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On the occasion of publication of its annual results, PGE has announced that by mid-twenties it wants to have 1000 MW offshore wind capacity in the Baltic Sea. The announcement was criticised by a recognised expert and commentator from BiznesAlert.pl, Professor Władysław Mielczarski of the Łódź University of Technology. The issue was commented by Monika Morawiecka, PGE’s Head of Strategy.
Professor Mielczarski argues that wind energy is the most expensive type of generating capacity. He refers to the article in the Financial Times – “Offshore wind strike prices. Behind the headlines”. He argues that offshore wind energy is more than three times more expensive than wholesale prices.
BiznesAlert.pl: Professor Mielczarski has totally hammered your offshore strategy.
Monika Morawiecka: Yes, indeed, but I would not be worried too much, professor has this style of approaching all announcements and statements very critically, which is of course perfectly justified from the point of view of the scientific method – we have to relentlessly validate the correctness of our reasoning.
But moving on to specific objections …
Well, one by one then. Firstly, it is worth noting that the Financial Times article referred to is not actually… a Financial Times article, but a letter to the editor. For you as a journalist, this is surely a noticeable difference. And moving on to specifics of this letter and the report its author refers to – being also the author of this report (how convenient it is to be able to refer to one’s own report!). Well… in principle I agree with it. It is true that when looking at the global statistics (e.g. by the International Renewable Energy Agency – IRENA – Renewable Power Generation Cost in 2017 Report) concerning the cost of construction of offshore wind farms per megawatt of installed capacity, one may not clearly conclude that this cost is dropping. However, the cost of constructing a wind farm is not the same as the cost of energy it produces.
How come? In such sources there are practically no other costs besides the construction cost.
There is no cost of fuel …
The cost of producing wind energy has two main components – the construction cost and the capacity factor. And capacity factor, in simpler words, is how much energy we can obtain from one megawatt of installed capacity. This factor is expressed as a percentage and is easy to explain: it tells for what part of a year the wind farm operates at full load. Thus, knowing the capacity factor and the installed capacity we may calculate the output.
And what does this mean?
Only after analysing the capcity factor of a specific wind farm we can get the true information about the cost of the energy produced. Let’s take an example. Two identical 100 MW offshore wind farms with identical construction costs, but one has capacity factor of 20%, and the other of 40%. Electricity from which one will be cheaper and by how much?
And now let’s also consider what does this capcity factor depend on, and we will get the full picture. In simple terms it depends on two elements: the wind force (speed) and the surface area of the circle made by the rotor blades. And now we are getting down to the essence, meaning the response to the question of whether we are really observing technological progress allowing reduction of costs of the energy generated in wind farms.
Higher towers, bigger turbines?
The offshore wind farms erected in recent years had on average 4 MW generator capacity, average height of 180-200 metres and rotor diameters of c.a. 130-160 metres. It’s simple – the higher, the stronger are the winds, the bigger the rotor blades, the more of this wind they will “capture”.
According to WindEurope, in 2017 the average generator capacity in new offshore wind farms was already at around 6 MW, whereas projects are under preparation with 8, 10, or even 12 MW generators (GE has recently announced that as of 2021 they will be offering turbines with such generators) and maximum height of 250 – 300 metres and rotor diameter exceeding 200 metres.
The global database of IRENA indicates that during the last 15 years the new build offshore wind farms moved from around 30 percent capacity factor to even over 40 percent. And further increases are just around the corner.
It is thus worth remembering that this is a multidimensional analysis – the farther into the sea, the higher the construction cost but a higher capacity factor in return – so we cannot focus on just one aspect and draw far reaching conclusions based just on it.
So there is a chance of cheap electricity from offshore turbines in our Baltic Sea?
We do not yet know all of the key parameters of the project we are talking about to make claims with hundred percent certainty. We are currently in the process of measuring the wind parameters and selection of turbines will come in due time.
When analysing the project being developed by the PGE, we are making realistic assumptions, not optimistic assumptions. We do not want to suggest that the price of electricity from Polish offshore wind farms would definitely be as low as in the projects that have won the auctions in the UK, Denmark of Germany in 2017We cannot exclude that some of these bids were based on very optimistic assumptions and were in fact just a purchase of options that maybe will not be exercised in practice. One thing we may say for sure, however: in recent years the decreasing trend in levelised cost of electricity (LCOE) for offshore wind farms is evident.
And in this situation I would risk one statement – that in the world of increasing costs of CO2 emissions from conventional power plants, offshore wind will be an increasingly cost-competitive
energy source.
So let me also ask you about the nuclear power plant. What is PGE’s real position on this matter?
Yes, I think it makes sense to explain our approach to the strategic vision of PGE’s growth. First and foremost it makes sense to note that nuclear energy and offshore wind farms have only one thing in common (besides producing electricity) – they are CO2-free. From this point of view both types of sources are desirable at a time when we are looking to a – quite distant – future when combustion of fossil fuels is to be completely eliminated.
However, looking at a slightly shorter perspective and taking into account current regulatory landscape, offshore wind will respond to a completely different need – the requirement to assure the specific share of renewables in the energy mix. We have a national target for 2020, but we’re also looking at 2030 pan-European target. And we do think Poland will have to contribute to that target.
Thus, offshore wind meets the requirement to grow the share of renewable sources and can meet this need relatively quickly – in my opinion having 3 – 3.5 GW of offshore wind capacity in the Polish part of the Baltic Sea by 2030 is realistic. Offshore wind also responds to the need for CO2 emissions reduction – also by 2030. Here the matter is somewhat more complicated – Poland has no CO2 emissions reduction target in the energy industry as such, but the energy companies have to purchase emissions allowances – and if they do not reduce these emissions, money spent on allowances will be flowing out of Poland, as the number of allowances at the disposal of the Polish government (for sale or free allocation) is limited. So, we are talking about the balance of payments of the country, but also about the electricity prices for consumers – higher CO2 costs incurred by utilities translate into higher electricity prices.
So where does the nuclear energy fit in all this?
Nuclear energy responds to the requirement to, in the longer perspective, completely replace the coal based capacity when making the transition to a carbon neutraleconomy. From this point of view it is a technology with a different application time horizon – both because the investment process takes much longer but also because it will not be needed earlier on to such an extent.
Are the nuclear and offshore wind projects in competition with each other?
Absolutely not! These projects are not competing for a place in the system as they respond to different needs. They also have non simultaneous timeframes, so they are not competing for funding either. We may put it this way – the additional EBITDA from offshore wind farms may also help in financing the nuclear investment.
Interviewer: Wojciech Jakóbik
