In economics you can churn out a set of numbers to suit almost any argument, and this is certainly proving to be the case with the continuing and highly politicised debate surrounding the renewable energy strategy of the Department of Energy and Climate Change (Decc).
It is true that modern combined cycle gas turbine (CCGT) power stations are, for now, cheaper than renewables and nuclear. It is also true that they produce approximately 50 per cent less carbon dioxide than old coal-fired power stations. However, this analysis fails to take into account the equally important issues relating to diversity of energy source and security of supply. As indigenous gas supplies diminish, the UK will become increasingly reliant on gas from international sources, and the development of a diversified energy strategy is the lowest-risk option.
Over the next 20 years international gas prices will continue to rise. Steady demand from developed nations and a strong growth in demand from developing countries will continue to put pressure on prices. In addition, political instability in the Middle East is likely to result in further oil and gas price shocks, which could have severe consequences for the UK’s economy as the largest gas-consuming country in Europe. If we fully priced-in the risk of relying solely on imported fossil fuels for our energy supply, there would be no question that renewable energy represents a competitive alternative.
True, other countries have seen gas prices plummet on the back of shale gas production. In the US, gas prices have fallen from $9 (£5.7) per cubic metre to $2.5 per cubic metre due to abundant supplies of shale gas and non-existent carbon pricing with minimal environmental regulation. But not only are the prospects for UK shale as yet unproven, but should we build an infrastructure that is heavily reliant on gas, the system will be vulnerable to sudden gas price shocks in the future. The environmental damage caused by unconventional gas exploration could also be considerable.
The government aims to secure an adequate energy supply for the future within the context of lower emissions and at affordable and stable prices. The big debate is about the investment costs required now compared with the price we will pay later for our energy supply by generation source, which is a complicated comparison to make.
Many are using “levelised cost”, in which the total cost of building and operating the source over time is divided by the estimated total energy produced over its life cycle. A recent analysis by Mott MacDonald for Decc estimated the levelised cost of gas generation at 8p/kWh, about 1.5p/kWh less than onshore wind at 9.5p/kWh. Onshore wind was cheaper than nuclear (10p/kWh) and offshore wind (13p/kWh).
This approach is limited and does not factor in all the costs associated with risk, such as fuel price volatility and supply risks, carbon penalties and the environment. The European Environment Agency estimates European environmental costs in 2009 from the power industry at between £65 billion and £90 billion (Revealing the Cost of Air Pollution, November 2011). In addition, it is almost impossible to estimate the cost over time that will stem from nuclear waste or the noise pollution created by wind turbines. Military deployment in the Middle East also relates to securing energy supply, but is paid for through our tax bill.
In short, using levelised costs often falls short of comparing like for like and providing a full perspective on the true costs of energy.
Scrutiny of renewable investments is too often focused on carbon dioxide and climate effects alone and often neglects their long-term economic benefits. Eighty per cent of renewable generation costs are largely fixed on initial implementation. The cost of actual power generation will be more or less the same in 20 years’ time. Without volatile fuel costs, this means its long-term pricing stability is unmatched. This is very different from conventional fuel plants. Consider gas or nuclear generation, where, over the past decade, oil prices have varied between $30 and $150/barrel and uranium has varied between $5/lb and $140/lb.
Let us look more closely at wind power. It is an intermittent source of energy but, as part of a hybrid solution, can effectively lower the cost of power. Models show that for every £1 million invested in a wind turbine operating at 30 per cent capacity, £1.2 million in fuel costs is saved over the turbine’s 20-year lifetime. Its capacity to generate power may be lower than fossil fuels but its price is already half that of two decades ago and continues to decline through developments in technology. Once installed, the wind is free and the turbine’s marginal costs are zero. Wind becomes the cheapest power source available, especially as of next year when carbon pricing comes into effect.
The use of wind power also ultimately reduces the demand for energy from conventional power plants and subsequently has a lowering effect on fuel prices and their volatility overall. However, it should be remembered that as use of these assets diminishes, their costs increase. Both effects therefore need to be taken in account.
A final point relates to spare capacity and risk. While fuel-cost savings may counterbalance investment costs, additional funding in spare capacity will be needed for periods of intermittent supply. This applies equally to all power systems, all of which are open to natural, technical and human failures. However, integrating a larger share of decentralised power generation will increasingly diminish construction and operational risk.
There is no logical and long-term economic reason why the UK should divert from its current low-carbon strategy. Indeed, we would argue that the country’s reliance on low-carbon sources should be increased. We need to develop an integrated long-term view of our power portfolio, driven by supply-risk assessments and an additional focus on renewables. This needs to be accompanied by a roadmap that incorporates perspectives on innovation and technology development to minimise costs.
With energy prices set to rise over the coming decades, the business sector and heavy users of energy should also become more engaged in the debate and examine low-carbon energy developments for their own purposes. Small and medium-sized microgeneration can be an efficient way for companies to reduce costs associated with energy supply risks and carbon emissions.
Scott Flavell is a renewable energy expert at PA Consulting Group and Vincent van den Brekel is a freelance renewable energy expert
This article first appeared in Utility Week’s print edition of 31 August 2012.
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