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Renewable Energy’s Hidden Costs?

Alternative Energy

A recent Bloomberg press release got wide coverage with its claim that wind power is now cheaper than coal. But a new report from the OECD shows that when you cover the full cost to the grid, variable renewables like wind don’t add up as favourably.

It is often claimed that introducing variable renewable energy resources such as solar and wind into the electricity network comes with some extra cost penalties, due to “system effects”. These system effects include intermittent electricity access, network congestion, instability, environmental impacts, and security of supply.

Now a new report from the OECD titled System Effects of Low-Carbon Electricity Systems gives some hard dollar values for these additional imposts. The OECD work focuses on nuclear power, coal, gas, and renewables such as wind and solar. Their conclusion is that grid-level system costs can have significant impacts on the total cost of delivered electricity for some power-generation technologies.

All generation technologies cause system effects to some degree. They are all connected to the same transmission and distribution grid structure and deliver electricity into the same market. They also exert impacts on each other, on the total load available to satisfy demand, and the stability of the grid’s frequency control. These dependencies are heightened by the fact that only small amounts of cost-efficient electricity storage are available.

Any electricity generation technology can cause grid instability and price fluctuations if it goes offline unexpectedly. But a key finding of the OECD report is that renewables that are particularly variable, such as wind and solar, generate system effects that are at least an order of magnitude greater than for “dispatchable” technologies such as coal, gas, and nuclear.

These renewable sources require no fuel, and so have very low operating costs. This allows them to enter the market at low prices (or even negative prices if production subsidies or generation mandates are in place).

As a consequence, with the current power-generation mix in the OECD (including Australia), dispatchable technologies will suffer due to lower average electricity prices and reduced capacity factors when a significant quantity of low-cost renewable energy is available. (That is, dispatchable units will more often be forced to ramp down their output when there are high flows of low-cost renewable energy, yet will still need to be ready to ramp up again when the output from variable renewable generators is not sufficient to meet the total demand across the grid.)

The report defines grid-level system costs as the total costs (on top of plant-level costs) to supply electricity at a given load and given level of security of supply. These additional costs include the extra investment to extend and reinforce the grid, plus the costs for increased short-term balancing and for maintaining the long-term adequacy of electricity supply in the face of intermittent variable renewables.

The system costs are limited to costs that accrue within the electricity system, so environmental and long-term security of supply impacts are excluded from this study.

The study assessed the grid-level system costs for six OECD countries with contrasting mixes of electricity technologies: Finland, France, Germany, South Korea, the United Kingdom and the United States. System costs, which include short-term balancing, long-term adequacy, and the costs of various grid infrastructures, were calculated at both 10% and 30% penetration levels of the main generating sources.

A summary of the results, expressed in dollars per megawatt hour ($/MWh) of electricity delivered, is shown in Table 1 below. The table shows the lowest and highest system costs for each technology considered at each penetration level.

Table 1: Grid-level system costs at differing penetration levels for a range of electricity generation technologies

Table 1: Grid-level system costs at differing penetration levels for a range of electricity generation technologies

The consequences of these results are clear. Grid-level system costs can be significant, particularly for wind and solar, and must be included in any realistic analysis of the total system costs of all technologies deployed at scale in regional or national electricity markets.

For Australia, the Bureau of Resources and Energy Economics (BREE) in its AETA reportsets out the Levelised Cost of Electricity (LCOE) for each technology, with and without a carbon price. However the bureau does not consider grid-level system costs. The levelised cost reflects the minimum cost of energy at which a generator must sell the produced electricity in order to break even.

If we take the mid-point of the OECD grid-level costs for 30% technology penetration shown in Table 1 and add them to the plant costs and carbon costs from the bureau, we can make a more accurate comparison of the total system costs for each technology as might apply in the Australian context – see Figure 1.

Figure 1: Total system cost for generation technology (2012) including carbon and grid-level costs

Figure 1: Total system cost for generation technology (2012) including carbon and grid-level costs

Ignoring such costs distorts the picture. For example, Bloomberg New Energy Finance (BNEF) recently put out a press release headed “Renewable Energy Now Cheaper Than New Fossil Fuels in Australia”, which attracted a great deal of attention.

Bloomberg’s very high coal levelised cost ($143) and lower on-shore wind levelised cost ($80) were the primary reasons for the headline, as pointed out by Tristan Edis at Climate Spectator.

However, if we include the grid-level system cost for wind and solar as estimated in the OECD study and apply the arguably more authoritative levelised costs presented by the bureau (shown in Figure 1), then the Bloomberg headline seems unlikely to be correct.

Like the carbon price, grid-level system costs need to be internalised. In other words, the plant owner should have to pay for grid-level costs in the same way they pay for carbon emissions. That way, solar and wind bid prices into the national electricity market would need to include the grid-level costs and could no longer be bid at rock bottom levels. This would help to level the playing field with coal and gas (important for the future viability ofcarbon-capture-and-storage technologies), and allow for a realistic assessment of the financial viability of nuclear energy for Australia.

In particular, if the Australian Energy Market Operator is to make a fully costed assessment, it must include grid-level costs in its forthcoming 100 per cent Renewable Study.

Energy Collective

13 Comments on "Renewable Energy’s Hidden Costs?"

  1. Plantagenet on Mon, 25th Mar 2013 3:25 pm 

    Since you still need power when the wind isn’t blowing, utilities can’t rely on wind alone. They need to build a coal-fired or other second, more reliable power system for use when the wind isn’t blowing. This adds immensely to the cost of wind.

