Green Boom or Energy Bust: Why Conventional Energy Could Cost More Than We Thought and What to Do About It
How do governments decide how to keep the lights on? Choosing which energy sources to invest in, what kind of power plants to build and which regulations to adjust is a complex balancing act, but crucial to taking the right road into the future are accurate metrics. Research shows, however, that the calculations used to compare energy options could be significantly underestimating the cost of conventional, central power plants.
THE HIDDEN COSTS OF CONVENTIONAL POWER
RethinkX, a US-based think-tank, has taken a second look at mainstream energy price analysis, demonstrating that the cost of electricity from conventional power plants has been vastly underestimated. They argue that current widely used levelized cost of energy (LCOE) projections underestimate the price of electricity produced in power plants; the actual cost could be up to 14 times the LCOE estimate.[1] This alone is enough to imply that the old guard of coal, gas, nuclear and hydro can’t keep up with the plummeting price of renewables like solar and wind. However, when we take into account that LCOEs don’t include distribution and balancing costs – which the European Commission estimates make up about 35% of the cost of energy – it becomes clear that we need to take a closer look at the grid.[2]
OVERLY OPTIMISTIC LCOES UNDERESTIMATE THE TRUE PRICE OF COAL
How do governments decide which new power plants to invest in? Although carbon emission considerations are starting to play a small role, often it boils down to price. This ranges from the cost of building the power plant, operating and maintaining it, obtaining the raw materials and, too often unconsidered, the secondary costs of climate change. But what if the conventional carbon culprits such as coal and gas aren’t just damaging the climate, but costing us more too?
Decision-makers around the world use the LCOE metric to compare the cost of energy. It divides the projected cost of producing energy across all the projected units of electricity that will be generated and sold during a power plant’s lifetime. This gives an average – or levelized – cost per a kilowatt-hour sold.
However, the LCOE methodologies used by governments, regulators and universities everywhere all contain the same critical error: they assume a high and constant capacity for producing and selling energy throughout the operational life of a new power plant.
RethinkX’s analysis shows that capacity estimates used in LCEOs have been above actual capacity since 2010, and with the price and capacity of solar, wind and their associated battery systems dropping exponentially, the capacity of conventional power plants to sell energy looks set to enter freefall.
In the US, if a new coal power plant got the greenlight to go ahead tomorrow, the capacity would be set at 85%. In fact, the standard capacity for coal has been at 85% for some time. The assumption is that if you build that new coal power plant this year, it will be able to produce and sell electricity 85% of the time for the next 20-30 years, giving an LCOE of 7.5 cents per kilowatt-hour [3]. But the reality is drastically different. In the US, coal capacity has fallen from 67% in 2010 to just 40% in 2020 thanks to competition from fracking, solar and wind. In the UK it’s an even more dramatic story, with coal capacity collapsing to just 8% by 2019 [4]. The situation is similar with gas, nuclear, and hydropower, with the actual cost of energy from these centralised sources up to 5, 14, and 10 times more expensive respectively than previously thought [5].
This data suggests that switching to solar, wind and battery-based power is already cheaper than any other form of energy, and with the price of renewables estimated to drop by 70% over the next ten years, the gap is set to grow.[6] The current faulty LCOE numbers, however, strongly bias any cost comparisons between solar and wind vs. conventional coal, gas, nuclear, and hydro in favour of the latter.
A NEW ENERGY ERA NEEDS NEW MEASUREMENT METRICS
In addition to underestimating the cost of energy, once you take into account that LCOEs don’t include distribution costs, the inefficiencies in the system start to stack up. Bax & Company has previously proposed a new metric – the Local Levelised Cost of Energy (LLCOE) to allow for a more accurate comparison of energy costs between different approaches. The LLCOE covers the lifetime costs of energy generation and distribution in a system, divided by energy production. The resulting more accurate comparison of energy costs highlights the benefits of going local with energy production.
LOW COST LOCAL ENERGY PRODUCTION
In contrast to large power plants, which produce energy centrally to be delivered through a mix of national and regional networks, biomass, solar panels and wind turbines can operate on a much smaller, more local scale. Local energy systems can also be tailored to local conditions.
