I would argue the ‘real cost’ of renewables is really just the cost to the country as a whole.
In other words to make a valid comparison you would also have to include the costs of providing back-up for intermittency, the transmission system upgrades to cope with their inherent overcapacity, the tie-ins of all the new generation sites and the costs of providing ancillary services (the network stability functions provided by conventional generation). Currently since we have no direct government subsidies these costs are hidden in our bills and borne by consumers.
So in reality the costs of renewables are even higher than this analysis suggests and without the cushion of the various subsidies, ‘market mechanisms’ etc. simply not commercially viable.
The much quoted (I would say abused) LCOE was never intended for use when evaluating very different forms of generation. As any Electrical Engineer will tell you, in system terms renewables are very different … it’s not a ‘like for like comparison’ and so the metric is useless.
Dieter Helm the renowned economist has drawn a similar conclusion ie. for the UK renewables are far more expensive than most other forms of base load generation when you consider the total (system) costs.
thanks Mark, and yes I agree 100% with your comment. I have written about this extensively - I think those who make a living from pushing the "green, clean and cheap" Utopia are very dangerous to society as it is such an easy "pitch" (because everyone earnestly wants it to be true) and there is no downside to them (+invitations to Davos/UN/TED etc, social adoration as upside).
That said, I didn't talk about the bigger picture in this article because I wanted to keep the focus only on the absurdity of the renewables folks saying they really want to be paid less, whilst their accounts seem to show that they barely get by even with these high prices...
Love this. Energy markets and marginal pricing aren't my deep expertise, although they matter and I am interested, I just end up focusing on technical matters more. I will try to read this, I know its important.
What I find really interesting about marginal pricing and costs, is the very nature of the Marginal Revolution, and its partly German language roots. For years I never understood the exact meaning of the word marginal, but it became clear when I learned its a translation from the German 'grenze' meaning border, so its the economics of things on the border, or 'on the margins'. THEN I got it.
To this day I still dont know what a fucking eigenvalue is.
Digging around in this raised an interesting question... which I might turn into a future post. The question is what is the real cost of generating electricity from wind or solar? The social-media version is that since wind and sun are free, the marginal cost of production is almost zero - you don't have to pay for fuel. In this case the cost to cover your operating expenses would be the cost of production.
In the real world you would need to add on the amortization of the capital costs, the cost of any debt financing and the return on investment for those who supplied the capital. Furthermore, you would likely have a TopCo that would need to push some of its G&A down to the operating assets.
How do you approximate for all of these? Well, it seems logical that the companies involved do the math and runcorporate finance models that include all of the other financial elements - and when you see an offshore auction round like the AR5 in the UK (2023?) which had a strike price of £44/MWh (2012 £ to be inflated to actuals - c. £53/MWh) - and that this attracted NO bids - it tells me that the "all in" cost of offshore wind is greater than £53/MWh.
Indeed the numbers in my article seem to show that the UK has to guarantee at least £100-£120/MWh to keep the industry alive and a company like Orsted is profitable with pricing in the £250/MWh range.
Wind may be free, but harvesting it has a cost. And that is without getting into the cost of fixing the internittancy at the system level.
What makes the "wind is free" argument patently silly is that you could apply the same to oil and gas. Hey its just sitting there, for free - all you have to do is harvest it.
Yes, excellent point about oil in the ground, it really IS exactly the same, its just sitting there and as you say all you have to do is harvest it.
The on-going argument about LCOE and its validity has to do with who's point of view one considers - LCOE remains a valid estimation tool for production cost for VRE from the point of view of an investor and a fixed project boundary/control volume, which is why I guess Lazard promoted it so heavily. If you have a fixed project and PPA contracts for money input, you can use LCOE to estimates. Where LCOE isnt useful is for looking at the VRE in a network system and comparing its costs to other asset classes. We have done lots of work recently on this subject and total system cost and System Cost Of Replacement Energy and other related metrics like LACE, VALCOE etc.