  2. DC on Mon, 25th Mar 2013 3:56 pm 

    Since you now need to blow the tops off entire mountain ranges to get at the low-grade coal that remains, this adds immensely to the cost of coal.

  3. J-Gav on Mon, 25th Mar 2013 6:00 pm 

    I, like comrade Kenz who contributes on this forum, am rooting for renewables. I’m just not nearly as optimistic about it all as he is. Look at some of the things that have happened recently in Denmark and Germany, the poster-children for renewables in Europe, with major wind grid-connection issues (constant, expensive stand-by for back-up sources because of intermittency, storage) Load-dumping (it sounds gross but that’s what it’s called) is also a problem since it means Central European countries importing electricity get blackouts. Solar has its issues too – it needs to find a healthy boost in efficiency if it’s to go beyond heating showers or,if you have a fair-sized roof full of them, could work for a low-consumption household. That seems to be BillT’s option and may be one of the best. But unfortunately, at this point in time, no combination of renewables is world-saving stuff.

  4. Kenz300 on Mon, 25th Mar 2013 6:15 pm 

    Renewable-Energy Growth to Outpace Oil, Gas Through 2030

    Just who is the Energy Collective?

    Oil, coal and nuclear companies trying to bash alternatives to protect their profits.

  5. Kenz300 on Mon, 25th Mar 2013 6:31 pm 

    What will the total cost of nuclear power be when clean up and storage of nuclear waste FOREVER is added in?
    The disasters at Fukishima and Chernobyl have shown us the true cost of nuclear energy.

    Add in the cost of droughts, floods, rising sea levels, more severe storms and Climate Change and we will se how expensive our reliance on FOSSIL FUELS really is.

    Alternative energy sources like wind, solar, wave energy, geothermal and second generation biofuels are the safest, cleanest and cheapest forms of energy.

    The cost of nuclear, oil, and coal keeps rising and causing environmental damage..

    The cost of wind and solar keeps dropping and id safe and clean..

    Easy choice.

  6. rollin on Mon, 25th Mar 2013 6:39 pm 

    Published by the Nuclear Energy Agency. Actual title is Nuclear Energy and Renewables: Systems Effects in Low-carbon Energy Systems. To believe or not to believe, that is the question. Didn’t feel like paying 60 euros for a nuclear agency book. I don’t believe the numbers, even before so-caled grid costs they contradict everything I have read previously.

  7. doug nicodemus on Mon, 25th Mar 2013 8:22 pm 

    first when i click on their link to their website…i get all kinds of security alerts from mozilla…including one that say “this is is claiming to be a site that it is not…second when i go to the real energy collective this is not a story they have covered so far and finally this is a bogus premise…the storage systems for solar and wind already exists…the one i like best is using excess capacity to pump water up hill to a reservoir and then letting it run down through a turbine when needed…so the unreliabity issue is bogus…

  8. BillT on Tue, 26th Mar 2013 1:43 am 

    Ah, but…. Doug. Not every country has a convenient lake sized valley nearby to pump water up into. And that just decreases the EROEI of the source. Get used to:
    1. Having much less energy to use in the future.
    2. For it to be very much more expensive than now.

    A roof top system with a small wind generator and solar panels is still the way to go if you want to be off the grid and still have a reasonable lifestyle. But you cannot have A/C and electric stoves or heat with those systems unless you are wealthy.

  9. Kenz300 on Tue, 26th Mar 2013 4:57 am 

    Nuclear Energy’s true cost………..

    The disaster at Fukishima continues today with no end in sight. The current TEPCO clean up plan is not to be completed for 30 or 40 years. The cost for storage of the nuclear waste FOREVER is too high.

    Renewable energy sources are safer, cleaner and they are cheaper.

  10. GregT on Tue, 26th Mar 2013 5:10 am 

    And, on top of what BillT said, all of the renewable electric power combined, ( if it were even feasible ) would only PARTIALLY replace fossil fuels in the generation of ELECTRICITY.

    They will not replace fossil fuels in transportation, medicine, resource extraction, resource refining, manufacturing, chemicals, pesticides, herbicides, fertilizers, agriculture, air transport, rocketry, and even in the manufacture of renewables themselves.

    We are barking up the wrong tree here, we need to learn how to live with nature, instead of perpetuating the very mindset that is destroying it. Without a healthy earth, it is completely irrelevant what source of energy we exploit, we would all be dead.

  11. GregT on Tue, 26th Mar 2013 5:47 am 


    “Alternative energy sources like wind, solar, wave energy, geothermal and second generation biofuels are the safest, cleanest and cheapest forms of energy.”

    We have already surpassed the 350 ppm threshold of atmospheric CO2, and everything that you keep chanting about will only add more. If we do not find a way to sequester greenhouse gasses, we are done as a species.

    When you figure out a way to not add more CO2 to the atmosphere, with all of your “technological breakthroughs”, come back and talk. Otherwise, your mantra is a huge part of the problem, not the solution.

  12. Arthur on Tue, 26th Mar 2013 8:57 am 

    Ah Bill, that sounds much more realistic!

    doug, you are right. Pumped hydro is for the time being the method of choice for evening out intermittent supply of solar and wind. Yes, it is true Bill, some countries like mine are flat. That’s why Holland was the first to install the worlds first undersea electricity cable to Norway, Europa’s future battery pack:

    The potential for North-America is even better, with your vast Rockies, combined with deserts in the south-west.

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