Let's be realistic about renewable electricity

Let's be realistic about renewable electricity

08-11-2016 | Insight

There is a lot of talk about renewable electricity becoming cost-competitive with conventional fossil fuel energy. That is good news for anyone who cares about global warming. However, energy experts point out real and substantial hurdles that still need to be taken.

  • Erik Hylarides
    Loan Manager at Robeco Asset Management

Speed read

  • Total costs of renewable electricity are systematically underrated
  • Its unreliable nature reduces its economic value
  • System costs are higher, a fact that is almost often ignored

We often hear the claim that renewable electricity is getting close to becoming as cheap as electricity from conventional sources. Unfortunately, reality is still different. The reasons are:

  • The method used to compare electricity costs from different sources is flawed
  • Renewable electricity poses large additional system costs which are (almost) never taken into account.

The general method used to quantify electricity costs from different sources - the ‘levelized-cost’ methodology - has a basic flaw: the value of electricity is assumed to be the same from renewable sources as from conventional sources. Research has however shown that renewable electricity has certain characteristics that make its value much lower than electricity from conventional sources, up to 50% at high renewable penetration rates.

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Unreliability lowers the economic value

Technically there is no difference between electricity generated from conventional sources and from renewable sources. However, as there is no guarantee for sunny, cloudless and windy days, renewable electricity is always erratic. As there is no economical method yet for large-scale storage, the power market needs to have a perfect balance between supply and demand on every moment. Large-scale electricity generation from renewables poses challenges to this balance.

The unreliability of renewable electricity makes its value lower than that of conventional electricity. This can be illustrated by a comparison between two cars that can travel the same number of kilometers, but one car is reliable and always brings you to your destination while the other car sometimes runs fantastically (a ‘sunny and windy day’) and sometimes breaks down (a ‘cloudy day without wind’). Of course the first car is much more valuable.

Higher system costs often ignored

System costs are the total costs accrued beyond the perimeter of a power plant to supply electricity. Electricity costs consist of more elements than just the generation costs. Electricity first needs to be generated (‘electricity generation’). Then it needs to be transmitted at high voltages over a long distance (‘transmission’) to a local area where it is distributed at lower voltage (‘distribution’) and sold to the final consumer (‘supply’).

The additional costs of adding renewable electricity to the system are:

  • The cost of investments to extend and reinforce the transport and distribution grid and to connect new capacity
  • The cost of increasing short-term balancing between supply and demand and for maintaining long-term adequacy of electricity supply
  • The continued availability of 100% back-up power generation using fossil fuels

The variability and unpredictability of renewable output are the main reasons why system costs are higher for renewables than for nuclear energy, coal and gas. In February 2012, for example, power generation by renewable electricity almost came to a standstill for nearly two weeks, caused by lack of wind. The gap had to be covered by dispatchable power stations in Germany and abroad. Keeping these generation reserves causes extraordinarily high costs.

In addition, the production of renewables is often located far away from where demand is situated and from the existing transmission grid. This requires the construction of new lines to connect the power plant to the transmission grid and to reinforce the whole transmission system.

How much higher are the costs?

Using renewables to meet up to 30% of electricity demand would according to the OECD increase the electricity supply cost by between 16% and 180%, with wind being at the lower end and solar at the higher end.

The cost calculations for renewable electricity are made more difficult by the strong dependency on location. For example, even in a small country like the Netherlands the difference in costs can be substantial. The Dutch Central Planning Agency CPB estimated that the Net Present Value for on-shore wind projects currently is positive (EUR 8 million) in the province of Friesland but negative in the province of Limburg (minus EUR 30 million). A simple statement like ‘wind energy is just as expensive as conventional electricity’ is therefore meaningless without mentioning the location.

Peak oil: Do costs matter if oil & gas prices will inevitably rise?

As the levelized-cost methodology is severely flawed, increased system costs are often ignored and 100% back-up costs still have to be borne for renewable electricity, it is clear that renewable electricity is far from being as cheap as conventional electricity. However, a common assumption underlying much of current energy policies is the inevitable rise of the price of fossil fuels (the ‘peak oil theory’). In that light, high costs are not a problem as coal and gas electricity plants will gradually become expensive.

The problem is that time and again the peak oil theory is proven to be wrong. The world’s fossil fuel resources are still abundant and prices are low. The fact that the shale revolution took less than ten years to transform the US, and with it world energy markets, is one example of the scale, speed and impact of innovation in the fossil fuel industries. We simply cannot afford to wait for fossil fuels to become scarce and prices to increase.

What about the good news?

Existing solar and wind generation technologies are not likely to have much impact on combatting climate change. However, wind but especially solar electricity is rapidly becoming cheaper to produce and there are many exciting new technologies that could force a breakthrough, such as electric cars and storage technology. Providing large subsidies to existing technologies does not provide much incentive for new technologies to emerge. Yet, that is what many carbon policies do. Large-scale Research & Development, a fixed carbon price or a coal tax should be very helpful. Betting on current renewable technology is not.

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