The price of a 40% Renewable Energy Target

[HiEquity]

Following an off the cuff comment in another thread I've had a request for an outline of the retail price impact of a 40% renewable target on electricity prices so I'll give it a shot here.

Average residential electricity prices in Australia are getting up towards 20c/kWh (1kWh = 1 unit) these days (inc GST). BTW a kWh is the amount of electrical energy needed to run a 1000W (1kW) load for an hour. Take away the GST and you get around 18c. That is made up of approx:
- 8 cents for generation
- 7 cents for network costs - transmission and distribution line construction and O&M
- 3 cents for retail costs - billing / metering / meter reading / trading etc

So when you pay 20c per unit for electricity you are actually only paying 8c for the electricity itself - the rest being necessary ancillary stuff (if you include GST in that category!). That 8c is the average of the cost of baseload assets that run 24 hours a day (so are comparatively cheap to run) and the shoulder / peak load assets that run only part of a day (and so are more expensive - an asset that is used less often has fewer kWhs to write off its capital cost against).

Now there is no physical rule that says "thou shalt have baseload power stations". The only requirement of the power grid is that the load has to be met every moment of every day which isn't too big an ask (as demonstrated by the fact the lights stay on most of the time!). So if we had a large quantity of wind energy, for example, there would need to be a balancing technology that could accommodate the fluctuations of the wind and keep the lights on. Gas turbines are a good example of that type of technology.

I should also point out here that I'm only using technologies in this analysis which are already available, bankable at large scale and we know the cost. That rules out stuff like fractured rock geothermal, wave, ocean current or anything else still stuck in a lab.

Which leaves wind, solar and biomass really for a large scale analysis. Every study that says increasing renewable energy is really cheap generally "assumes" the successful development of a new technology which never actually happens so forgive me for being jaded on predictions of cheap power from such sources. Anyway, in each of those categories there is a large variation in the cost base at this scale. This can be seen in the track of wind farm development which started in some of the best wind resources on the north east coast of Tasmania and is now being seen in far worse wind resources in parts of rural Victoria. As the amount of energy you require from wind farms grows, the further away from the good sites (in terms of wind resource and transmission infrastructure) you get forced to go - so the price increases.

To reflect this problem I'll give a range of costs, with the first figure being the current price for the next best site in the country and the last figure approx where we will end up by the time we get to 40%, as follows:

Wind 11c - 16c
Very Large Scale Solar (VLSS) 20c - 30c
Biomass 15c - 30c (this is really burning offcuts from timber and agricultural operations such as bagasse - the lack of resource without encroaching on farm land really limits you to around 2-3% of our total load in any case)

VLSS is either (>100MW) solar thermal or PV farms where the economies of scale are needed - rooftop residential PV systems are twice this price. Due to the lack of large scale resource, we can discount the effects of biomass - suffice it to say that higher electricity prices will drag up a heap of sources previously written off as uneconomic but it's still not enough to get over 2-3% from this source.

BTW the comparison of solar to wind isn't really fair as the solar resource enjoys being coincident with load, an effect which is worth approximately 3c per unit in its own right. Wind is still the cheapest though and all the predictions around the existing 20% renewable energy target by 2020 is that the vast majority of it will be met by wind farms as a result.

To be continued...

 

[Strannik]

what's the cost of nuclear?

 

[units4me]

The cost of establishing electricity transmission assets to many remote generation sites would be a huge cost, along with the associated power losses due to the length of transmission.

 

[Strannik]

you talking about wind?

don't need remote locations for nuclear, anywhere on the coast is fine

 

[HiEquity]

So to get from the known track of lots of wind farms by 2020 to get to 20% (much of which - around 9% - is due to existing hydro schemes still by the way) to a 40% renewable energy track, we need to start getting innovative. So we start from (at 2020 under the current program) approx:
- 9% Hydro
- 10% Wind
- 1% Other renewable (landfill gas / biomass)
- Total 20% renewable

It's generally accepted that 20% wind farms across Oz will start causing material balancing issues and a different approach to power system management. Effectively that level will mean:
- 9% Hydro
- 20% Wind
- 1% Other
- Total 30% renewable

Overseas experience and experience with our own small islanded systems shows that such a level of wind will mean running existing power stations out of merit order (ie coal stations have to start turning down and gas turbines have to run up when they normally wouldn't). At the 30% level I would peg the impact at around 1-2c per unit overall in extra balancing costs - it's not going to be huge but is certainly material for the existing players in the market - they will need to be compensated by those 1-2c per unit for running their assets sub optimally like this.

