Contributed by Robert Lyman © 2017
Robert Lyman is an Ottawa energy policy consultant, former public servant of 27 years and prior to that, a diplomat for 10 years.
At virtually every public discussion of the issues surrounding global warming, there will inevitably be someone who will state, with absolute conviction, that the “solution” is already at hand because the global demand for fossil fuels is quickly declining, the costs of renewable energy are falling dramatically, and investment in renewables is increasing.
Let us briefly examine each of these contentions using the facts and authoritative assessments available to us.
Where Are We Now?
Context is always important, but never more so than when one is asked to believe future projections. In this case, we must be aware of how the global pattern of energy demand has changed in the past, and especially in the recent past. The most reliable authority on this is British Petroleum, which for many years has published annual “statistical reviews of world energy”. The latest review, published in 2017, includes data and graphics that present the trends in global supply and demand for each of the major energy sources, as well as summaries of how the relative shares of each energy source, in terms of primary energy consumption, has changed over time.
The following graph illustrates how the shares of primary energy consumption met by different energy sources have changed over the period from 1966 to 2016.
There are several notable points about this background. First, the share of oil has declined steadily since the OAPEC oil embargo of 1973-74; nonetheless, oil continues to be the largest source of energy in the world, at about 34% of the total. The share held by coal has wavered up and down around 30% over the period but has remained in second place, and is now about 28%. Natural gas’s share has steadily increased, despite the fact that until recently there was only limited transportation of gas in liquid form by tanker. Gas now holds about 25% of demand. Hydroelectricity has held its share in the range of 6% to 8%. Nuclear energy rose from next to nothing to about 7% but recently has declined to about 5%. Renewables, as represented mainly by wind and solar energy, has risen from next to nothing before 2000 to about 3% in 2016. In short, after half a century evolution of global energy markets, fossil fuels continue to provide 88% of global energy needs, while renewables play a rising but still very small part.
The following graph shows what that means in terms of the total level of energy consumption over time.
The graph shows how world energy consumption, as measured in terms of primary energy, rose from about 9,000 million tons of oil equivalent (MTOE) in 1991 to 13,300 MTOE in 2016, an increase of 47% over 25 years. The small dark orange part of the trend lines is renewable energy’s share.
What Will Happen In Future?
The reality is that no one knows what will happen to energy supply and demand in future. We can say with quite a lot of confidence that people’s demands for energy services will lead developments, as various energy suppliers are motivated to respond to those needs. Supply and demand will also be affected by the prices of competing energy sources, and these in turn will be affected by resource availability, technological developments and other supply factors. The key demand factors are probably the trends in global population and in economic development in different regions.
There is a fairly small number of organizations in the world that have the information at hand and the capability to use advanced econometric modeling techniques to formulate projections of future energy supply, demand and emissions. The four most authoritative are the International Energy Agency (IEA), the United States Energy Information Administration (EIA), ExxonMobil and British Petroleum BP).
I will use BP’s projections for two reasons. First, of all the major forecasters, BP is the most willing to share the results of its analysis and data for free and in a form that allows clear comparisons of past and present trends. Second, BP’s projections to 2035 are the most “favourable” to renewables.
The following graphs show the future trends in comparison to the previously described past trends.
- Total energy demand will continue to rise significantly throughout the period to 2035.
- Oil, coal and natural gas will continue to dominate the energy mix
- The share held by renewables will grow but by 2035 will still only reach 10% of global energy demand; this will be almost entirely in the electricity generation sector.
To repeat, this is the most favourable outlook for renewables in any of the authoritative energy forecasting organizations. All the others show renewables holding a smaller share of global demand in 2035. No authority projects renewables to constitute even 20% of global energy demand, let alone 100%, in the period to 2050.
The Costs of Renewable Energy
Advocates of wind and solar energy constantly refer to how low the prices of these energy sources will be in future, while ignoring the costs that have been imposed on electricity ratepayers and on taxpayers up to now.
