In energy scenarios, energy systems are mixes of fossil fuels, renewable energy, and nuclear power, combined with models of future infrastructure (e.g., power grids, buildings, cars, and factories) and levels of future energy demand (accounting for population, economic growth and structure, and energy efficiency). Many other factors enter the picture, such as future fossil fuel prices, interest rates, policies, and carbon prices. Scenarios typically model least-cost energy mixes, some with constraints like future carbon emissions.
In scenarios and professional debates alike, renewable energy is often portrayed as “competing” with conventional energy (fossil fuels and nuclear). And historically, debates about renewable energy versus conventional energy have revolved around cost comparisons between individual technologies, or “cost competitiveness.” However, experts debated how to make proper cost comparisons. Many noted that it depends on what is counted as “costs.” They pointed to three fundamentally different types of comparisons, and posed the question, “What is the right way to make economic decisions and comparisons between competing technology alternatives, such as between renewables and fossil fuels?”
Levelized cost comparisons
Conventional economic comparisons are typically made on the basis of levelized cost (i.e., cents/kilowatt-hour), accounting for direct investment costs, fuel costs, and operating and maintenance costs, as well as the cost of capital (interest rates). However, experts pointed out key deficiencies of the conventional approach, which does not account for some factors, in particular: n Fuel and technology subsidies. Fossil fuel subsidies, direct and indirect, “tilt the playing field” toward fossil fuels and amount to large public expenditures. The IEA WEO (2012) estimates that global subsidies to fossil fuels exceeded US$520 billion in 2011, compared to roughly US$90 billion in policy support for renewable energy.
Some experts called for elimination of fossil fuel subsidies, or justified equivalent subsidies to renewable energy. Experts also pointed to existing public subsidies to nuclear power, both direct and indirect (i.e., accident liability).
Experts were quick to point out that most environmental costs associated with fossil fuels and nuclear are not included (“internalized”) in conventional economic comparisons. Some experts also pointed out that many emissions regulations targeting conventional power plants are an attempt to partly internalize environmental costs, but they questioned whether existing regulations go far enough. n Fossil fuel price risk. Experts voiced arguments about the manner in which the risks of future fossil fuel price swings is calculated and incorporated into economic comparisons (and who bears those risks). Analyses have been done on the “hedging premium” necessary to account for natural gas price volatility and uncertainty; for example, one U.S. expert claimed that between 1 and 3 U.S. cents/kWh should be added to the cost of power from natural gas to account for a hedging premium. Summing up, one European wind industry expert said, “By 2020, we should see real competition in energy markets for wind power in Europe; by then, investors will be fully exposed to fuel price risk and carbon costs, and existing subsidies for coal, gas, and nuclear will be greatly reduced.”
Financial risk-return comparisons
Finance experts pointed to “risk-adjusted spread” as the measure they use to compare alternative investments. This involves the difference between a project’s internal rate of return and the cost of capital (interest rates), adjusted for the risks of that specific technology, market, segment, and supplier. Experts noted that this method can provide different results from levelized cost comparisons because of the inclusion of risk. They noted that the risk profiles of conventional fossil fuel plants in many markets have increased in recent years. And several experts spoke of “portfolio” approaches to energy investments that minimize the total risk across an entire portfolio of energy assets, similar to financial portfolio management. Whole-energy-system comparisons Some experts emphasized that cost comparisons should be made at the level of whole energy systems, not at the level of individual technologies. For example, they pointed out that “least cost” in an electric power system depends on configuration, market rules, types of generation, operation patterns, load profiles, and other factors. And in projecting costs of transport-sector scenarios, IEA ETP (2012) considers total costs—including vehicles, fuel, and fuel/road infrastructure. As another example, Lovins/RMI (2011) models four alternative electric power systems: a fossil-fuel-centric system similar to what exists today, a nuclear and clean coal system, a highly distributed system with a high share of renewables, and a high-renewables and high-efficiency (low energy demand) system. At the system level, the scenario found that all four options cost about the same, when some technology innovations and many forms of typically uncounted cost-savings are taken into account. (And it found that a highly distributed system costs about the same as an all-centralized version, but provides better mitigation of outage risks and other economic and environmental shocks.)
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