It should be pointed out here that the more wind farms there are on the system and the more geographically diverse they are, the lower the likelihood that they will all be off at once. So as wind farms grow the power swings they cause reduce as a percentage but increase in actual amount. This is why building big lines to places like the Eyre peninsula and putting all your wind farms in one (albeit windy) place is not such a good idea. Better to keep the money it would take to build such a line and take the hit on the lower wind resources all over Australia.

To go from 30% to 40% though we are now starting to get a price signal to go solar as, if it was all wind, those balancing charges would start to balloon out to maybe 4-5c per unit. As solar doesn't have that balancing impact and is intrinsically worth circa 3c more anyway due to its load coincidence and the best sites are around 20c per unit in cost, solar will now start to compete with wind as we go to 40% (and if we went beyond solar would pull even more weight - but only at a higher price again of course!).

Seeing the 40% makeup is pure guesswork of course but for the purpose of this lets assume that it breaks down like this:
- 9% Hydro
- 25% Wind
- 1% Other renewable (landfill gas / biomass)
- 5% VLSS
- Total 40% renewable

The price for the last project to get us to 40% is likely to be around 25-30c per unit as a result, unless the price of steel, concrete or silicon drops in the meantime... .

So what's the price impact of all this? Starting from our 20% at 2020 baseline for business as usual, we impose a varying impost on the electricity market that:
- Starts at around 11c per unit for the first wind farm and
- Ends at say 30c per unit for the last VLSS system (Think of it that the first solar farm gets built in the Pilbara (there is some load there) and the last one in Victoria!)

So the average cost increase is around (30 + 11)/2 = 20c per unit for that 20% worth of the market we are making renewable. I'm assuming here that taking off the value of the fuel saved (you still need to build those other power stations but you will save fuel) is in the noise for this - an assumption that is arguably hard on the renewable cost but keeps everything realistic.

As this extra cost only applies to 20% of the electricity market, we need to reduce it accordingly to see what the impact would be on the total market and therefore its impact on the bill seen by you and I, ie:
20% increase in renewable energy from 20% to 40% = 20c per unit
Smear the same increase over 100% of the market = 4c per unit

So retail price increases would end up (ex GST) at 18c + 4c = 22c per unit. Roughly a 25% increase - I know I said 30% before but that was before I ran the actual numbers...

Hope you enjoyed all this as much as I did - any questions just ask away!

 

[HiEquity]

what's the cost of nuclear?

Where? How big? New nuclear right now would be in the order of 20c per unit at least using existing technology at the large end of the scale. That factors in having to build whatever transmission system would be required to connect it into our current system.

It also uses a much lower cost of capital because the only real information we have (other than technology company sales gumpf) is from jurisdictions where govts have guaranteed the loans for them. For a capital intensive technology like nuclear (and renewables) the cost of capital is the major consideration. Renewables don't get loan guarantees (although the Greens are advocating for them) so if you were to do a like for like comparison of the cost of nuclear using the private cost of capital used for renewables you would get up to the 30c per unit end of things for nuclear. But no-one has ever funded a nuclear power station without a govt loan guarantee so we never see what the comparable figures would be - a govt guarantee drops the cost very considerably - just ask the banks!

BTW Ziggy Switkowski did a report on nuclear for Australia but it was full of errors and omissions. It made sweeping assumptions about the cost and availability of smaller nuclear stations that just don't compute with international experience to date (no-one is building them commercially). Much of the content was reminiscent of those reports that say "if we assume technology X will be commercially available at price Y". You get the idea...

Internationally the "nuclear renaissance" just isn't happening. There are some new builds going on but nowhere near enough to make up for the retirement of old units - even with what China is doing.

 

[Intrinsic_Value]

Hope you enjoyed all this as much as I did - any questions just ask away!

How can i profit from it, and how can i insure that profit (or create my margin of safety)

 

[Witzl]

Hello Mr H.E.,

Just wondering, when you are providing the cost per unit of renewables (eg, solar) VS the unit cost of nuclear - what sort of energy generation life span are you assuming when looking at the capital expenditure?

