benefits of investment in offshore .the macroeconomic benefits of investment in offshore wind

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    CentreforEconomicsandBusinessResearchLtd.Unit1,4BathStreet,LondonEC1V9DX

    t:02073242850f:02073242855w:www.cebr.com

    ThemacroeconomicbenefitsofinvestmentinoffshorewindAscenariobasedassessmentoftheeconomicimpactsontheUKofalternativerealisationsofoffshorewindcapacity

    ReportforMainstreamRenewablePower

    June 2012

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    CentreforEconomicsandBusinessResearchLtd,2012

    Disclaimer

    Whilsteveryefforthasbeenmadetoensuretheaccuracyofthematerialinthisdocument,neitherCentreforEconomicsandBusinessResearchLtdnorthereportsauthorswillbeliableforanylossordamagesincurredthroughtheuseofthereport.

    Authorshipandacknowledgements

    This report has been produced by Cebr, an independent economics and business research consultancyestablished in1992. Thestudywas ledbyOliverHogan,CebrHeadofMircoeconomicswithanalyticalandresearchsupportfromCebrEconomistsOsmanIsmail,ShehanMohamedandColinEdwardsandinsightsfromDouglasMcWilliams, CEO. The views expressed herein are those of the authors only and are based uponindependentresearchbythem.

    This study has been commissioned by Mainstream Renewable Power (Mainstream and has utilised acombinationofdataprovidedorpointedouttousbyMainstreamandthoseavailable inthepublicdomainthroughDECC,ONS,Nomisandarangeofothersources.

    ThereportdoesnotnecessarilyreflecttheviewsofMainstream.

    London,June2012

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    CentreforEconomicsandBusinessResearchLtd,2012

    Contents

    Contents..................................................................................................................................................3

    Foreword:TheValueofWind.................................................................................................................4

    ExecutiveSummary.................................................................................................................................6

    KeyConclusionsoftheReport..............................................................................................................................................6Butevenlargerimpactscanbeexpectedgivencurrenteconomiccircumstances...........................................................7

    1 Introductionandbackground......................................................................................................10

    1.1 Offshorewindincontext....................................................................................................................................101.2 Governmentpolicyonoffshorewind.................................................................................................................111.3 Purposeandstructureofthisreport..................................................................................................................11

    2 Methodologyandassumptions....................................................................................................13

    2.1 Developmentoftheoffshorewindcapacityscenarios.......................................................................................132.2 Embeddingoffshorewindinvestmentswithinaneconomicimpactsframework..............................................252.3 Inputoutputmodellingandalternativemultiplierconcepts.............................................................................31

    3 UKoffshorewind:size,economiccontributionandimpacts......................................................35

    3.1 ContributionofoffshorewindtoUKGDP..........................................................................................................353.2 ContributionofoffshorewindtoUKemployment.............................................................................................393.3 ContributiontoUKbalanceoftradeandimpactsonotherindustries...............................................................413.4 Effectsonmultipliersinelectricityandfossilfuelsectors..................................................................................41

    4 Conclusionsandnextsteps..........................................................................................................44

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    CentreforEconomicsandBusinessResearchLtd,2012

    Foreword:TheValueofWind

    EddieOConnorFounderandChiefExecutive,MainstreamRenewablePower

    Ihavebeendevelopingandbuildingwindandsolarplantinmarketsaroundtheworldsince1997.In2008togetherwithagroupofuniquelyexperiencedandtalentedcolleagues,IfoundedMainstream.

    Mainstream isnow theUKs leading independentoffshorewindcompany,withover5000MW indevelopment. Inmost,butnotall,of theothermarkets inwhichweoperate,governmentor theregulator has offered a revenue or capital support scheme to incentivise renewable energydevelopment.Criticsofrenewableenergyhavearguedthattheprovisionofsuchschemesprovethatwindandsolarenergyareuneconomic,inefficientandcostly.WhatIknow,frominsightsgainedover the last 15 years, and from evidence gathered from globalmarkets, is that the benefits toelectricityconsumersortaxpayersdeliveredbywindandsolarenergyoutweighthecosts.

    AtMainstream,werefertothesebenefitsastheValueofWind.PartofourmissionasacompanyistoensurethattheValueofWindcanbemorereadilyunderstood,andusedtohelpshiftpolicydiscussion from the costs to the benefits of renewable energy. This report from Cebr, and itscompanionpaperfromDrMarkCooper,tobepublishedlaterthisyear,continuesthatmission.Theyclearlyillustratethevalueoftheinvestmentin,andsupportfor,offshorewindtotheUKeconomy.

