The Ruinous Cost Of Free Energy: Why An Electricity System Built On Renewables Is The Most Expensive Of All Options

Written by:
1 July 2024
The Ruinous Cost Of Free Energy: Why An Electricity System Built On Renewables Is The Most Expensive Of All Options - Featured image
  • Australia previously benefited from some of the lowest consumer electricity prices in the industrialised world, but it now has some of the highest.
  • This paper shows that an electricity supply system built on a foundation of baseload generation – that which provides power 24/7 to the grid to meet base energy needs – results in the lowest Total System Cost.
  • This invalidates claims that renewable energy is the cheapest form of energy. That may be true in particular locations at particular points in time, but at the system level a system built on renewable energy would be the most expensive – by far – of available options.
  • Customers pay for what they use, but far more of what we pay is required to cover the costs of the physical infrastructure, from generation to our meter, than for generating the electricity itself. To expose the full costs of providing electricity, we need to focus on Total System Cost.
  • For example, when a consumer installs rooftop solar panel they draw less electricity from the system, and daytime load on the system is reduced. The excess is exported into the distribution network further reducing load on the system, which forces large-scale generators to reduce output. But the large-scale generators, transmission and distribution networks, retail-ers and environmental costs still exist. Less energy drawn from the main system does not mean less fixed cost: in this case it means more fixed costs overall.
  • The main power system that Australians inherited – engineered in the 20th century on a foundation of low-cost mine-mouth coal – can provide bulk electricity at a wholesale cost level in round numbers of about $50 per megawatt-hour (MWh) or in other words 5c per kilowatt-hour (kWh).
  • When a flexible, fast-response open cycle gas turbine meets the last megawatt of demand it sets the spot price for all generators operating at that moment across the entire market. Such units are increasingly called upon to balance not only the relatively predictable and smoothly changing variability of aggregate customer demand, but at the same time the far steeper and more volatile fluctuations in wind and solar power output. Also in round numbers, if the price of an extra unit of gas for the marginal generator is about $10 per gigajoule (GJ), then the wholesale electricity price at that moment will be about $100/MWh, which is 10c/kWh. Each $1/GJ change in the gas price will change the corresponding electricity number by $10/MWh (1c/kWh). 
  • Continuing with round numbers, if the system is to be operated only on wind, solar and hydro power, with energy shuffled in and out of large and small storage assets and devices, the generation cost averaged across the energy for the total interconnected system will approach $200/MWh (20c/kWh) or more. The additional costs in the transmission and distribution systems will be far higher than for the historical coal-based and the current increasingly gas-price exposed system.
  • In other words, the further the system moves away from the inherited gen-eration system in the coal-based ‘$50 cost zone’ through the gas-based ‘$100 cost zone’ and towards the wind- and solar-based ‘$200 cost zone,’ the more the actual outcomes for final consumers are likely to escalate to even higher price levels. The underlying economic problem remains even if cost of living price relief shifts costs from electricity bills to the tax-and-welfare system.
  • This paper is summarised in the following short statements:
    • The system with the lowest Total System Cost is the one we have.
    • The levelised cost of energy (LCOE) of any generation type does not reflect Total System Cost.
    • There is a modest role for renewable technology before it increases Total System Cost.
  • Contrary to popular belief, coal-fired power plants do not have a predeter-mined life. They can be refurbished periodically and remain in service for an indefinite period. The benchmark for comparing costs is not a hypothet-ical fleet of new coal plants: it is the fleet of already existing coal plants.
  • Thus the lowest cost system is the one we have, and the next lowest cost system is one built on new baseload power plants, whether they be coal or nuclear.
  • Official plans assume, encourage, or require the elimination of coal-fired generation, not on cost, but on emissions grounds.
  • Notionally wind and solar provide “free energy” because there is no fuel cost. LCOE acknowledges the up-front investment required to generate electricity from the wind or the sun, and ‘levelises’ that cost across the output from the turbines or the panels over their life. However, LCOE (which is used by AEMO – relying in turn upon the CSIRO’s GenCost model – to develop the ISP) is a simplified calculation applied at the genera-tion level that is not able to provide insight into the Total System Cost with various types of generation technology needed to serve customer demand at all times.
  • These conclusion are summarised in Figure 5, below, which appears in the body of the report on page 20.
  • Beyond the $200/MWh wholesale cost zone indicated in the Figure above, there is the additional cost of the poles and wires required to deliver the elec-tricity as the system hypothetically transitions to one built on renewables.
  • Storage via batteries and pumped hydro is often raised as a means of shifting excess wind and solar generation to periods of high demand, but each has significant limitations with respect to duration and cost.
  • The total system cost of a renewables-based system (>80% share) may be two or three times as expensive as one premised on baseload (whether current or with new build nuclear), and a ‘renewables only’ system is likely to be five or six times as expensive. All such costs must ultimately be recouped from the consumers, if not the taxpayer.
  • It is true that it takes time to plan, prepare, finance, and build nuclear power plants. Avoiding increasingly high cost electricity while also pursuing envi-ronmental goals would require prudent management for a number of years of the existing system, including the existing coal plants and gas plants, while replacement baseload assets capable of playing the same role without incurring far higher costs are planned, prepared, financed and deployed.

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