I mean - how long is that capital cost spread over time to come up with the unit cost figure?

I'm also interested to know what sort of life expenctancy you would get from a nuclear power station versus VLSS thermal and photovoltaic plants?

Do private companies factor in a "we want our capital back in X-years" number to come up with the unit price?

 

[shiftyphil]

Hello Mr H.E.,

Just wondering, when you are providing the cost per unit of renewables (eg, solar) VS the unit cost of nuclear - what sort of energy generation life span are you assuming when looking at the capital expenditure?

I mean - how long is that capital cost spread over time to come up with the unit cost figure?

I'm also interested to know what sort of life expenctancy you would get from a nuclear power station versus VLSS thermal and photovoltaic plants?

Do private companies factor in a "we want our capital back in X-years" number to come up with the unit price?

Any per kwH cost for solar/wind will take into account the expected lifetime and generating an economic return with in that lifetime.

 

[Witzl]

yeah i realise that, i'm just wondering what numbers the energy providers use, what numbers H.E. has used, and what the real world life expectancies are.

 

[HiEquity]

Hi Witzl

It actually doesn't matter all that much what life you assume. When you do a discounted cash flow analysis to come up with these numbers - one with a 20 year assumption and another with a 40 year assumption the price will only vary by a few cents at most. This is due to the fact that revenues in 20-40 years time are discounted to next to nothing in today's dollars. You spend all your capital in year one and revenue in year 20 is worth very little by comparison. One of the quirks of DCF analysis unfortunately and the need for a return on capital today... Of course the situation will look very different in twenty year's time!

In any case, the general rule of thumb is for solar PV and wind at around 20 years, solar thermal at 30-40 years, depending on the technology and nuclear at around 40 years.

Note that this is unlikely to reflect reality - many wind turbines can get an extra ten years out of a new set of blades for example. Performance guarantees from PV manufacturers generally all run out around the twenty year mark though...

 

[HiEquity]

How can i profit from it, and how can i insure that profit (or create my margin of safety)

Dunno - this is an assessment of a 40% target which doesn't exist yet so the short answer is you can't. The 20% target does exist though and the wind farms that were built early on in the best locations will do very well when they are competing with the last wind farm that gets built in the boonies in 2020 which receives the same revenue. But that is all priced in of course... and wind farms are relatively low risk / low return types of investments so there goes your margin of safety.

The biggest issue is whether govts will continue to recognise the external costs of electricity production (eg carbon, diversity, security etc) in a financial manner as they are in a small way at the moment. If they don't, then it will be a matter of "if you live by the subsidy, you die by subsidy".

I've been living by the subsidy for ten years and counting though...

 

[Dazz]

The price for the last project to get us to 40% is likely to be around 25-30c per unit as a result, unless the price of steel, concrete or silicon drops in the meantime...

I see some horrible huge holes in this, that render it unworkable ;


1. It's the stretch case, and likely to be unachievable, and yet it's only 40%. What about the majority 60% of the load ??

2. I don't think you've adequately taken into account the 7c per unit breakdown for transmission lines. You haven't added or discussed this aspect, only the difference between 8c for coal generation and 30c for other. The transmission lines are hooked up to the existing coal fired stations, not 15 or 20 far flung little ratty wind farms. Good for maybe a wee little country town like Albany, but hopeless for anything substantial.

3. What happens if the excellent negotiators for BHP and Rio continue to do an excellent job and manage to negotiate higher prices for steel / concrete and silicon ??

4. Large members of the Australian community are hurting badly over the cost of their power bills now. Maybe OK for the cashed up latte set in SE corner of the country, but alot of the elderly folk are struggling big time to pay their power bills. Any suggestion of another increase (and I'd presume double or triple, not 25%) would be utterly rejected at the ballot box.


Trumped up fears of maybe potentially sometime in the future global warming perhaps, vs I'm old and frail and freezing in winter but cannot afford to turn the heater on don't cut the mustard....as has been just shown at the ballot box, and the withdrawl of the ETS. The case has not been argued well enough.

 

[HiEquity]

1. It's the stretch case, and likely to be unachievable, and yet it's only 40%. What about the majority 60% of the load ??

