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    Wednesday, January 23, 2013


    A Study into the Economics of Gas and Offshore Wind; A report for Greenpeace and WWF-UK

    November 2012 (Cambridge Economics)

    Executive Summary

    Key Findings

    • This research finds that, compared to a future power system more heavily dependent on gas, large-scale investment in offshore wind would impact positively on UK GDP and employment. GDP increases by 0.8% by 2030 and there are over 100,000 additional jobs by 2025, falling to 70,000 additional jobs by 2030. The development of offshore wind capacity would stimulate construction and manufacturing demand over the period to 2030. In the longer term, it would prevent locking the UK into natural gas usage and imports.

    • However, the scale of the macroeconomic impact depends on the location of the supply chain for offshore wind equipment. If the import content of offshore wind projects were to remain at current levels, the positive impact on GDP would be smaller (0.2% by 2030). Alternatively, if the development of the UK as a major global centre for offshore wind attracted investment in UK-based production, this could boost UK exports and lead to larger GDP gains.

    • The impact on GDP and employment by 2025 and 2030 of a high offshore wind deployment scenario, compared to a scenario with high gas-fired generation, is shown in Figure ES.1.


    • Greenpeace and WWF commissioned Cambridge Econometrics to assess the macroeconomic impact of large-scale offshore wind deployment, compared to a future with limited offshore wind power generation in the UK and, in its place, additional gas-fired generation.

    The macroeconomic impact of large-scale offshore wind deployment

    • Our analysis compares the economic outcomes of two alternative power generation portfolios to 2030. The first of these (labelled WIND) is similar to the Committee on Climate Change's (CCC) 65% renewable electricity scenario1 with large-scale development of offshore wind, while the alternative case (labelled GAS) relies instead on existing and new gas plants to provide the UK's electricity. It should be noted that the scenarios compare deployment of (currently) the most expensive large-scale renewable energy option against unabated gas power generation. In the real world, however, a high renewables scenario would include lower cost technology options, as outlined in DECC's renewables roadmap. The scenarios are described in more detail in Chapter 2.

    • The combination of falling capital costs for wind turbines and rising natural gas import prices means that offshore wind is only slightly more expensive than Combined Cycle Gas Turbines (CCGTs), by 2030. As a result, electricity prices in the WIND scenario are only 1% higher than in the GAS scenario in 2030; a very small difference compared to possible variation in relative prices caused by other factors such as changes in gas prices. This challenges the prevailing view that electricity produced by gas-fired plants will be much cheaper indefinitely.

    • The model results show several important economic impacts. The construction work for large-scale investment in offshore wind boosts GDP and creates jobs (which are mainly high skilled) in the UK. However, as noted above, currently much of the investment is in equipment that is produced overseas. The GAS scenario also relies heavily on imports (of natural gas) but captures revenues for government through the carbon price floor. In the WIND scenario the UK pays slightly more for electricity but more of the value added of the supply chain is located in the UK. Total UK imports of natural gas are 45% lower in the WIND scenario by 2030, a reduction of almost £8bn annually.

    • Despite a small increase in electricity prices, GDP is around 0.8% higher in the WIND scenario by 2030 because the domestic content (construction and manufacturing of offshore wind capacity) of electricity is higher than in the GAS scenario. The relative increase in GDP in the high offshore wind scenario is robust to all the key sensitivities we tested (see below). If a commitment to offshore wind led to major supply chain companies locating in the UK, it is likely that exports would also increase, serving to increase GDP further and create more jobs, but the potential impact of this is not included in the analysis presented here.

    Levelised costs and the import content of gas and wind generation

    • The study also assessed the prospective cost structures of gas and offshore wind power generation and compared the levelised costs for projects initiated between 2012 and 2030, with a range of assumptions and at varying discount rates. The findings draw on prior analysis and show that gas-fired generation is currently cheaper, for each unit of electricity generated over the lifetime of the plant, than offshore wind. However, as gas and carbon prices are expected to increase in the future and the unit costs of offshore wind farms are expected to decrease, this difference will become smaller.

