It seems to be a fashionable question to ask these days: “when will renewable energy reach grid parity?” (Q1)
The answer, usually coming from the same people who asked the question is “sometime in the future”
It is of course the wrong question. The cost of electricity on any grid is a the sum of the capital servicing costs (which includes the repayment of the capital as well as interest charges),plus the fuel cost, plus the operation and maintenance costs. When all these costs are added up and divided by the annual electricity output, the costs of a unit of electricity can be arrived at.
There is a mixture of historical and current costs in this calculation. Many of the capital costs included in the calculation are historical. They are historical in three senses. The money used to build them was “real” at the time the stations were built. Inflation has been adding to these costs since they were built. Secondly many of the capital costs, particularly the older stations, have been fully depreciated. Thermal power stations are depreciated over 25 years but have a useful life of 40 years. The capital cost can in many instances be fully depreciated. Thirdly, the costs of building old power station was not done by means of project finance. They were constructed as a result of Government decree on the balance sheet of large monopolies, where rates of return were exceptionally low.
Fuel costs can be historical as well. Often the power stations were built at the mouth of a mine (coal or lignite). The costs of opening most mines and bringing them into production happened a long time ago. The incremental costs of delivering a tonne of coal or lignite are at the very least not transparent.
In the case of gas the only thing we know for sure is the price we pay for it now, or the forward price for the next year. It is not possible to predict a longer term future price, or to pre-purchase gas for a longer time period. Even with shale gas there is almost a complete lack of transparency in its pricing. The cost of conducting environmental impact statements, water costs, treatment of polluted effluent water costs, combined with subsidies in the form of tax breaks make the true price of shale gas impossible to access.
In electricity systems the cost of production is a mix of historical and current blended costs. It is as unfair to ask when will renewables meet grid parity as it is unfair to ask when will new coal, new oil or new gas meet grid parity. We are comparing apples with oranges. If we were to persist with this line of reasoning no new generation would be built as no new source could compete with the blend of sunk and current costs on today’s generation.
The real question is “how does the cost of new coal, new gas and new oil stand up against new wind” (Q2).
There is another question allied to this which goes as follows:
“If we were planning a rational future for electricity what generation methodology would we use”? (Q3).
The answer to Question 2 varies from country to country. We have seen it answered recently in South Africa and Australia.
The cost of new coal in South Africa is R O.99 whereas the cost of new wind is R 0.89 (as determined by Round 2 of the comparative wind contracts awarded there recently). This is without taking into account the pollution abatement costs associated with coal firing.
In Australia, according to data supplied by Bloomberg, electricity can be supplied from a new wind farm for A$80 (US$84) per megawatt hour compared to A$143 per megawatts hour from a new coal fired power station or A$116 from a new station powered by natural gas when the cost of carbon emissions is taken into account. A report compiled by BNEF (Bloomberg New Energy Finance) says that “although coal fired power stations built in the 1970s and 80’s can still produce lower priced electricity, new fossil plant is more expensive than wind. The cost of wind has fallen by 10% since 2011 and the cost of solar by 29%.”
“The fact that wind power is now cheaper than coal and gas in a country with some of the best fossil fuel reserves shows that cleaner energy is a game changer which promises to turn the economics on its head” says Michael Liebreich, CEO of Power Stations (BNEF).
My next blog will deal with grid parity for solar PV.