Not a stretch case at all - it's easily achievable. The 60% would be supplied as it is now but with a higher proportion of gas to supply greater balancing power than at present - a factor that has been costed in to the previous analysis.

2. I don't think you've adequately taken into account the 7c per unit breakdown for transmission lines. You haven't added or discussed this aspect, only the difference between 8c for coal generation and 30c for other. The transmission lines are hooked up to the existing coal fired stations, not 15 or 20 far flung little ratty wind farms. Good for maybe a wee little country town like Albany, but hopeless for anything substantial.

I should have been more specific. The cost of transmission lines to wind farms and the rest is costed in to the previous numbers as the individual project is always required to pay the cost of their own transmission connection. It's the main reason the cost of the last wind site, for example, is so much more than the current "low hanging fruit" marginal project because you get pushed further away from the wires. Getting further away from the wind resource isn't such a large factor by comparison.

16c per unit pays for an awful lot of transmission connection costs on a wind farm, on top of having a poor wind resource...

3. What happens if the excellent negotiators for BHP and Rio continue to do an excellent job and manage to negotiate higher prices for steel / concrete and silicon ??

For steel and concrete, the cost of all forms of power goes up, although the capital intensive forms will go up more of course. In a wind turbine, the cost of raw steel and concrete would represent about 30% of the total numbers I've put here, which is relatively high for the industry but it's not going to be a show stopper. Increasing these prices by say 50% would, as a result, be in the noise of the numbers in my analysis.

4. Large members of the Australian community are hurting badly over the cost of their power bills now. Maybe OK for the cashed up latte set in SE corner of the country, but alot of the elderly folk are struggling big time to pay their power bills. Any suggestion of another increase (and I'd presume double or triple, not 25%) would be utterly rejected at the ballot box.

I've laid out a pretty detailed case that a circa 25% increase would result from a 40% target. I know these numbers intimately so I can speak to them. No idea whether a 25% increase in electricity bills for 40% renewable energy would be rejected at the ballot box - I'll leave that up to the armchair experts to guess.

Happy to supply an analysis for another % if you wish - it's all achievable, at a price of course.

case has not been argued well enough.

Agreed. In particular, artificially holding down electricity prices as a form of social security needs to stop. The poor and needy represent a tiny part of the electricity market and yet our whole electricity policy and debate is dominated by this issue.

Social welfare should be provided through the social security system while power prices should be set according to the wider strategic issues facing the nation.

 

[Dazz]

Agreed. In particular, artificially holding down electricity prices as a form of social security needs to stop.

In your opinion.....and being intimately involved in the industry, your opinion on the subject of prices must naturally be culled as having a vested interest.

Good for technical input of course, but must be excluded when deciding policy.

In our state Hi Equity, Barnett just raised prices by a whopping amount, after Labor held them flat for 5 years. Any landlord dealing with a resi tenant would know that it was stupid to hold them flat for 5 years without inching them up slowly to avoid a big jump.

The poor and needy represent a tiny part of the electricity market and yet our whole electricity policy and debate is dominated by this issue.

....for the very reason that I outlined above. It is toxic to all politicians. They make the rules, not the engineers in the power industry.


Little old grannies vote, big power consumers like massive corporations do not.

Social welfare should be provided through the social security system while power prices should be set according to the wider strategic issues facing the nation.

You are failing to recognise the politicians in charge on the day set both. You can't expect them to flip flop according to your values and professional knowledge. They aren't interested.

They put their policies up before election and then the people decide....

 

[Witzl]

do you think that time-of-use metering is something that will help modify average household power useage habits?

I think something has to be done about changing people's energy useage habits first and foremost. Slap everyone on time-of-use metering, charge "excessive use" tarrifs for households that go over "acceptable" power levels... something?

I've talked to a fair few people about this through work, and have formed the personal opinion that many household power users are complete power ABUSERS. Running a/c for 6+ hours a day, drying their clothes in the drier, leaving copious amounts of excess lighting running (how many houses do you see with the OUTSIDE of the house lit up with >20 downlights??), using multiple inefficient 2000W ceramic heaters from bunnings to heat one room.... need i go on?

In fact, there is one lady at work here with a family of 5, whom had an average quarterly power bill of over $1200. That's larger than my power bill for the WHOLE YEAR.... and apparently this is "normal" amongst her friends and neighbours!!

anyway.... ive gone offtopic. Sorry.