Those historic costs, however, are enormous. They were essentially caused by the actions of several European and North American governments, in the name of addressing global warming, to accelerate the purchase and penetration in the electrical energy systems of renewable energy technologies that were not yet mature and far from competitive with existing generation sources. Typically, governments (in Germany, the United Kingdom, Spain, and Canada to name a few) offered wind and solar suppliers several advantages over conventional electricity supply; these included:
- Feed-in-tariffs far above market rates in contracts that were guaranteed for 15 to 20 years;
- Priority access (“first-to-the-grid”) rights that required the electricity system operators to use the production from wind and solar generation when it was available, and to back out, or “curtail”, alternative sources of supply;
- Requiring the construction of other transmission and distribution systems expansions and upgrades (e.g. “smart meters” and other “smart” systems) to accommodate the additional renewable generation capacity;
- Requiring other suppliers and ratepayers to pay for the cost of additional balancing and flexibility (e.g. backup generation) to deal with situations when demand was high but the sun was not shining or the wind blowing;
- Similarly, requiring ratepayers to pay the costs of dumping surplus power supplies on export markets when the renewables plants produced electricity but the demand was low; and
- Granting renewable energy generators various tax benefits, principally in the form of accelerated capital cost depreciation and low realty taxes.
The countries of the European Union have made the largest expenditures on renewable energy generation. The main source of data on generation costs there is the European Observer, an organization that actively promotes increased use of renewable energy. According to data from this source, to the end of 2014 European Union countries spent about 1.1 trillion EUR (CDN $1.68 trillion) on large-scale renewable energy installations. This provided a nominal nameplate generating capacity of about 216 gigawatts (GW), or nominally about 22% of the total European generation needs of about 1000 GW. The actual measured output by 2014 supplied by the renewables industry was 38 gigawatts, or 3.8% of Europe’s electricity requirements, at a capacity factor of about 18% overall. Accounting for capacity factors, the capital cost of these renewable energy plants has been about 29 billion EUR (CDN $44.4 billion) per gigawatt.
The following table from the European Observer indicates the capital costs per GW of wind and solar energy technologies actually built through 2014.
Thus, the capital costs per unit of generation have ranged from 16 billion EUR (CDN $24.4 billion) per gigawatt for onshore wind to 63 billion EUR (CDN $96.1 billion) per gigawatt for solar PV on the grid, or an average of 30 billion EUR (CDN $45.8 billion) per gigawatt for the three main sources of renewable energy. The capacity factors actually achieved are important in determining these costs.
No wonder renewables advocates do not refer to these costs. Instead, they refer to the rates that have resulted from countries finally terminating the FIT contracting system and requiring renewables producers to sell their services through competitive bidding. The result has been a sharp reduction in the bids received.
The future costs of renewable energy depend not only on the current bids but also on the projected costs over the life of the systems. In the United States, the Energy Information Administration (EIA) reports on the comparative costs of different generation sources on a “levelized” basis. The levelized cost is essentially the expected real total cost (capital plus operating costs), in terms of dollars per megawatt/hour of different new generation technologies over the lives of the plants. The EIA updates these figures every few years.
In the EIA’s 2017 updated version of the levelized cost of new generation sources, it estimates the U.S. national average costs for generation entering service in 2022. The EIA report can be read here:
The following table shows the 2017 estimates.
U.S. Average LCOE (2016$/MWh) for Plants Entering Service in 2022
|Plant Type||Capital Cost||O+M||Transmission||Total|
|Gas Combined Cycle||13.9||42.2||1.2||57.3|
|Gas Advanced CC||15.8||39.4||1.2||56.5|
|Wind – Onshore||47.2||13.7||2.8||63.7|
|Wind – Offshore||133.0||19.6||4.8||157.4|
Note that, partly because of lower natural gas prices, the natural gas-fired plants are projected to have the lowest LCOE, followed by onshore wind. The surprising change from the 2016 figures is the projected reduction in the LCOE of solar PV to U.S. $85 per MWh.
These figures are the bases for the claims by renewables advocates that wind and solar energy are now at or approaching “grid parity” with conventional generation sources.
The Systemic, or Grid-Wide, Costs of Intermittent Energy
The LCOE approach measures mainly the projected direct costs of the generation plant technologies that will be built in the near future. It does not address the broader, or indirect, costs that the addition of renewable energy imposes on the electricity system.
A number of analysts have examined further the differences between the costs of intermittent and dispatchable electricity generating technologies. A seminal paper was written by Paul Joskow of the Alfred P. Sloan Foundation and MIT in 2011. The paper can be found here.
