Renewable costs

The cost of renewable energy is falling rapidly, with it being claimed that it is now competitive with conventional energy supply in some cases. That means that renewables are replacing coal in many situations and may do in more, with costs continuing to fall, for example down to €14.8/MWh for PV projects in Portugal, an all-time low.

However, as the use of wind and solar expands, so will the cost of balancing their variable outputs. The technical costs of balancing variable renewables have been extensively studied. One UK estimate is that they might add 10-15% to generation costs at medium levels of penetration, depending on what balancing technology is used.

Nevertheless, it’s usually argued that, if the share of renewables on the grid goes up further, so will the balancing costs, and dramatically so. That may be true, although it depends on how the system is developed: some of the balancing techniques will actually reduce costs. For example, a study by the UK National Infrastructure Commission claimed that an integrated flexible supply and demand management system, with smart grids, storage and also grid interconnector imports/exports, could save the UK £8 bn p.a. by 2030.

Cost offsets

A study by Imperial College London/OVO Energy claimed that just adding residential flexibility in domestic energy use (including for electric vehicle charging) could reduce whole system costs by up to £6.9bn p.a., or 21% of total electricity system costs. It was suggested that these savings could more than offset the cost of upgrading the power system. That does seem credible for some of the options. For example, introducing variable time-of-use energy tariff charges requires no capital outlay, but would lead to reduced peak energy use and user costs and also lower system costs. In all it has been suggested that improved system flexibility could save the UK up to £40 bn by 2050:

Moreover, there may be a limit to the cost rise. While balancing costs will rise until most power demand is met most of the time from renewables, after that, any further expansion of renewable capacity will not incur extra power grid balancing/backup costs. It will actually reduce the need for back-up (more power would be available more often), while increasing the surplus that will be generated at times of low demand, this, and the extra power generated at other times, being available for other uses e.g. for heating, transport or export, or maybe conversion to hydrogen for these purposes, if that was the most lucrative option.

In the latter case, more power-to-hydrogen (P2G) electrolytic conversion plants would be needed, but in either case, the costs would be offset by the earnings from these end-uses and the reduced system balancing costs. And, if P2G costs fall, as seems likely, not least since renewable costs are falling, then we can have a low-cost balancing system. 

All of this has to be set in the context where we would be avoiding the even larger and growing economic cost of using fossil (and fissile) fuel and the even greater environmental  and climate impact costs of using fossil sources.  For example, the 2050 scenario produced by Prof Mark Jacobson and his team at Stanford University suggest that a system supplying 100% of global energy from renewables will not be more costly than the current system, and could actually be cheaper/kWh, even given the use of variable sources. Moreover, since it would avoid the rising cost of fossil fuel and also the social & environmental cost of using them, it could be significantly cheaper overall.

Similar conclusions have emerged from the studies done by LUT University in Finland in conjunction with the Energy Watch Group (EWG) in Germany- 100% of energy globally by 2050, or even earlier, was possible, and would not cost more, in fact slightly less in direct cost terms, with energy generation costs falling from € 54/MWh for the system used in 2015 to € 53/MWh with the new system, with full balancing/storage, in 2050.

Total transition costs

What might all this mean in terms of total energy transition costs? The UK Treasury say the cost of the now agreed move to ‘Net Zero Emissions’ by 2050, will be around £1 trillion, or 1-2% of Gross Domestic Product (GDP), although some felt that was an over-estimate. Germany’s BDI Industry forum has put the costs of a transition to 80% or 95% greenhouse gas reduction at around €1.5 -2.3 trillion, by 2050, or about 1.2 or 1.8% of Germany GDP annually, although with energy and cost savings from the programme reducing that to respectively about €470 & €960.  Consultants Wood MacKenzie has put the cost of reaching (and balancing) 100% renewable power supply in the USA at up to $4.5 trillion, if it had to be done by 2040, but less if done more slowly. A University of San Francisco study claimed that the cost of transitioning the US to 80% clean energy by 2050 might be around 1% of GDP, although that could be offset by the savings of not having to buy fossil fuels, even ignoring the savings from avoided pollution and climate damages.

Bringing it back to direct costs to consumers, in the UK context, the governments advisory Climate Change Committee has claimed that ‘for households, the average costs so far, of £105 per household per year in 2016, have been more than outweighed by savings from improved energy efficiency: energy bills fell £115 in real terms from 2008 to 2016. That balance will continue to 2030.’ It added that, subsequently, ‘our scenarios involve an annual resource cost of around £4 bn in 2050’, down from £7bn currently and around £12bn by 2030, and it claimed that ‘overall bills need not rise as a result of climate policy’.

There may be a degree of wishful thinking involved here, in that, in practice, it has proved hard to get energy saving projects running successfully: some have been abandoned or withdrawn in the UK. However, that does not mean that it is impossible, and, longer term, as savings build up and the cost of using fossil fuel are avoided, overall costs should stabilise and maybe even fall. The  European Commission has claimed that, under its proposed renewables-led transition, ‘by 2050, households would spend 5.6% of income on energy-related expenses, i.e. nearly 2 percentage points lower than in 2015 and lower than the share in 2005’. We shall see!

Will costs fall?

So far, the savings from green energy programmes have not always been passed on to consumers by power utilities, who sometimes claim that they are facing extra costs due to the expansion renewables. Marginal cost renewables do tend to undermine the value of existing energy sources, pushing them out of key markets and adding balancing costs. But system change seems inevitable, and the power industry has to adapt to the new market, including the new balancing market, which may be quite lucrative for them, while they should enjoy savings from not having to use increasingly expensive fossil fuel, or for that matter, costly nuclear.

That may not be how all in the power industry see it yet, and for good or ill, some still look to fossil fuel use growing. Wood Mackenzie’s  president Neal Anderson recently said that ‘The energy mix is changing only gradually, and the world risks relying on fossil fuels for decades to come’. Indeed, Wood Mac says that global PV solar growth will level off from 2020, while wind growth will fall back in 2012, though pick up again after 2025. That sounds pessimistic. The global economy may well falter, but that would surely slow demand for costly fossil energy most, while, with global political pressures growing to decarbonise, and as their costs fall and markets for green energy build, it is hard to see a depressed growth pattern for renewables lasting for very long. China is a case in point. There have been cut-backs there, but renewables are still expanding, and the potential is vast- see my next but one post.