 

[Dazz]

I reckon the demand side of the ledger is very much on topic Witzl.

The less we use, the less we need to supply.

All of your examples are true, and I had to have a little chuckle. All of those things are to make the average person's housework a heap easier and quicker. Power usage - pffft - doesn't even come into it.

 

[HiEquity]

In our state Hi Equity, Barnett just raised prices by a whopping amount, after Labor held them flat for 5 years. Any landlord dealing with a resi tenant would know that it was stupid to hold them flat for 5 years without inching them up slowly to avoid a big jump.

Agreed. It was definitely well past time.

You are failing to recognise the politicians in charge on the day set both. You can't expect them to flip flop according to your values and professional knowledge. They aren't interested.

Not at all - just making the observation that if Barnett can do it then there is certainly a chance. It can be done and will get done if enough of the population demand it... someone has to start that process!

I'll reserve my right to comment on both technical and policy questions too - alongside disclosing my interest of course.

do you think that time-of-use metering is something that will help modify average household power useage habits?

I think something has to be done about changing people's energy useage habits first and foremost. Slap everyone on time-of-use metering, charge "excessive use" tarrifs for households that go over "acceptable" power levels... something?

I've talked to a fair few people about this through work, and have formed the personal opinion that many household power users are complete power ABUSERS. Running a/c for 6+ hours a day, drying their clothes in the drier, leaving copious amounts of excess lighting running (how many houses do you see with the OUTSIDE of the house lit up with >20 downlights??), using multiple inefficient 2000W ceramic heaters from bunnings to heat one room.... need i go on?

In fact, there is one lady at work here with a family of 5, whom had an average quarterly power bill of over $1200. That's larger than my power bill for the WHOLE YEAR.... and apparently this is "normal" amongst her friends and neighbours!!

anyway.... ive gone offtopic. Sorry.

Not at all - I share your frustration. Time of use metering is great for economic efficiency but does nothing for energy efficiency or the environment for that matter. In Australia it would shift load from the peaks (where it would be gas fired) to overnight (where it would be coal fired). So it actually increases emissions accordingly - its effect to reduce transmission losses is marginal by comparison to that.

As for energy waste and inefficiency, it's one of the big missing pieces of the puzzle, much the same as water use. Public education campaigns only go so far and now even home insulation has got a bad name. In my view we could go a long way with increasing the efficiency threshold for air con units as an example - regulation combined with a price signal.

However, by far the biggest culprits here are industry. The level of waste in most of the process plants and minesites around the country dwarfs the impact of housing. Simple stuff like insulating pipework and tanks, using high efficiency motors, variable speed drives, electronic control systems etc etc. Very hard to benchmark and impossible to enforce but there is an awful lot of companies out there (sometimes unknowingly) unnecessarily wasting a lot of money...

Don't know the solution - just the problem!

 

[HiEquity]

IAll of your examples are true, and I had to have a little chuckle. All of those things are to make the average person's housework a heap easier and quicker. Power usage - pffft - doesn't even come into it.

Yes - power is that cheap it barely matters out there in the real world. Hence the argument for regulation to prevent people and businesses buying inefficient equipment (including lighting!).

Personally, I think a combination of a higher price for electricity that causes many to think about how they use it and minimum efficiency standards to prevent people buying the inefficient junk is the way to go.

Attacking one problem without the other leaves out some of the key opportunities out there to improve.

But for most a 25% increase in electricity prices for example would barely raise an eyebrow as they reach for the Visa card...

 

[Witzl]

i wasnt going to comment on industry, as i know most average people simply cannot relate - but yes, many are MASSIVE wasters of energy. Not just industry, but also commercial buildings!! How many office buildings do you see of a night time with ALL the lights left on?? There would have to be at least 50 times the number of office blocks to industry plants, so the volume of wastage would be similar I assume (yes i realise the volume of waste per industry site is far greater than an office site).

At our office the lights and aircon are all on a timer - lights go off at 7pm, and only bare minimum "emergency" lighting is left on. The warehouse is completely turned off except for the chargers for the electric forklifts.

.... but we are a privately owned company, and the owner signs off on all the bills and therefore gets the absolute *****s when he sees power being wasted. Of course this sort of culture does not exist in the normal corporate world of publicly owned companies.