In his abstract, Professor Joskow wrote, “the standard life-cycle cost metric utilized is the ‘levelized cost’ per MWh supplied. This paper demonstrates that this metric is inappropriate for comparing intermittent generating technologies like wind and solar with dispatchable generating technologies like nuclear, gas combined cycle, and coal. Levelized cost comparisons are a misleading metric for comparing intermittent and dispatchable generating technologies because they fail to take into account differences in the production profiles of intermittent and dispatchable generating technologies and the associated large variations in the market value of the electricity they supply. Levelized cost comparisons overvalue intermittent technologies compared to dispatchable base load generating technologies. Integrating differences in production profiles, the associated variations in the market value of the electricity at the times it is supplied, and the expected life cycle costs associated with different generating technologies is necessary to provide meaningful economic comparisons between them.”
To be more specific, the Joskow paper makes these points:
- The LCOE approach is flawed because it treats all megawatt hours supplied as a homogeneous product governed by the law of one price, and thus does not account for the fact that the value (wholesale market price) of electricity supplied varies widely over the course of a typical year.
- Different intermittent generating technologies (e.g. wind versus solar) also can have very different hourly production and market value profiles, and indeed, specific intermittent generating units using the same technology (e.g. wind) may have very different production profiles depending on where they are located.
- Electricity that can be supplied by a wind generator at a levelized cost of 6 cents per kilowatt hour (KWh) is not “cheap” if the output is available primarily at night when the market value of electricity is only 2.5 cents per KWh. Similarly, a combustion turbine with a low expected capacity factor and a levelized cost of 25 cents per KWh is not necessarily “expensive” if it can be called upon reliably to supply electricity during all hours when the market price is higher than 25 cents per KWh.
- In effect, the electricity supplied by conventional plants and by renewable energy plants is not the same product.
LCOE analysis ignores the costs of backing up intermittent renewables and of the networks required to integrate them. Usually in North America, a large number of natural gas plants are required to stand ready, operating at very low capacity factors, to be available when demand is high and renewables generation is not available. Silvia Pariente-David, writing in the IAEE Forum in 2016, summarized the grid integration costs.
“The system operator and the ratepayers pay twice for generation capacity. Integrating wind and solar variable energy into power systems causes costs elsewhere in the system. Examples include distribution and transmission networks, short-term balancing services, provision of firm reserve capacity, a different temporal structure of net electricity demand and more cycling and ramping of conventional plants. Typically, these “integration costs” are of three types: grid costs, balancing costs and the “adequacy costs”, or “utilization effect on conventional power plants”.
She went on to describe a less well known but important consideration, the “merit order” effect of renewable energy (RE).
“RE penetration affects the revenues and margins of conventional power plants by lowering wholesale electricity prices and peak prices and by reducing the volume of electricity produced by thermal plants. Wholesale prices fluctuate between zero when renewables are at the margin (or even negative when low demand coincides with a very high level of wind for instance) and the variable cost of fossil fuel-fired plants when the latter are at the margin.
In a merit order based on marginal cost, RE plants will be dispatched first, as they have a zero marginal cost. As the RE capacity increases, conventional fossil fuel power plants move to the right of the merit order curve and their utilization is substantially reduced. In Spain, effective operations of CCGT fell from over 4000 hours in 2008 to 1000 hours in 2014. Not only do they not cover their fixed investment costs, but they also risk being decommissioned if they run too few hours to cover their fixed O&M. However, these plants are needed to provide the system flexibility to integrate a high level of RE. An issue for electricity systems is how to provide adequate compensation for this flexibility. Capacity mechanisms have been introduced in some European countries to remunerate that flexibility and avoid conventional power plant closure. However, capacity payments tend to create an oversupply of power generating capacity, further depressing prices. This affects negatively both the value of RE and conventional plants.”
The article can be found here:
In other words, as the prices of renewable energy decrease and its role increases, it imposes ever-higher costs on the rest of the generation and transmission system. Advocates for renewable energy ignore these costs.
Questions About Future Investment in Wind and Solar
Due to the significant costs of wind and solar generation to date, governments are increasingly facing opposition from the affected industries and residential consumers to reduce power rates. Some governments have initiated reviews of the design of the regulatory regime and the use of policy and fiscal instruments to attain certain predetermined levels of emissions reduction. The October 2017 Cost of Energy Review, led by Professor Dieter Helm in the United Kingdom, for example, pointed the way to a more economical approach to reducing GHG emissions. The report made two central recommendations.
The first was that the UK government should eliminate the vast array of subsidies, regulations, and programs by which it is now seeking to alter energy supply and demand patterns and instead replace them with one single, universally applied carbon price that would rise in accordance with the emissions reduction target.