    Iwant tohighlightoneaspectof thevalueof this investment theprice loweringeffectofwindenergy.Operators of electricity systems are familiarwith MeritOrder operation, the standardmethodofallutilitiestosatisfyconsumerdemandbyutilisingplantwiththelowestmarginalcostofgeneration.Windandsolarplantwithzerofuelcostarezeromarginalcostplantandsitatthetop of themerit order. Themost efficient thermal plant is next to be brought on line, and ascustomerdemand increases towardspeak the leastefficient,andmostexpensive fossilplantgetsused. TheMeritOrdereffect is the termused todescribe thedisplacementofmoreexpensivemarginalcostthermalplantbywindorsolarwhichhaszeromarginalcost.1

    In February 2011, the Irish grid operator Eirgrid and the Sustainable EnergyAuthority of Irelandpublishedajointstudydemonstratingthepriceloweringeffectsofwind.2IrelandhasroughlytwicetheinstalledamountofwindplantonitselectricitysystemastheUK,despitehavingapeakdemandofaroundone tenthof theUKs.Like theUK, Ireland relies largelyon importedgas foradditionalgeneration.

    EirgridshowedthatthegenerationofelectricitybywindplantontheIrishsystem in2011 loweredtotalwholesalecostsby74m.Notonlywasthismorethanenoughtooffsetthecostofthesupportschemeforwind(50m)butitwasalsosufficienttooffsettheadditionalconstraintcostsassociatedwith increasedwindon the system,deliveringanoverallnetbenefit to the Irish consumer. In adirect rebuttal of critics ofwind energy, the study concluded thatwindwas not contributing tohigherwholesaleelectricitypricesinIreland.

    TheBritishelectricitymarketisopaque.ItisverydifficulttoobservetheMeritOrdereffectwhentheutilities,which dominate themarket,mainly supply to themselves, and savings due to increased

    1 Krohn, S., P. Morthorst and S. Awerbuch (2009), The Economics of Wind Energy, European Wind Energy Association. 2 Clifford, E. (EirGrid) and M. Clancy (SEAI) (2011), Impact of Wind Generation on Wholesale Electricity Costs in 2011, Sustainable Energy Authority of Ireland and Eirgrid. See also Cleantech Ireland: An assessment of the sector and the impact on the national economy, Ernst & Young and Oxford Economics, 2012.

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    CentreforEconomicsandBusinessResearchLtd,2012

    renewablespenetrationareinternalised.However,thecurrentmarketreformsproposedbytheUKGovernmentandbyOfgemshouldhelptoincreasetransparency,thusenablinggreaterclarityofthepositivepriceimpactofrenewables,tomoreeffectivelycounterthemonotonousandwrongheadedcriticismofopponentsofrenewables,thattheyincreasethecostofelectricityforconsumers.

    Intheabsenceofthisclarity,wehavecommissionedCebrandMarkCoopertolookatoneemergingpart of theUKs electricity sector to illustrate its present and future contribution to theUKeconomy.Offshorewindhas thepotential to transformelectricitygenerationbydelivering inadecarbonisedpowersectoraverylargeamountofcarbonandfuelfreepowertoconsumers,andbyenablingtheUKtocapturesignificantadditionalvaluefromthewiderindustrialbenefitsthatthesectorwilldeliver. In2010theOffshoreValuationGrouppublishedthefirsteverstudyoftheUKsoffshore renewable energy resource. It showed that by 2050 theUK could be a net exporter ofenergy,generatingtheelectricityequivalentof1bnbarrelsofoilayearfromitsoffshoreresources.

    WehavesetouttobuildontheworkoftheOffshoreValuationInitiativeinthisproject.TheValueofOffshoreWindtotheUKistrulysignificant.CebrshowsthattheneteconomicbenefittoUKplcfrom investment in offshore wind, both in terms of contribution to GDP, and to the countrysbalanceof trade isconsiderable.MarkCooperwillshowthat, inadditiontotheseeffects, theriskreduction to theUK electricity systemprovidedbyoffshorewindwilldeliver further savings andwidereconomicandpolicybenefits.

    Withaproper interconnectedelectricitynetwork linking theUK toneighbouringmarkets,we canexportrenewableenergy intoasingleEuropeanelectricitymarket,furtheraddingtotheeconomicbenefits. In late May, it was reported that Germanys powertransmission companies haveannouncedplans tobuild fourelectricityAutobahns to linkwind farmsoff thenorthcoastwithmanufacturingcentresinthesouth.3BuildingaNorthSeagridtoconnecttotheseAutobahnsandlinkUKandGermanoffshorewind farmswith load centreshereand inGermanywouldgive thiscountrysignificant tradingopportunities,delivermuchneeded infrastructureprojects,and furthertransformthelowcarboneconomiesofbothcountries.

    Wehaveembarkedonaonceoff transition from fossil fue