CapX August 10, 2017 Scotland

By John Constable and Matt Ridley
(Dr John Constable is Director of the Renewable Energy Foundation. Matt Ridley is a journalist and author)

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 neighbours, 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 doesn’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 in to 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.

The result is that there is a perverse incentive to locate wind farms in Scotland, even though they aren’t welcome and the grid can’t take their output. In fact, some wind farms that are already being “constrained off” on a regular basis are considering major extensions to their capacity.

Take Fallago Rig in the Borders. This 48-turbine wind farm, with a capacity of 144 MW, was built in the teeth of fierce local resistance in 2013. Since then, it has received £21,713,858 in payments to stop generating, at an average price of £82/MWh – roughly double the lost income. That lost generation, about 264,954 MWh, is equivalent to 16 per cent of its output during that period.

In spite of this, its owners EdF, the economic wizards behind Hinkley Point C, are proposing to add a further 12 turbines, each over 126.5m in height. Is this about saving the planet? Or because the farm’s owners know they are on to a very good thing and are determined to make out like bandits?

Yet remarkably, this isn’t the end of the counter-economic insanity. When a Scottish wind farm is stopped from generating because of a bottleneck in the system, it throws the whole British market out of balance: supply no longer matches demand. A generator that was contracted-in to the market has been told to stop. That means that the market on the other side of the bottleneck is now short. National Grid, which is responsible for fixing these problems, has to buy last-minute supplies to make up for it. And that is very expensive indeed.

It’s quite difficult to determine which payments to these emergency generators – who are said to be “constrained on” to the system – are caused by Scotland’s capacity and export problems, and which by power station failures or errors in demand forecasts (among other factors). But either way, it’s big money.

And in a supreme irony, it is more than likely that the same large companies getting constraint payments on one side of the bottleneck (because the Scottish grid can’t cope) also get paid to start up their gas turbines in England to make up for the shortfall. Laugh? It’s enough to make a grown bill-payer cry.

The remedies are obvious. First, existing wind farms should not be allowed to demand compensation in excess of income lost. Second, we should carefully weigh up the costs and benefits of building new grid and reinforcing existing lines. It may well be much cheaper to shut wind farms down and compensate their owners, at the correct rate of course, rather than build another subsea interconnector on the east coast – or reinforce the landlines over the border to the main centres of load.

Third, and most importantly, the Government in Westminster should put its foot down, in the interests of us all, and stop Holyrood consenting new wind farms and extensions in Scotland. Or at least ensure that if MSPs want to play fast and loose with consumer bills, those should be Scottish bills. That might focus minds.