The Energy Review: The "Extra Cost"
The PIU review estimates that meeting the 2020
target for renewables could increase "household electricity
prices" by 5-6 per cent. That corresponds to around nine
per cent extra on industrial prices, which is bad publicity for
renewables, and the FT and the Telegraph lost no time in asking
if they are really worth it. The Treasury may ask whether it is
worth supporting technologies that have not converged in price
with the conventional thermal sources after 30 years of support.
On closer analysis, however, it appears that the cost premium
is more to do with the policy than the real cost of rewewables.
In addition, the review appears to use a low price for CCGT installed
costs, a central estimate for gas costs, but a very pessimistic
estimate for renewables costs.
It is important that renewable costs are compared
on a similar basis with CCGT costs, as it is the difference that
matters. Calculating a small difference between two large quantities
(the price of renewables minus the price of CCGT) is always hazardous,
but the report does not acknowledge this, neither does it put
error bars on its estimate, nor are there any sensitivity analyses.
In an attempt to fathom the arithmetic, assume
that the average domestic unit price falls by 10 per cent between
now and 2020, then the six per cent "extra cost of renewables"
corresponds to 0.34 p/kWh. Taking the report's central estimate
of CCGT prices, this implies the renewables, on average, are being
priced at 3.85 p/kWh, 42 per cent higher than the average under
Taking the reference price of electricity from
CCGT, first, para 55 of Annex 6 pulls a figure of £270/kW
out of the air for current plant costs. It is doubtful whether
anything has been built in the UK recently at that price. A recent
of CCGT contracts suggested an average cost of around £450/kW.
If that is reduced by 10 per cent (for 2020) and combined with
a central estimate of future gas prices
(18p/thermroughly equal to current prices), then a "central
estimate" of CCGT electricity price for 2020 is around 2.3
p/kWh. Given some uncertainties in future gas supplies, the "high"
estimate of future gas prices is 25p/therm (also from ref 2),
which corresponds to a generation price of 2.7p/kWh.
This gives an electricity price range from 2-2.7 p/kWh, with the
central estimate about 10 per cent higher than in the review.
The way in which the total cost of generation
from the renewable sources is calculated is particularly opaque.
The mix of technologies used is also unclear. It may be noted
that the Review suggests onshore wind prices may come down to
1.5 p/kWh, offshore to 2.0 p/kWh and energy crops to 2.5 p/kWh.
Given that landfill gas also comes in below 3 p/kWh, it is clear
that the implied 3.85 p/kWh average price for renewables is not
backup documentation implies that some of the anomalies of NETA
and of the Obligation may still be unresolved by 2020. If the
obligation has not succeeded in delivering cost-reflective prices
by 2020, there will not be a level playing field. Renewables should,
by then, be able to compete on equal terms with gas (and nuclear).
If this does not happen, then that is not the fault of renewables.
It is possible to design "Obligations"
that deliver cost-reflective renewable energyin Texas and
Australia, for examplewhilst California and US DoE
studies suggest that any extra costs are very small. What appears
to be needed is a slight change of emphasis with the renewables
industry perhaps emphasising that the "six per cent extra"
figure is not wholly due to the (quite small) extra cost of renewables.
15 Power UK 91, September 2001. Back
House of Lords, 2001. Energy Supply: How secure are we? Supplementary
memorandum by the DTI. Back
This is consistent with a US DoE estimate in "Annual Energy
Outlook, 2001". Back
Several contracts for wind farms have already been let at well
under this level in the US and elsewhere. Back
Energy Information Administration, US DoE, 2002. "Impacts
of a 10 per cent Renewable Portfolio Standard". Back