Posted by: nialljmcshane | July 15, 2010

The Economics of Renewable Generation.

As I have become more involved in understanding Smart Grid technology and the process by which electricity is generated, transmitted and delivered to me, the consumer, I have developed a greater awareness of the complexity of the vast enterprise that sits behind the switch on the wall.  There is technological complexity that most of us take for granted that helps to ensure that the grid is always ready and able to provide power when I need it.  There is regulatory complexity that governs what utilities can do, how they earn their profits and how they interact with one another.  And there is market complexity that affects the cost of generating, transmitting and distributing electricity and the price that consumers actually pay for that electricity.

For many in the green movement, renewable energy is the future and we should be building out more and more renewable capacity, shutting down the coal, oil and gas fired power stations that spew toxic emissions into our environment and creating a new, sustainable future for ourselves and our children.  This is an appealing vision but there are a number of purely practical challenges with this that I will address briefly before getting to the more fundamental question of affordability.

The first challenge with renewables is the variable nature of their output.  Some forms of renewable power such as hydroelectric generation can be regulated but wind and solar technologies cannot.  One of the most complex things that transmission and distribution utilities have to do is to regulate the grid to ensure that capacity matches demand at all times.  This requires the ability to predict and control the output of generating plants in response to changes in demand.  A certain amount of variability can be accommodated and emerging smart grid technologies are pushing the boundary of how much renewable power can be integrated into the grid but utilities require a stable base capacity around which they can regulate the grid to maintain service and avoid brownouts and blackouts.

Another significant challenge for renewables is that the areas of the country that are most suitable for wind and solar generation are very distant from the major load centers where that power is needed.  Significant additional transmission capacity is required to move power from these generation sites to the cities and urban areas and there are many regulatory hurdles affecting the ability of utilities to build new transmission lines.

Turning to the economics, many people assume that wind and solar power, since they require no fuel, should be cheaper than coal, oil and gas fired generating plants.  That was my assumption too before I started looking into this in more depth.  The US Energy Information Administration (EIA), an agency of the US Department of Energy, reports that US electric utilities consumed almost a billion tons of coal at an average cost of $43.79 and over 50 million barrels of petroleum based liquid fuels at an average cost of $60.67 a barrel in 2009.   These are huge sums of money to be sure but the reality is that these fuel costs represent only a portion of the actual cost of building and operating a generating plant.  In a paper describing the Electricity Market Module portion of the National Energy Modeling System which is used in preparation of the Annual Energy Outlook, EIA provides a table of comparative capital and operating costs for various generating technologies.

A sampling of interesting data from table 8.2 in this paper follows:

  • The capital cost for onshore wind generation, landfill gas or conventional hydroelectric power is comparable to or slightly less than coal fired generation at around $2,000-2,500 in 2008 dollars per kW of capacity.
  • Offshore wind and Biomass capital costs are comparable to advanced nuclear technology at around $3,800/kW.
  • Fuel cells, solar thermal and solar photovoltaic technologies are significantly more capital intensive at between $5,000 and $6,000/kW.
  • Geothermal at around $1,750/kW, Gas/oil combined cycle plants at just under $1,000/kW and combustion turbines at $650-700/kW are significantly cheaper than coal, wind, landfill gas or hydroelectric power.
  • Carbon sequestration technology adds significantly to the capital cost of coal oil or gas generation, pushing the costs above $3,700/kW for coal and over $1,900/kW for oil or gas.
  • Turning to operational costs we see, as expected, that the renewable technologies have zero variable cost associated with fuel but, for the most part, the variable portion of the operating cost is not very significant.  Because of their bulk buying advantage, utilities can purchase fuel relatively cheaply.  Fuel costs for distributed generation (microgrids) is higher because they do not have this advantage.  Fuel costs for fuel cells and biomass are significantly higher than for large scale coal oil and gas fired facilities.
  • Onshore wind has a relatively high fixed O&M cost of around $31 per kW of capacity which is comparable to scrubbed coal technology.
  • More advanced coal technologies have higher fixed operating costs of $40-47/kW but the oil and gas fired technologies have much lower fixed O&M costs around $12-13/kW.  The combined fixed and variable O&M costs of these technologies are significantly lower than the fixed O&M cost of onshore wind.
  • Nuclear ($92/kW), Biomass ($66/kW), Geothermal ($168/kW), landfill gas ($117/kW), offshore wind ($87/kW) and solar thermal ($58/kW) all have substantially higher fixed operating costs.
  • Of the renewable technologies, only solar photovoltaic at around $12 can match the oil and gas fired plants for operating cost but, as we have already seen, solar photovoltaic has significantly higher capital costs than those technologies.

In summary, these data indicate that while wind is comparable to baseload generating technologies from a capital and operational cost perspective, it is significantly more expensive than the oil and gas fired plants that are typically used for non-baseload generation which is where wind needs to be competitive.  Solar and other renewable technologies are not competitive on cost although this may change with ongoing research and development of new materials for photovoltaics etc that will drive down the capital costs.  The other thing that could change the economics of the situation dramatically would be a sudden and significant increase in fuel costs resulting from supply and demand issues, political instability, or coordinated government action on climate change and environmental policy.

