a place that is already off the grid/ significantly self sufficient and getting it cheaper in a bank sale when the original owner defaults under strain of payments, including the loan for the panels.

RickWill
Reply to  PCman999
November 15, 2022 1:33 pm

I have panels already. Maybe enough to go off grid. I currently run half our load of grid on a 5kWh battery. I am waiting for the battery subsidies to make it a shorter term payback with a much bigger battery. I doubt battery or panel prices will come down. China is currently mining their own coal, paying well below the spot price so actually subsidising their manufacturing.

I only have about a 5 year horizon at this location. In this area, an energy producing house is attractive. There is wide belief in Australia that “renewable” is the ONLY way to go. That is why Greens and Teals are getting voted in.

Cannon-Brookes could not have completed the board takeover of AGL without wide investor support. I think his company has less than 20% of the AGL shares.

BLS1965
Reply to  RickWill
November 19, 2022 6:24 am

Solar PV plus battery storage will never be cost-effective.

michel
November 14, 2022 11:28 pm

Many thanks, one of the most interesting and illuminating pieces I have seen on this subject.

The problem is the same as the problem with the use of the LCOE parameter as a measure of renewable costs (which I have posted about several times).

The problem is intermittency of supply. The only way its possible to claim that wind or solar is cost competitive is to somehow omit a lot of the costs. In the case of LCOE, the method is to pretend that intermittency, transmission and constraint payments are commercially immaterial.

If you did accounts for a listed company in this way, you’d be in for false accounting.

In this piece Mr Schneider is showing the same phenomenon but from another standpoint by showing what the implications are of having those real costs, which are ignored in the LCOE parameter, met by the buyer.

In LCOE its assumed that the only thing that matters is the total electricity generated over the life of the installation. When its delivered is immaterial.

Normally when doing LCOE estimates the customer is an electricity provider. Obviously they have to deliver consistent supply to meet demand.

However intermittency leads to frequent outages, and these make the product unusable by the buyer. The only way to make the product usable is to have complete backup to make the supply reliable and consistent. The costs of this backup, which would usually have to be backup gas, which the customer as network operator supplies, are invariably omitted from the LCOE calculations.

Then there are constraint payments, which is when the system delivers more power than the buyer can use in the network. The supplier is then paid to turn off generation. If you like, he is paid for what he was threatening to deliver!

In Mr Schneider’s post you see both of these costs appearing in a slightly different form because the costs are being born in this case by an end user.

The outage or short supply cost appears because the customer is supposed to make up the shortfall by buying on the spot market. The constraint cost appears in the obligation to buy whatever is generated, whether you can use it or not.

This piece is really showing that wind doesn’t deliver a viable product. The only way you can pretend that it is viable is to omit a big chunk of the costs, those involved in making the supply usable by either an end user or a utility company. You can do this in the abstract by using LCOE as the parameter of comparison with conventional. Or you can do it in supply agreements by passing on to the buyer all the costs of making the product usable.

What is going on here is basically accounting fraud. There are all kinds of ways of hiding the real costs of intermittency, but the fact is, leave them out and you have an unusable product. Put them in and you have a product that is not cost competitive.

Mr Schneider’s case history makes this perfectly clear. We need more such documented cases. His final position to the supplier was brilliant but perhaps not of universal use.

The other tactic is to demand that the supply meet the same reliability and consistency as conventional. That is the position we should all demand our governments and electricity suppliers take with renewables suppliers. Its a simpler way to go, and it puts the onus on the generator by making the simple demand, impossible to object to, that they deliver a usable product. Which, of course, they cannot do with either wind or solar.

wilbur
Reply to  michel
November 15, 2022 7:08 am

LCOE????. please don’t make assumptions.

Tom Abbott
Reply to  wilbur
November 16, 2022 4:05 am

I typed “LCOE” into the search engine and got this:

Levelized cost of electricity (LCOE) refers to the estimated revenue required to build and operate a generator over a specified cost recovery period.

michel
Reply to  wilbur
November 16, 2022 10:30 am

Worth a careful explanation.

LCOE is an acronym for Levelized Cost of Electricity [or Energy]. Its dollars per unit of power delivered.

To calculate it, you first estimate how much power will be delivered by a system over its entire life. This will be in megawatt or gigawatt hours.

Next, you write a list of all the cash flows required for building and running the system, by year. These will be in currency, lets say dollars.

Now you have to calculate the Net Present Value (NPV) of those cash flows. Some of the expenses are incurred in year 1, others through the life of the installation. Repairs, maintenance etc. Depending on when they occur, you need to know not what their face value is in dollars of today, but how much a given outlay in year x is worth today.

