Deep Pockets Needed for Alternative Energy

Developing offshore windfarms and solar photovoltaic (PV) power stations needs strong nerves, plenty of confidence - and deep pockets. This opinion is shared by analysts at the European Bank for Reconstruction and Development (EBRD), which is a major financing source for ambitious but costly large-scale windfarm and solar PV projects in Europe.

As the EBRD's analysts and other observers and consultants say, the high capital costs of these projects is joined by many technical challenges, making future financing and continued fast expansion of these alternate energy sources difficult and uncertain.

According to the European Wind Energy Association (EWEA), however, investment in ocean-based windmills may increase 30 percent this year to about $4 billion, outpacing growth of less than 10 per cent for onshore wind projects. The outlook for solar PV power stations in Europe is less sure, with the fastest growth of this alternate energy source for electricity production now in Asia and USA. For Europe's offshore windfarms the main advantage is that developers can get more electricity output from each windmill offshore, where winds are about 40 percent more regular than on land.

The problem is that even if wind supply is better offshore, unit costs are much higher. The EWEA and other sources estimate each kilowatt of peak capacity for onshore windfarms can cost as little as 1500 Euro - but offshore windpower costs at least 4000 Euro per peak kilowatt. This brings them into the same cost range as solar PV power stations in Europe, at about 4000 Euro per peak kilowatt. Because offshore windfarms and solar PV power stations are new and untried technology, their operating lifetimes are hard to estimate, with some experts believing they may only have 20-year lifetimes, with unit power costs higher than 15 Euro cents per kWh.

These high cost projects therefore depend on government subsidies and support, to deliver enough profit to bring in private banks and investors, who typically seek an 18-20 per cent a year return on investment. For onshore windfarms and solar thermal water heating with lower costs and longer working lifetimes, we can note, they accept lower returns of about 10 per cent a year.

In other words solar PV power stations and offshore windpower are presently both very high cost and high financial risk generating methods for electricity, compared to any thermal electricity power generation such as coal, nuclear power or natural gas. When or if governments are forced to remove or reduce subsidies and legislative support to these alternate energy projects, their financial and economic feasibility declines to low levels.

This has not stopped financing of both windfarms (onshore and now offshore), and solar PV power stations in several European countries, but the outlook is now unsure for future projects. This is shown by the case of Spain which for both these new alternate energy sources is the leader in Europe. From around 2000 until 2009, Spain provided very large government financial and legislative support to development, allowing Spain to have the highest output of solar electricity and wind electricity per capita in the world. Spain's direct subsidies to electricity from renewable energy reached 6 billion Euro in 2009, but this excludes deferred payments on electricity billing to commercial and residential users. This is estimated as costing the Spanish government as much as 12 billion Euro for the year 2009, in future costs financed by Spanish government borrowing.

As the European government debt crisis develops and spreads from Greece, Portugal and Ireland, to Spain and Italy the high amounts of Spanish government debt for renewable energy subsidy has started to be examined by ratings agencies such as Standard & Poors. The need for European governments to reduce debt is now very strong, resulting in subsidies for high cost alternate energy projects starting to be reduced in Spain, as well as Germany, France and other countries.

Present installed electric power capacity of windfarms and solar PV power stations is still low, even in Europe. This especially applies to solar PV power stations except in Spain. Taking offshore windfarms in Europe, the European and world leader in capacity is Denmark-based Dong Energy with 595 MW, followed by Sweden's Vattenfall with 426 MW as of April 2010, according to New Energy Finance of New York. Total onshore capacity of windfarms, with large European capacity and fast growing capacity in USA, China and India is about 155,000 MW today, but this is very small compared with world total installed electric power capacity of all types.

Using US EIA estimates, this is about 4 200 000 MW of which around 67 per cent is thermal based. Total windpower capacity is therefore only about 3.7 per cent of world total electricity generating capacity, although it is growing fast. Solar PV power station capacity is much smaller than windpower capacity, at around 0.33 per cent of world total electric power capacity.

European countries, and to a lesser extent the USA have ambitious plans for the higher cost alternate energy systems, like offshore windfarms and solar PV power stations. With the debt crisis however, their high costs are under the microscope in finance ministries, and state subsidies are likely to be cut back by large amounts. This can or might lead to a complete change of present policies and programmes for developing the higher cost alternate energy systems.

Claims by some governments that offshore windfarms could grow to very large capacity, for example a UK government claim these windfarms in UK could grow to about 40 000 MW by 2035 or 2040, will likely be cut back or forgotten until the economy improves. The same will apply to solar PV power stations, especially in unsuitable regions like most of Europe and most of the USA, due to power production costs as high as 15 Euro cents per kWh, or more. Until costs are reduced, alternate energy will tend to remain what many critics call it, high tech "vanity projects".

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