I am reminded of the statement sometimes attributed (perhaps inaccurately) to British Prime Minister Benjamin Disraeli that “there are three types of lies: lies, damned lies and statistics”.  The complexity of the model used by EIA lies in the many assumptions which include provisions for cost reductions associated with learning curves on new technologies, risk and contingency factors affecting projected capital costs, future fuel costs, and regulatory impacts of such things as the clean air act and tax credits and incentives for each generating technology as well as the impact of stimulus funds.  It is important to understand these for a full appreciation of the cost implications of a real world technology choice for a specific utility considering new generating capacity.  I do not profess that the data presented here is accurate in all contexts or that I fully understand the data.  However, for comparative purposes, I think the data is sufficiently clear.  I did compare the EIA data with data on capital costs from the National Renewable Energy Laboratory (NREL) which provides a very similar picture.  NREL are working on providing data on operational costs also.

There are companies like Intelligent Generation in Chicago who are developing solutions that attempt to address the economics and make distributed renewable generation more cost effective with a shorter payback time for the initial capital investment by adding intelligent storage of energy to take advantage of periods when energy is inexpensive.  If we are going to see a future in which we declare independence from fossil fuels, we need more innovation like this, which is not just technology innovation but business model innovation.  We also need strong policy support for state and federal governments to realize the goal of increased use of renewable and we need to find a way to address the issue of stable, reliable baseload generation which wind and solar cannot provide.  Geothermal, Biomass, Fuel Cells and other technologies have some potential in this area but their cost profiles are currently prohibitive.  Hydroelectric power is perhaps the best bet for replacing baseload generation but hydroelectric power also has significant environmental impacts that need to be taken into account.

So, it seems that for the foreseeable future at least, we are going to continue to rely heavily on existing coal oil and gas fired generating plants and we will continue to see new oil and gas fired plants being built to meet the ever increasing demand for energy.  Demand side management through load control schemes or variable pricing models will remain a key tool for the utilities to manage the grid until such time as renewable technologies move down their price curves and become more cost competitive with existing oil and gas fired generation.

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Responses

  1. Niall,

    Very well written informative synopsis of the entire energy confusion. As always, economics will ultimately drive the investment of capital to specific areas.

    There is no silver bullet curative alternative energy source that will work in all locations.
    That will depend on the indigenous resources in each given location. I, personally feel that WE as a nation need to concentrate on cost effective “steppingstone or phased-in alternatives” until the many technologies improve and pricing comes down with more eventual competition. Alternative Energy will come from multiple sources & differ contingent upon local conditions & demand.

    In the meantime Nat Gas, CNG & LNG are available & domestically plentiful. Additionally, those energy sources will keep the US monetary supply growing & recirculating here as opposed to being sent abroad only to return in the form of mounting US national debt.

    While still fossil fuels, they emit significantly ( 30% +-) less CO2 and only fractional amounts of other pollutants; they are still the “lesser of evils”. Conversion of our transportation fleets & the necessary infrastructure would not be terribly costly nor difficult. Plus it would create much needed domestic employment during the transition and ongoing operations.

    The true “low hanging fruit” is certainly the reduction of our current energy usage demands. Our buildings, facilities & homes still remain the largest demand sources for all utilities. Retrofitting the “built enviornment” and a myriad of Smart Grid enhancements will relieve utility demand response requirements for new plants & huge capital cost expenditures. These upgrades to existing infrastructure will save customers energy & operating costs while helping utility companies control line voltage distribution loss & reducing current and future expenses while being able to meet peak demand.

  2. Niall,

    This post is spot on and provides a great analysis of the challenges we face in attempting to move toward a greater dependence on renewable energy. One thing you didn’t mention, however, is that the attitudes of individual consumer may be the greatest challenge of all. When I talk to customers about adding renewables into their energy mix, they’re all for it until they discover the price premium they’ll pay. Public opinion also affects the development of renewable generation and transmission lines. Lot’s of people want to see more solar and wind, just not in their back yard (think Cape Wind).

  3. Fantastic post – thank you for putting together such concise information. It seems to diversify makes sense, but not necessarily “cents” to the individual consumer. I think the average person has a hard time evaluating the true cost of various energy sources, particularly in these troubled economic times. Reduce, reduce, reduce.

  4. Hi Niall,

    I don’t think anyone is saying that renewable are cost competitive today. If they were, they would be widely used. The main points for renewables are the following:
    1. Unaccounted health and environmental cost of fossil energy. That includes our natural gas, which extraction has atrocious impacts on the aquifers. I am sure the cost impact of climate change will dwarf the cost of renewable energies.
    2. Anticipation of high price of fossil resources. We have seen it in 2008. As you point out, once fossil resources become more expensive, renewable will become competitive. But the shift may not happen fast enough to avoid disruption.
    3. Renewable can be distributed, as in solar roofs. If the home generates its own energy, it can be made “smart” by controlling its loads according to the amount of electricity it produces.
    4. We buy our oil from unfriendly countries. Wars were fought (and still are) for oil. What about this for an unaccounted cost?

    • Andre,

      I agree that there are vast unquantified (and largely unquantifiable) costs associated with fossil fuels. Proposals to implement a carbon tax are an effort to begin to put a price on the pollution costs associated with fossil fuels but even that doesn’t fully account for the additional costs that you mention. We should note however that green technologies are not unencumbered by some similar hidden costs, albeit at much lower levels. There will always be some level of hidden cost in any technology and the proponents and opponents of a given technology will always seek to highlight or hide those costs according to what best suits their agenda. Renewables will need to become competitive on the visible, quantifiable costs in order to succeed. Increasing fossil fuel prices will help. So would a carbon tax although the entrenched interests of the fossil fuel industry will fight that one very hard and they are well funded to do so. The best way to get renewables to be more cost effective is to stimulate the research and development efforts that will drive down the costs of these technologies through new discoveries and improvements in scale.


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