If you have a spreadsheet package, LibreOffice is fine, you’ll find an NPV function built in. Play with it. For a proper explanation of NPV read Brealey and Myers.

You now know two things: how much power the system will produce over its life, and the total cost of that system expressed as the value of all of the money expended on it, adjusted for the time value of money, for the fact that $100 payable in year 10 is worth less now than the same $100 payable tomorrow.

Now comes the interesting part. You get to the LCOE parameter by simply dividing the NPV of the cash flows by the amount of power generated over system life. The result is a cost per megawatt hour, gigawatt hour, whatever you are using to make your index.

This procedure raises two questions. The first is, have you included all the costs in the cash flows? Usually the answer is no. There is usually no provision for backup, constraint payments, or transmission costs.

The second question is about the nature of the power parameter. The assumption is that it doesn’t matter when its delivered. If you deliver 100 units every day for the whole year, as conventional plants do, this output is just all added up over the life of the plant and then used to calculate the conventional plant’s LCOE. If its wind and you deliver it with several weeks of nothing, interspersed with several weeks of 200 units, and with the daily amount varying between 10 and 200 units, as long as it all adds up to the same total as the conventional plant, you just add it up and divide and get a cost per unit of power.

In this case you would claim that the conventional and the wind plants were equal in cost. Because they had equal LCOE numbers.

In fact, people commonly claim that wind and solar are now cheaper on an LCOE basis, because the total amount of power produced divided into the cost of producing it over system life can be lower than for a conventional plant. Never mind that a huge amount of this power will be unusable, or only usable with expensive additional costs for backup and supplementation when the wind dies. Or that it will cost to stop it being supplied when the grid can’t take it.

The essence of LCOE comparisons are that you assume that it doesn’t matter how intermittently the power is delivered. The only thing that matters is the total delivered over the installation life.

Now this is obviously hare-brained. Because the end users cannot do with power fluctuating wildly on a daily, weekly and monthly basis. Using the LCOE methodology however assumes they can, and that intermittency imposes no additional system costs. So all of the costs of turning the intermittent and unreliable and unpredictable supply into a usable constant predictable one are simply omitted.

In the past I have compared wind and conventional to lettuce suppliers. Wind suppliers say they will make the lettuces available at their field gates, and they will deliver what they want when they want. Some days it will be a week’s worth, other days it will be none. And when they deliver so much there is no place to put it, well, you will pay them anyway.

The other supplier says he’ll deliver by truck to stores a constant amount of lettuce week in week out, day in day out, and match your customer demand.

The eco activist says, but the cost per lettuce is lower for the first supplier, so we should buy from him.

In business if you claimed LCOE was a valid method of costing a product you’d get fired, and if you were in Finance, you might go to jail for false accounting.

Sommer
Reply to  michel
November 15, 2022 4:18 pm

” We need more such documented cases.” I fully agree.
In Ontario, no cost/benefit analysis was done before 20 year contracts were signed.

Tom Abbott
Reply to  michel
November 16, 2022 4:03 am

“The other tactic is to demand that the supply meet the same reliability and consistency as conventional. That is the position we should all demand our governments and electricity suppliers take with renewables suppliers.”

Agree.

Excellent comments, michel.

BLS1965
Reply to  michel
November 19, 2022 11:50 am

Where wind farm operators are required to meet minimum capacity/operating requirements, they fold like cheap suits. Ditto for solar collector or solar PV.

Jeroen B.
November 14, 2022 11:52 pm

This one is going in my bookmarks for reference

Nick Graves
November 14, 2022 11:58 pm

That was a really fascinating read.

I love the ‘escape plan!’.

Joy
November 15, 2022 1:54 am

This is an extremely useful article and thank you very much for posting

cognog2
November 15, 2022 2:26 am

An Excellent Article Bill; Many thanks; for it gives good insight into the way finance and accountancy operates these days which is very disturbing indeed.

From an engineer’s perspective, however, one must really ask why the Thermodynamic Laws were not first consulted before launching into this expensive analysis of who eventually winds up with the Costs and who takes the profits..

These Laws are quite clear: Low intensity energy sources are a dead duck if you are looking for a positive USEFUL ENERGY Outcome and Wind, due to its intermittency etc. is a Low Intensity source.

BLS1965
Reply to  cognog2
November 19, 2022 6:26 am

Remember the whole point of this exercise from the developer’s view was to take advantage of my company’s political exposure. The exercise therefore had to be carefully reviewed due to this exposure. Otherwise it would have been a simple matter to look at proposed costs and security of supply issues, laugh, and walk away…

Mikehig
November 15, 2022 3:19 am

Thanks for an excellent article. If only such commercial awareness could be deployed by governments in managing the terms of renewables projects.
The comment about the scheme needing 7 years to break even is illuminating. It explains why the strike prices for wind projects in the UK are 100% escalatable (under CfDs) although the capital costs are fixed and the on-going costs of maintenance, etc are relatively minor.

