Annex A
FACTORS INFLUENCING COMPARITIVE COSTS OF
RENEWABLE ENERGY
A1. Quoted cost estimates for future renewable
energy generation vary widely and comparisons can be meaningless
unless the costs quoted are based on the same input assumptions.
Particularly misleading results can be obtained by comparing the
quoted costs of renewables already in commercial production with
indicative costs of those still at the research stage.
A2. Below we set out the factors that need
to be taken into account when estimating future costs of renewable
energy technologies. We also discuss the factors influencing the
cost of alternatives which are necessary for comparison in a holistic
energy policy.
COSTS OF
ELECTRICITY OR
HEAT FROM
RENEWABLE SOURCES
A3. Costs of electricity or heat from renewable
sources are affected by:
(a) Capital costs of equipment.
(b) Other capitalised costs of producing complete
working power or heat plant.
(c) Capital costs of necessary infrastructure
to export the power or heat to where it can be used.
(d) Quality of the primary energy resource being
converted into energy or heat.
(e) In some cases, the cost of providing primary
energy resource at the point of use.
(f) Costs of operation and maintenance.
(g) Costs of finance and equity return expectations.
(h) In some cases, costs associated with intermittency
of output.
We explore each of these in turn below:
Capital costs of equipment and construction
A5. The capital cost of equipment for energy
production depends on a wide and sometimes surprising range of
factors. At one level there is variability from site to site (for
example different wind farm layouts to suit different landscapes
and ground conditions require different expenditures on cable
lengths and foundation requirements; different biomass fuel types
require different storage, handling, combustion and emission control
solutions).
A6. However, at least as significant is
pricing pressure in global markets for all types of equipment
depending on supply and demand balance, and raw materials costs,
for example copper and steel prices. At the moment almost all
power equipment is supply constrained globally, and we have seen
price rises over the last two to three years of 50-100%. In turn
this signals investment to increase supply capacity and potentially
new entrants to the market, creating the possibility of downward
price corrections in the future. It also may cause developers
to defer projects in the hope of securing better pricing and availability
later.
A7. You are therefore likely to be presented
with data showing very wide ranges of equipment capital costs.
Also the pricing prevalent today is unlikely to represent a long
run average price.
Other capitalised costs
A8. Other costs associated with building
new power plant include land acquisition, environmental and social
assessments, permits, engineering costs, legal fees, costs of
planning gain, and the internal costs to organisations of having
staff devote effort to developing projects. In aggregate these
tend to be in the range of 5-20% of the capital costs of equipment
and construction, and are proportionally higher for smaller projects,
"first of a kind" projects, and projects with unusual
characteristics.
Infrastructure capital costs
A9. For power plant these costs include
the connection to the grid and any necessary reinforcement of
the grid necessary to allow the plant's output to be exported
to a point of consumption. This can include anything up to major
new transmission lines and substations. Infrastructure investment
is as complex as power station investment and is subject to many
of the same constraints. In particular the costs of gaining planning
consent for new transmission lines can be very substantial, and
transmission infrastructure costs are highly influenced by global
commodity prices (steel, copper, aluminium).
A10. Infrastructure costs also vary hugely
depending on plant location. At one extreme a wind farm in southern
England close to an existing major substation may have very low
infrastructure costs, whereas a similar wind farm in northern
Scotland may incur infrastructure costs of the same order as the
costs of the wind farm itself.
A11. For renewable heat the same issues
apply, but at a more local scale, as heat degrades in long distance
transport. The costs of a district heating network can be substantial,
especially if it is to be used to supply existing premises rather
than a new development.
Quality of primary energy resource
A12. Many renewable technologies harvest
a primary energy resource made available free of charge by nature.
However the cost of a unit of energy production depends substantially
on the extent to which the resource is available to be harvested.
This can vary significantly from site to site. For example achieved
capacity factors for onshore wind farms range from 10% to 35%.
A13. In assessing claimed costs it is important
to understand the underlying assumptions used.
Costs of providing the primary energy resource
at the point of use
A14. Further costs arise where the primary
energy resource requires intervention to be made available in
a form suitable for use at the power station location. This is
a particularly important issue for biomass and waste.