    • The results also show that a large proportion of the operating cost of a gas CCGT plant over its lifetime is imported because of the large imported fuel cost component (see Appendix D).

    • At present a large proportion of the lifetime offshore wind farm cost also goes to imports, as offshore wind turbine manufacturing has so far remained largely outside the UK (see Appendix D). However, in a scenario with high offshore wind deployment, there would be the opportunity to attract investment into the UK supply chain, increasing the proportion of wind turbines that are designed and manufactured domestically.

    • There is considerable scope for offshore wind costs, both capital and operating, to fall over time, as economies of scale and learning effects drive costs down. In addition, as offshore wind projects become established, the risk premium associated with the borrowing cost for offshore wind will be reduced; this is currently a major cost of offshore wind relative to new gas projects.

    Impact on CO2 emissions

    • UK power sector CO2 emissions in the WIND scenario would be one-third of those in the GAS scenario in 2030, even though some gas-fired power is needed to provide backup when there is insufficient wind to meet power demand.

    • The development of offshore wind capacity envisaged in the WIND scenario, coupled with other low carbon sources and measures to deal with the intermittency, meets the CCC's recommended target for the carbon intensity of the UK's power generation target of 50gCO2/kWh by 2030 and would reduce total annual emissions in the UK by 50MtCO2 by 2030. The lock in to offshore wind would support decarbonisation consistent with the UK's legally binding emissions target for 2050 and encourage the development of the UK as an offshore wind technology leader.

    Sensitivity analysis

    • To ensure that the results of the economic modelling analysis are robust, the following sensitivity tests were carried out (discussed in full in Chapter 5):

    – Natural gas prices: The sensitivities are the DECC low and high gas price assumptions. The impact by 2030 on GDP of moving from the GAS to the WIND scenario is 0.7% in a world of low gas prices and 0.9% in a world of high gas prices.

    – Domestic gas production: Shale gas could reduce the UK's dependence on natural gas imports, but this has no impact on the scenario results. The reason is that increased UK gas extraction represents a positive impact on GDP regardless of whether or not it is used in UK power generation. In the WIND case the gas is sold on the export market (which is not generally feasible for new shale gas in the USA).

    – The future costs of offshore wind projects: Offshore wind costs are expected to fall considerably as offshore wind capacity is deployed, but it is not clear by how much. Under the low capital cost sensitivity the impact on GDP between the WIND and the GAS scenario increases to 1%, while high capital cost projections reduce the impact on GDP to 0.6%.

    – The import content of offshore wind projects: If significant offshore wind capacity is deployed in the UK, it is possible that a substantial domestic supply chain will be developed. In the central WIND scenario, the import content of the capital required for an offshore wind project is projected to fall from 63% to 37% by 2030. If the import content of an offshore wind project were to remain at 63%, the positive impact on GDP by 2030 would be reduced to 0.2%.

    – The required interconnection capacity to support intermittency: The two scenarios contain the same level of interconnector capacity. However, the requirement may be less if there is a high level of gas generation, but our sensitivity test for this assumption did not materially affect the positive GDP impact of 0.8%.

    • The results of the sensitivity analysis are shown in Figure ES.3. The results highlight the potential benefits of reducing the import content, and capital cost, of offshore wind projects, but still show that substantial emissions reductions could be made in the WIND scenario without a negative impact on the economy, even under conservative assumptions on import content and capital cost reductions for offshore wind. The assumptions tested on interconnection capacity, gas production and the price of gas have only a small impact on the economic results. These are described further in Chapter 5 of this report.

    • At the sectoral level the differences are also modest. Large-scale development of offshore wind is likely to benefit engineering, manufacturing and construction firms, and also possibly insurance and project financing companies. In contrast, utilities (including gas distribution) would benefit from increases in gas-fired generation.


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