Second, it recommended that, once the carbon price was in place, renewables suppliers should be required to bid on an “equivalent firm power basis”; in other words, they must be required to contract with a generator or a storage company able to provide electricity when there is no sun or wind. This would go a long way to removing the current system in which each additional producer of renewable energy shifts more of the system-wide costs of providing balancing and flexibility on to other energy suppliers or ratepayers. In addition to the ending of FIT rates and requiring that all procurement be done on the basis of competitive bidding, it would substantially reduce the pace of new renewables development.
The Helm Report can be seen here:
Indeed, that process has already begun to some extent. After rising at the average annual rate of almost 20% per year from 2000 to 2011, global investment in renewable energy generation essentially flat-lined and has barely increased since then. This followed sharp reductions in the use of FIT contracting practices. The Energy Institute at Haas recently reported that 48 countries have replaced feed-in-tariffs with competitive auction systems, and another 27 are seriously considering do so. This has probably been the key factor in driving down the prices negotiated in new contracts. The European Union is now studying a proposal by the Council of European Energy Regulators to remove grid priority for renewable energy and reduce the compensation when renewable energy is curtailed. These two changes, if approved, would severely cut back investment in renewable energy in Europe.
The next bar chart plots investments in renewable generation over the period since 2000. Between 2001 and 2011 investment grew at almost 20% a year, but after 2011 it flattened out
Source: Carbon Brief/International Energy Agency data
Euan Mearns, writing on the blog Energy Matters, analyzed the reasons for this stabilization in spending.
“It’s been claimed that investment flattened out after 2011 because decreasing prices for wind turbines and solar panels allowed developers to build more for less money, but this explanation does not hold water because prices had been decreasing steadily for years without having any effect on investment growth. The true explanation is that 2011 was the year in which cash-strapped governments began to water down renewables targets and cut back on subsidies. “Investment in renewable energy fell in 2012 as governments cut subsidies” as the Guardian put it in 2013. A year later in 2014 Bloomberg New Energy Finance had much the same to say about the 2013 results:
Looking at the reasons for the decline in overall investment in 2013, worries about future policy support for renewables delayed investment decisions in countries such as the US, Germany, India, the UK, France, Sweden, Romania and Poland. In some other countries, such as Spain and Bulgaria, retroactive subsidy cuts for existing projects almost killed off investment entirely, while in Italy, the amount of PV capacity eligible for support quickly ran up against a government-set cap.
In short, the rapid growth in renewables investment between 2001 and 2011 came to a halt as soon as the subsidy bubble began to burst.”
Mearns also pointed out that the reduction in the prices bid for renewable energy supplied is not entirely beneficial to the renewables industry.
“These cost reductions, however, are a double-edged sword. As governments save money the wind and solar industries make less. This makes wind and solar projects less attractive to investors, which in turn makes it less likely that governments will fill their auction quotas and meet their renewables targets. There are also questions as to whether some of the bidders will make any money at all at the prices they bid, even though they will get paid for all of their intermittent output without having to pay anything for the backup generation and storage services necessary to match it to demand – a chicken which at some point is going to come home to roost.”
Mearns’ article can be read here:
The journal Renewables Now published an analysis of the region-by-region breakdown in global renewables investment. According to it, European renewables investment has been in decline since the second quarter of 2011 and shows no sign of a recovery. Investment in the USA has remained essentially flat. Investment in China grew before the second quarter of 2015 but has fallen off. Investment in the rest of the world has also failed to increase. The post-2011 flattening, in short, is a worldwide phenomenon.
No authoritative source of energy supply and demand projections sees renewable energy rising above 10% of global energy consumption by 2035. In fact, they all foresee fossil fuels continuing to supply by far the majority of the world’s energy needs.
The extremely large costs incurred by the countries that have given preferential contracts and system access to wind and solar energy from 2000 to 2015 have raised electricity prices sharply in those countries and provoked strong opposition to the continuation of such policies. The movement away from feed-in-tariffs towards procurement by competitive bidding has led to much lower prices, but also flattened the growth in investments. If, as some European countries are now considering, intermittent energy supplies are required to bear a larger share of the system costs previously imposed on other generators and electricity ratepayers, the incentive to invest in wind and solar may decline further.
There is no evidence that wind and solar energy will soon fully replace fossil fuels even in the power generation industry, let alone in the entire economy. It is important that the public be better informed about this, so that the wrong policy choices will not be made.