In Eemnes, a small Dutch town 35km from Amsterdam, for example, many south-facing homes take advantage of sunny hours with solar panels. This decentralised energy production also enables a different kind of energy distribution: small scale, with residents selling excess energy to their neighbours. This kind of local energy community isn’t just more sustainable, it also cuts out the significant distribution costs and inefficiencies (through energy loss over distance) associated with national power grids. Eemnes is part of the Renaissance Horizon 2020 project, an EU funded project developing novel business models to facilitate energy trading within communities, increasing the amount of locally produced energy and the overall share of renewable energy.
West Suffolk Council in the East of England is also a pioneer in promoting the deployment of decentralised PV (solar) generation on businesses’ rooftops. Through their West Suffolk Solar for Business programme, the Council has planned, financed, managed the installation of 3.5MW of PV capacity, generating green energy to be used by local businesses at a cheaper tariff. The Council is also exploring the potential for local energy trading in Mildenhall industrial estate, an area with possible future network constraints that could both hinder its economic growth as well as the connection of additional renewable capacity. In the Interreg NSR ACCESS project, the Council is working closely with businesses on the estate to test innovative energy solutions, such as demand-side management and peer-to-peer trading, that will improve energy efficiency while providing enhanced flexibility to the network. BaxCo is proud to be collaborating with such an ambitious partner that strongly believes that the development of a smart local system is key to achieving a cost-effective, reliable, low-carbon power supply.
While investing in renewables can be a significant outlay, when we look at the miscalculations in the LCEO and the distribution costs taken into account in the LLCEO local energy communities could see significant savings by jointly producing, managing and storing their own energy. Local energy production and storage would also enhance flexibility, especially at points of congestion in the distribution network. This also translates into savings, which have been evident in areas with grid constraints, where the extra storage and generation provided by the local energy community’s decentralised energy system helps to take pressure off the grid. Not to mention, the sustainable nature of smaller scale energy production and distribution is urgently needed in the context of the transition to low-carbon energy.
IMPLICATIONS FOR THE FUTURE
While local energy communities tick a lot of boxes, to get the most out of our energy system, we need to be weighing up the options with accurate measurements. The combination of overlooked distribution costs and vastly overestimated power plant capacity in the existing widely used LCEO is distorting predictions and decision-making.
The research by RethinkX indicates that mispriced energy assets are creating a growing valuation bubble in the conventional energy sector – an idea supported by the increasing cost of financing coal and gas projects as investors price in the long term risks of the transition to clean energy sources. It also shows that carbon neutrality in energy production could be achieved more quickly and cheaply than previously thought – as long as decision makers make the right choices.
Of course, it’s not as simple as swapping all energy production to local, low carbon options tomorrow. Regulators are concerned that if communities switch to local energy production and distribution, the people left on the grid will be saddled with ever-higher maintenance costs. And the need for a backup energy source is always worth bearing in mind.
The true cost of energy, however, needs to be taken into account while choosing which energy sources to invest in or whether to subsidise conventional power sources. The inaccurate metrics are baking in market distortions and slowing essential progress towards the energy transition. By taking a more accurate look at the cost of energy, we can make the right investment decisions to get the best value for people and the planet.
At Bax & Company, we are working with industry partners and local energy communities to develop more accurate methods of comparing energy costs. For more information, please get in touch with one of our consultants.
References
[1] RethinkX: By 2030, the corrected LCOE of a new nuclear power plant is almost 14 times greater than the U.S. EIA Reference Case assumption, at 105 cents per kilowatt-hour.
[2] EU Reference Scenario 2016: Energy, transport and GHG emissions – Trends to 2050, Figure 49, page 75
[3] U.S. EIA. Assumptions to AEO2021 – Electricity Market Module. (2021).
[4] DUKES. Digest of UK Energy Statistics (DUKES): Electricity. (2020)
[5] RethinkX, Rethinking Energy, The Great Stranding: How Inaccurate Mainstream LCOE Estimates are Creating a Trillion-Dollar Bubble in Conventional Energy Assets, pp. 12-18
[6] RethinKx, Rethinking Energy 2020-2030: 100% Solar, Wind, and Batteries is Just the Beginning