BLS1965
Reply to  Mikehig
November 19, 2022 6:28 am

The seven years’ thing was based on NZ tax law and how renewables were treated under that law at the time (2008). Also recall that the scheme would not actually be profitable until the end of the PPA term (end of year 15). Without having favorable tax treatment, the scheme was a dead man walking, as it were.

rovingbroker
November 15, 2022 3:39 am

There are many other reasons why so-called “renewable power” – that is, intermittent power schemes where the “fuel” is purported to be “free” and “clean” but cannot be stored or controlled by humans – are unreliable and utterly wasteful as capital investment programs …

And then there’s FTX.

Except that FTX is a total loss while many “investments” in “renewable power” will likely be backstopped by taxpayers.

Hold on to your wallet.

It doesnot add up
November 15, 2022 4:20 am

Very well written up. Every time I see another study reported that claims it shows how a low cost renewanles dominated system can supposedly be achieved I know it has failed to capture the consequences of intermittency and inter seasonal andinter annual variability. Your tale is an excellent illustration of the realities.

TRex
November 15, 2022 4:21 am

Thank you for your amazing and very thorough report. I love how you brilliantly dealt with the political pressures and “out foxed” the greens mafia. I hope you got a large and well deserved bonus that year.
As an aside, I currently live in the Boston area and have been getting mailings requesting my signature on a document requiring that a substantial fraction of our electricity be generated from “renewable” sources. These went straight into our paper recycling bin, but kept showing up in our mail box for more than 6 months…

paulmilenkovic
Reply to  TRex
November 15, 2022 5:51 am

In Mario Puzo’s novel, Don Corleone’s goal was on how to say no to Sollozzo’s scheme, ill-begotten and ill-advised even for a criminal enterprise, without saying “no.” Most of the novel was on how difficult this was.

David Dibbell
November 15, 2022 4:30 am

Terrific post! I live in the state of New York, and the legislated push for “climate” action in the form of massive overbuilding of wind, solar, and battery storage projects is headed for a stunning wreck. The author avoided that wreck in his case. The only effective way for the millions of rate-payers in NY to push back is through voting out the politicians who so unwisely passed the law and issued the regulations. We came close to replacing the governor. Didn’t quite get it done. Our state will likely have to learn the hard way.

wilbur
Reply to  David Dibbell
November 15, 2022 7:18 am

I’m in NM and see the same going on here. We have massive amounts of natural gas in both the Permian basin and in the San Juan basin. We are energy rich but our ignorant politicians here are setting us up for failure and our utilities companies here are going along with the plan. They just shut down our biggest power plant and are replacing it with fairy dust and unicorn farts. I’ve seen enough. We are moving to a Red state in the Heartland of the country.

Tom Abbott
Reply to  David Dibbell
November 16, 2022 4:13 am

“Our state will likely have to learn the hard way.”

Yes, that’s the way it looks. Not enough common-sense voters in New York yet. An energy crisis might generate more common-sense voters in the future.

The Democrats are bound and determined to produce an energy crisis in the United States. The Northeast and California are farthest down this path and will be the first to suffer the consequences.

cuddywhiffer
November 15, 2022 5:40 am

Thanks for a very informative summary

Paul Chernoch
November 15, 2022 6:57 am

Wonderful case study. Most informative. Now to see if I have the courage to share your findings with my colleagues on our offshore wind team…

wilbur
November 15, 2022 7:03 am

The LAWS of thermodynamics do not bend or twist easily. You may be able to twist them slightly for a time but rest assured they will right themselves. In time the bureaucrats, simpletons, and the ignorant will realize this, but I’m afraid after much pain and tragedy. A reckoning is coming and I take no joy in this, as many innocents will be the victims of such shallow thinking.
Thank you Bill Schneider for taking the time to do the research and to publish your conclusions.

BobM
November 15, 2022 7:20 am

Great article.

This always comes to mind:

“For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’s the only reason to build them. They don’t make sense without the tax credit.” –Warren Buffet cited by U.S. News/Nancy Pfotenhauer

John the Econ
November 15, 2022 7:21 am

That was a very one-sided contract, where the buyer assumed almost all the risk. That alone should have been reason enough to reject it. In sane times, anyway.

ResourceGuy
November 15, 2022 8:54 am

Heads I win and tails you lose. Oh, and I have advocacy groups, politicos, and potentially ESG-biased finance interlopers on my side. Any questions?

