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Blowin’ in the wind

The much-touted British Energy Security Strategy, announced last week, was what one would expect from a government that prioritises appearance over substance. In the pick’n’mix there was something for everyone across the spectrum of climate-change belief. According to prime minister Boris Johnson, Britain will soon be producing “vastly more hydrogen”, “embracing the safe, clean and affordable new generation of nuclear reactors”, giving a “new lease of life” to the UK’s North Sea oil and gas fields and “taking advantage of Britain’s inexhaustible resources of wind and – yes – sunshine”.

Arguably most interesting is this inexhaustible supply of wind, partly because it really is inexhaustible; more so because – as the chart shows – wind has had the biggest impact on the UK of all the renewable power sources. Roughly speaking, in the 22 years covered by the chart, 75 per cent of the decline in electricity generated by coal-fired plant has been made good by wind power. Add in the small but significant increase in electricity generated from “bioenergy” – most of which is Yorkshire’s Drax power station burning wood rather than coal – and all of the 95 per cent drop in coal-fired generation is accounted for.

This has saved an awful lot of CO2 emissions, but at a price. To explain, let’s briefly turn to Germany’s energiewende and precis a few paragraphs from How the World really Works, a new book from the super-prolific Canadian academic, Vaclav Smil, whose focus is energy and the environment.

Germany’s early and enthusiastic embrace of renewables makes it a good case study. In the 20 years to 2020, it raised its wind and solar capacity 10-fold, so that the share of electricity coming from renewables rose from 11 per cent to 40 per cent. Yet wind and sunshine are unreliable power sources so, as their share of generation rose, the need for Germany to keep a reserve of instant power became more onerous. In consequence, in 2019 Germany needed to generate less than 5 per cent more electricity than in 2000 but, to achieve that, it needed 73 per cent more generating capacity; all the increase presumably coming from renewable sources. Simultaneously, it had to keep 90 per cent of its fossil-fuel capacity ready to run, and at enormous cost to consumers and generating companies alike.

The UK is taking a similar path. The country has about 76GW (gigawatts) of generating capacity but, if the wish list of the government’s energy strategy is fulfilled, 50GW in offshore wind capacity alone will be built by 2030. Add in already-installed wind plant – both onshore and offshore – and the UK’s wind-power capacity alone will be much greater than 76GW.

Even that may not be enough. Sceptics would point out that masses of spare capacity would be needed, such is the inefficiency of wind power. According to Gordon Hughes, an energy economist at Edinburgh University, onshore wind plants in the UK operate at just 27 per cent of their capacity, on average, during years of normal wind speeds. Put simply, on average that would require 4GW of capacity to be sure of 1 GW hour of power. Offshore plant did better with a so-called load factor of 41 per cent in 2019. But even that falls well short of the 50 per cent load factor typically produced by gas-fired plant when permitted to run most of the time, or the 80 per cent factor of nuclear-power stations.

Compounding the unpredictability of the wind is the limitations of the kit. That means wind-farm operating costs tend to be higher than expected and to increase with the age of the plant. Onshore wind farms are usually meant to have a physical life of 25 to 30 years. In practice, says Hughes, most are decommissioned before 25 years and many don’t make it to 20 years. For offshore farms, operating in tougher environments means higher costs both for construction and wear and tear. That makes it harder for them to make an economic pay-back despite their superior load factors.

Still, there are always government subsidies, paid for by electricity consumers. For critics of the net-zero agenda, renewables’ generators are addicted to their subsidies, a habit they will never kick. The truth may be more nuanced, especially for wind power.

Sure, most of the earlier wind farms benefited from the UK’s renewables obligation scheme, which was basically a state-guaranteed hand-out to generators. Many wind farms are still subsidised via this mechanism. Increasingly, however, government levies on consumers are used in a contracts for difference (CfD) scheme run by the government-owned Low Carbon Contracts Company (LCCC).

Like any CfD scheme, this one rewards one party if prices are below a pre-set level and penalises the other. If prices come in above that level – it’s called the strike price – the roles of winner and loser are reversed. As that applies to the government scheme, wind-power generators both set the strike price (it is the auction price at which they are willing to supply electricity to the system) and are guaranteed to receive it. So if market prices for wholesale electricity fall below the strike level, their counterparty, the LCCC, makes good the deficit; ultimately, though, the tab is picked up by consumers via green taxes.

Interestingly, however, recent super-high prices for electricity have meant market prices have been higher than strike prices. As a result, the usual pattern has been reversed and since October wind-farm operators have been paying into the scheme at a rate that works out at approaching £500m a year. In the larger picture, this isn’t a huge amount. It would mean an annual saving of £6.46 for the average household, says Alex Luke, an analyst at Onward, a think tank. Yet it is, if you like, a vote of confidence for wind power expressed in the currency that arguably matters the most – money.

This helps underpin the idea that a wind-power operator might be an acceptable addition to the Bearbull Income Fund. As the table shows, the fund is overloaded with cash following the takeover of Air Partner – probably enough for two new holdings.

One likely candidate is Greencoat UK Wind (UKW), a £4.0bn fund of 43 UK wind farms, two-thirds of which are onshore. At 155p, its shares trade at 16 per cent above end 2021’s net asset value, which is fairly typical of the company’s nine-year price history. Despite that, they offer a 4.6 per cent yield based on 2021’s payout, although the aim is to raise dividends in line with RPI inflation. Like it or loathe it, wind power won’t be going away and, via Greencoat, it  may provide a useful low-volatility addition to the income fund.