Select Committee on Environmental Audit Minutes of Evidence


The Energy Review: The "Extra Cost" of Renewables

  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 NFFO5.

  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 review[15] 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[16] (18p/therm—roughly 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[17]. 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 cost-reflective[18]—The 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 energy—in Texas and Australia, for example—whilst California and US DoE[19] 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.

David Milborrow

15   Power UK 91, September 2001. Back

16   House of Lords, 2001. Energy Supply: How secure are we? Supplementary memorandum by the DTI. Back

17   This is consistent with a US DoE estimate in "Annual Energy Outlook, 2001". Back

18   Several contracts for wind farms have already been let at well under this level in the US and elsewhere. Back

19   Energy Information Administration, US DoE, 2002. "Impacts of a 10 per cent Renewable Portfolio Standard". Back

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