Larry Sprague
November 15, 2022 8:56 am

Why Renewables Must Add to the Total Cost of Electricity

  No matter how cheap (almost) the cost of the generation of electricity by the renewables wind and solar will result in an increase in our electrical costs. The reason is because wind and solar power generation are unreliable and must be backed up 100 percent by an on-demand system. The cost of the on-demand power generation and transmission lines must be paid for regardless of the amount of renewable power used. If a power company needs $100 million to pay for the fixed costs of the generation facilities and transmission lines, it needs $100 million in revenue regardless of the percentage of power generated by renewables. If renewables generate 30 percent of the power, rates for the electricity provided by the on-demand power generation must go up, because the fixed costs of $100 million must be paid for. Renewables can only add to the capital costs (and expense) of generating electricity because the renewables add nothing to the on-demand supply of power and thus their capital costs are an added burden on the cost structure. While wind and solar may be “free”, the capital costs (and maintenance costs) are not and the fixed costs of the on-demand system must also be fully covered.  
  
The only way that the renewables could make economic sense is if they produce both enough electricity and produce it so cheaply that they can pay for their own capital costs plus the capital cost of the on-demand plants. Thus if renewables generate 30% of the power, their revenue must cover 30% of the fixed costs of the on-demand generation as well as 100% their own capital costs. Otherwise, electrical costs must go up.

  This is not just theoretical. We have a real world example in Germany which has gone in a big way in the use of wind and solar to power their grid. Prices have not declined with the increased use of renewables and in fact are approximately three times what they are in the United States (13 cents/KWh (cheapest US) vs. 44 cents per KWh (Germany)). This resultant higher price level is based on the inherent economics of wind and solar power. Germany’s higher costs are not due to them not “doing it right” and in fact are due to the inherent unreliability of solar and wind and thus the requirement for 100% backup.

  In very broad terms, the three components of delivering electricity to a customer – power plant, fuel and transmission – each costs approximately a third of the total cost. This means that, broadly speaking, two-thirds of the costs of providing power are fixed and must be paid for whether or not the power plant is used. If a homeowner has solar panels on his roof and is able to generate all of the power he needs during the day, the full capital costs of the on demand generating plant and transmission lines must still be paid for. One might argue that the electricity generated by the solar panel allowed the power company to avoid the fuel costs, but that is not helpful because unless the power company generates and sells electricity it is unable to generate the revenue to pay for the fixed costs. In addition, the power company must charge more per unit for the power it does sell because it must cover the fixed costs of plant and transmission lines with lower unit sales. Unless the homeowner is completely “off the grid” and is never part of the power company’s demand load, solar power only adds to the total cost structure, and hence adds to the total cost of the electrical power system. The homeowner may pay less, but the system’s costs are higher. 

ResourceGuy
November 15, 2022 9:00 am

The failing of the wind project group was in not hiring Obama and Eric Holder to force through the deal.

BLS1965
Reply to  ResourceGuy
November 19, 2022 11:39 am

Short of someone showing up from Wellington and demanding that the mill agree to the PPA, we were able to escape the deal. But had Wellington thrown tax $$$ around, I have no doubt that leadership at the asset would have signed.

beng135
November 15, 2022 9:02 am

Thanks, an interesting post of stepping thru a regulatory/economic/engineering minefield.

It doesnot add up
November 15, 2022 11:00 am

Reality bites again

https://www.reuters.com/business/energy/shell-chinese-partner-drop-off-shore-wind-farm-project-france-2022-11-15/

Despite sky high electricity prices this project is suddenly not economic. Obviously even Chinese made turbines cost a bit…

November 15, 2022 3:34 pm

Nice to see no sign of windmills today on Google earth around Taharoa.
Distantly related story. After a merger, our resources company acquired a site that was levelled after years of recycle of car batteries. The EPA said we had to pay to remove the lead that was left behind, that we could not allow a housing development to continue. What to do with the site? One of our corporate solicitors said “Make it available as a cemetary, allowing lead-lined coffins.”
Lateral thinking is lovely when it works well.
Geoff S

BLS1965
Reply to  Geoff Sherrington
November 19, 2022 11:37 am

Well played 🙂

Taharoa Block C Wind Project never launched, nor was there a single spade of dirt turned on the site to construct a wind turbine. The last notice I saw online showed that their license to develop the site expired back in 2016. May it stay dead.

Michael S. Kelly
November 15, 2022 10:37 pm

Great presentation, and very valuable. Kudos.

BLS1965
November 19, 2022 6:22 am

Thanks everyone for the kind remarks.

Appreciate the article being picked up by WUWT 🙂

-Bill Schneider

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