No Ambrose, curtailed power is not free

Ambrose Evans-Pritchard, writing in the Telegraph, has been looking at what the future grid might do to stay afloat when the wind isn’t blowing. This is certainly an important question, and one that you might have hoped would no longer be the subject of speculation now that we are twenty years into the renewables ‘revolution’. Unfortunately, the Green lobby has conned the country into ploughing on before finding the answers, but I suppose we should be relieved that the issues are finally getting an airing.

AEP's first suggestion is to use Allam-cycle gas turbines, and this is only a partially daft idea. Allam cycle looks a promising technology, and is said to be able to deliver power for about the same cost as unabated CCGTs, although presumably the storage bit is extra. You can believe the hype or not, as you prefer. Either way, it looks likely it is going to be lower cost than renewables, and without causing the same problems for the system as a whole. That being the case, it’s hard to see why you wouldn't just dump all the windfarms and use Allam cycle on its own.

AEP's other suggestion is, of course, hydrogen, and here he betrays the lack of economic understanding that is so prevalent in the media. Here’s what he says:

The second default option is to use free electricity from excess renewable power that would otherwise have to be curtailed – at night, at weekends, etc – to produce green hydrogen via electrolysis.

If I had a penny for every time some wild-eyed hack in Fleet Street punted the idea of “free” curtailed electricity I would long since have retired to the sun. Let me explain why this is so wrong.

Imagine a windfarm (let’s call her “Anna”), which each year produces 2 million megawatt hours of electricity per year at a cost of £100 each. That’s a total cost of £200 million, representing part of Anna’s build cost and all of her operating costs for the year. Note the word “cost”: it’s what has been paid out to produce the energy, as distinct from the “price”, which is what someone is willing to hand over to get their hands on it.

Then imagine that the following year another windfarm (“Betty”) comes on stream in the vicinity, and that at times throughout the year, there is not enough transmission capacity to get both windfarms’ output to market. Let’s say 10% of Anna’s output has to be curtailed. Her unit cost therefore goes up (to £200m/180m = £111/MWh).

In year 3, someone sees an opportunity and builds a hydrogen plant (“Horace”) next door to Anna. They will take the curtailed power off her hands for nothing (in reality, for a low price, but let’s not quibble). Anna’s output is therefore back up to 2 million MWh, and her unit costs back down to £100. But the 200,000 MWh of electricity that pass from Anna to Horace have still cost £100 each to make! The price may be low, but the cost is still high! Selling this power for nothing to Horace therefore creates a big loss in Anna’s books, which cancels out the “profit” that Horace has effectively made by getting hold of electricity worth £100 for free.

Another way to think about the transaction is to consider the picture if Anna’s owners had built their own hydrogen plant and administered it as part of the same operating company as the windfarm. Feeding power from the windfarm to the hydrogen plant would then just be a change of location. No profit, illusory or otherwise, would be seen. In AEP's model of the world, creating the hydrogen plant as a separate entity magically creates "free" electricity. It's daft!

So in system terms, the “free electricity” is an illusion. It’s only free to the hydrogen plant because a loss has been sustained elsewhere.

Fortunately for Anna, things are pretty comfortable whatever happens. Firstly, if she is curtailed, she gets a constraint payment from the grid for her trouble, and can then get that topped up to her CfD strike price. Both these sums are ultimate funded by consumers. And if she can unconstrain herself, by building a direct wire between her and Horace (in other words, if she doesn’t have to deliver power via the transmission grid), she can get the constraint payment, the strike price top up and whatever Horace is willing to pay her for the power. Quids in!

This is the antithesis of "free".