A15. Some biomass and waste projects are
located adjacent to a ready supply of waste material (eg woodchips
from a wood processing plant). Others can be paid to take a feedstock
(eg municipal solid waste which would otherwise attract landfill
tax). However those which take feedstock from energy crops, or
distributed sources of waste, will incur a transport cost (which
can be substantial) and may have to compete for alternative uses
for the feedstock such as food production, or alternative biomass
power plants. There is already substantial import of biomass for
power production. It should be noted that individual plants are
designed for particular types of biomass—it should not be
assumed that a plant designed for woodchips can burn chicken litter
for example.
A16. Calculating the cost of the delivered
feedstock is not only dependent on the particular circumstances
of each plant but is also very vulnerable to future supply and
demand balances, both locally and internationally. The UK's relatively
small land mass means that a heavy dependence on biomass will
imply substantial imports. Other countries in Europe and beyond
are considering major roles for biomass. Hence in the future costs
of feedstock are likely to rise, perhaps substantially. Transport
costs are also likely to increase with increasing oil prices,
and the transport has its own emissions implications.
Costs of operation and maintenance
A17. These costs include staff salaries,
overhauls and repairs, rates, insurance and use of grid charges.
They vary with technology (eg onshore wind requires almost no
staff and limited maintenance, whereas biomass is relatively labour
and maintenance intensive). However, for a given technology they
are generally reasonably predictable. An exception to this are
the offshore technologies, where there is as yet limited experience
of long term maintenance and hence less certainty.
Cost of finance and equity return expectations
A18. Unit electricity costs vary depending
on financing costs, and the return expectations of developers.
Both of these depend on the perceived risk of the investment.
The risks involved include engineering performance but also perceptions
of risk of change in regulatory environment or other uncertainties.
For the established technologies these are well established, but
less so for new technologies.
Costs associated with intermittency
A19. Intermittent technologies such as wind
and wave power impose costs on power system operations around
the provision of replacement capacity. These costs are negligible
when the amount of intermittent generation is small, but could
be substantial at levels of intermittent renewables implied by
the EU targets for 2020, especially if dedicated power plant has
to be provided as back-up. Alternative options such as intelligent
load management are developing, these in turn will incur infrastructure
costs for control and metering systems. Concentrations of intermittent
generation in particular geographic regions, eg Scotland, will
also create a need for investment locally to ensure the stability
of local and regional grids.
ALTERNATIVES TO
RENEWABLE GENERATION
A20. When assessing renewable generation
costs against other options it is important to understand the
uncertainties in:
— other generation options; and/or
— non-generation options such as demand
reduction and energy efficiency.
Alternative Generation Options
A21. The alternative generation options
are gas and coal fired power plant and, potentially, nuclear energy.
All the same issues as for renewable plant affect the cost of
providing the physical generation assets. Market pressures worldwide
affect pricing in just the same way, over time this will increase
supply capacity and may ease pricing. However, barriers to entry
are generally higher in the gas, coal and nuclear power plant
equipment markets and their responses are likely to be more sluggish,
meaning that higher prices may persist for longer. However a large
unknown at present is the impact of low cost Chinese plant entering
world markets, particular coal fired. This is something that is
currently gathering momentum rapidly.
A22. The major issue governing cost of alternative
generation options however is global fuel prices. Recent oil price
increases have been well publicised, and the consensus is that
we have entered a prolonged period of much higher oil prices.
Gas prices are linked to oil prices through indexation clauses
in long term gas supply agreements in Europe, and we can therefore
expect a prolonged period of high gas prices. Coal prices are
set more globally, and are currently high driven by demand in
emerging economies and high oil and gas prices. A major global
recession could soften this, but the general picture is of energy
becoming much more expensive. However there seems little consensus
over how much primary energy prices will increase over a 10, 20
or 50 year horizon.
A23. A further uncertainty is carbon price,
especially over the long term. To date this has had limited impact;
it seems certain this will change, but only limited progress has
been made on the international commitments that will give this
clarity.
A24. This backdrop increases substantially
the attractiveness of non-generation options such as demand management
and energy efficiency.
Demand Management and Energy Efficiency
A25. A whole spectrum of these is available,
ranging from home insulation to the redesign of cities to minimise
car usage. Many of these options are low cost (even negative cost),
but have not proved popular owing to their transaction costs or
lifestyle implications.
A26. Heavily rising energy prices are likely
to change this and it is interesting to speculate on possible
consequences. An early sign is the reduction in motoring that
seems to have occurred between January 2007 and January 2008.
20 June 2008
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