I would argue the ‘real cost’ of renewables is really just the cost to the country as a whole.
In other words to make a valid comparison you would also have to include the costs of providing back-up for intermittency, the transmission system upgrades to cope with their inherent overcapacity, the tie-ins of all the new generation sites and the costs of providing ancillary services (the network stability functions provided by conventional generation). Currently since we have no direct government subsidies these costs are hidden in our bills and borne by consumers.
So in reality the costs of renewables are even higher than this analysis suggests and without the cushion of the various subsidies, ‘market mechanisms’ etc. simply not commercially viable.
The much quoted (I would say abused) LCOE was never intended for use when evaluating very different forms of generation. As any Electrical Engineer will tell you, in system terms renewables are very different … it’s not a ‘like for like comparison’ and so the metric is useless.
Dieter Helm the renowned economist has drawn a similar conclusion ie. for the UK renewables are far more expensive than most other forms of base load generation when you consider the total (system) costs.
thanks Mark, and yes I agree 100% with your comment. I have written about this extensively - I think those who make a living from pushing the "green, clean and cheap" Utopia are very dangerous to society as it is such an easy "pitch" (because everyone earnestly wants it to be true) and there is no downside to them (+invitations to Davos/UN/TED etc, social adoration as upside).
That said, I didn't talk about the bigger picture in this article because I wanted to keep the focus only on the absurdity of the renewables folks saying they really want to be paid less, whilst their accounts seem to show that they barely get by even with these high prices...
Love this. Energy markets and marginal pricing aren't my deep expertise, although they matter and I am interested, I just end up focusing on technical matters more. I will try to read this, I know its important.
What I find really interesting about marginal pricing and costs, is the very nature of the Marginal Revolution, and its partly German language roots. For years I never understood the exact meaning of the word marginal, but it became clear when I learned its a translation from the German 'grenze' meaning border, so its the economics of things on the border, or 'on the margins'. THEN I got it.
To this day I still dont know what a fucking eigenvalue is.
Digging around in this raised an interesting question... which I might turn into a future post. The question is what is the real cost of generating electricity from wind or solar? The social-media version is that since wind and sun are free, the marginal cost of production is almost zero - you don't have to pay for fuel. In this case the cost to cover your operating expenses would be the cost of production.
In the real world you would need to add on the amortization of the capital costs, the cost of any debt financing and the return on investment for those who supplied the capital. Furthermore, you would likely have a TopCo that would need to push some of its G&A down to the operating assets.
How do you approximate for all of these? Well, it seems logical that the companies involved do the math and runcorporate finance models that include all of the other financial elements - and when you see an offshore auction round like the AR5 in the UK (2023?) which had a strike price of £44/MWh (2012 £ to be inflated to actuals - c. £53/MWh) - and that this attracted NO bids - it tells me that the "all in" cost of offshore wind is greater than £53/MWh.
Indeed the numbers in my article seem to show that the UK has to guarantee at least £100-£120/MWh to keep the industry alive and a company like Orsted is profitable with pricing in the £250/MWh range.
Wind may be free, but harvesting it has a cost. And that is without getting into the cost of fixing the internittancy at the system level.
What makes the "wind is free" argument patently silly is that you could apply the same to oil and gas. Hey its just sitting there, for free - all you have to do is harvest it.
Yes, excellent point about oil in the ground, it really IS exactly the same, its just sitting there and as you say all you have to do is harvest it.
The on-going argument about LCOE and its validity has to do with who's point of view one considers - LCOE remains a valid estimation tool for production cost for VRE from the point of view of an investor and a fixed project boundary/control volume, which is why I guess Lazard promoted it so heavily. If you have a fixed project and PPA contracts for money input, you can use LCOE to estimates. Where LCOE isnt useful is for looking at the VRE in a network system and comparing its costs to other asset classes. We have done lots of work recently on this subject and total system cost and System Cost Of Replacement Energy and other related metrics like LACE, VALCOE etc.
I will try to digest your article this week.