The Economics of Renewable Energy and its role in the UK

1. The Economics of Renewable Energy and its role in the UK Richard Green University of Birmingham

2. Sources of energy • Fossil fuels • Coal • Gas • Oil • Nuclear power • Fission • Fusion • Renewable energy

3. Why support renewables? • To reduce carbon emissions • Is carbon properly priced? • To enhance security of supply • To reduce costs in future • Support R&D or learning-by-doing

4. UK Energy in 2006 Renewable Electricity Air Heat Land Transport Conventional Source: BERR

5. UK Energy in 2020 (?) Renewable – 15% target Electricity Air Heat Land Transport Conventional Source: BERR

6. Renewable sources for transport • Biofuels • First generation are also food crops • Second generation won’t be • Carbon emissions during production • Deforestation • Impact on food prices

7. Renewable sources for heat • Biogas • Biomass • Heat pumps • Solar heating

8. Renewable sources for electricity • Biomass • Hydro • Marine – tidal and wave • Solar photo-voltaic • Waste • Wind

9. UK Renewable Generation

10. System impacts • Many renewable generators can only generate when nature allows • Tidal generation is predictable • Wind generation is only in the short term • Many renewable generators are small • Many are remote from demand centres

11. Network requirements • More transmission for remote generation • Large capacity relative to output • Need efficient rationing system • Distribution networks will contain more generation • Need more protection against faults

12. Reserve requirements • Short-term balancing costs • “What happens if the wind changes?” • National Grid estimates an extra £500-1,000 million p.a. in 2020 • Peak capacity needs • “What happens if the wind doesn’t blow?”

13. Plant closures GW Demand plus 20% Oil Nuclear Demand Coal Gas Other E.ON UK

14. The growth of wind capacity GW Demand plus 20% Oil Demand Nuclear 30 GW of wind capacity by 2020 Coal Gas Other

15. Wind Output - Probability distribution 30 GW of capacity in January

16. The wind capacity credit GW Demand plus 20% Oil Demand Nuclear 10-20% of wind capacity Coal Gas Other

17. Reserve capacity • UK Energy Research Centre estimated the cost of providing “peak reserve capacity” to be 0.3 – 0.5 p/kWh • With 100 TWh of renewable output, this is £300-500 million p.a.

18. Long-term system issues • Will transport become electrified, or use hydrogen from electrolysis? • Will storage become cost-effective? • How much storage is needed, and where should it go?

19. The cost of renewables • Cost to the generator • What investors think about • Resource cost • What it costs to society • Cost to energy consumers • What we end up paying

20. Cost to the generator • These affect investment decisions • Capital costs • Operating costs including grid charges • Compare with costs of conventional plant • Including price of carbon permits

21. Cost comparisons Generator cost Direct costs Carbon price Direct costs Ren Con

22. Estimated costs to the generator Source: House of Lords, 2008

23. Resource cost • System-level estimates are best • Cost to the renewable generator • Plus system costs not borne by generator • Compare with costs of conventional system • Exclude price of carbon permits to get cost per tonne of CO2 abated

24. Cost comparisons Generator cost Resource cost System costs Direct costs Direct costs Carbon price System Direct costs Direct costs Ren Con Ren Con

25. Predicted cost of generation and transmission in 2020 Source: House of Lords, 2008

26. Resource cost • Total cost is about £6.8 billion extra • Roughly £80 per household per year • Based on 4500 kWh/year • Carbon saving of 52 million tonnes • Implied cost around £130 per tonne of CO2

27. Cost to consumers • Support payments made to renewable generators • Carbon prices may bridge much of the gap with conventional costs, reducing required support payments • Bad design will increase them • System costs not borne by generator • Less any impact on wholesale prices

28. Cost comparisons Consumer cost Generator cost Resource cost System costs System costs System Support costs Direct costs Direct costs Market prices Carbon price Market prices System Direct costs Direct costs Ren Con Ren Con Ren Con

29. Support policies • Grants • Offset capital costs • Feed-in tariffs • Fixed income per unit generated • Tradable Green Certificates • Obligation on retailers creates demand • Supplementary income to market price

30. Feed-in Tariffs • Fixed price per unit of output • May depend on site as well as technology • Avoids risk over market price • Generator won’t respond to price signals • Have been very effective in promoting investment on the Continent • Will be used for smaller UK schemes

31. Tradable Green Certificates • Obligation on retailers to surrender certificates or pay fine, creating demand • Generators paid for certificate and power • Incentives related to market price • Generators face price risks • UK’s Renewables Obligation is of this type

32. The Renewables Obligation 2006-7 figures Source: Ofgem

33. Cost of the RO • UK renewables output has been below target, so the RO has a high cost per MWh • Planning system the main culprit • Uncertainty over income may also hinder generation investment • But changing the system could delay investment for several years…

34. Cost to consumers • Renewables obligation payments at least £4.4 billion a year by 2020 • Additional system costs (transmission, balancing and reserve) of £2.5 billion • Cost is c.£80 per household per year

35. Overall • If carbon saving is the only motive, most renewable generation is expensive • Benefits from security of supply and learning-by-doing should also be counted • Energy from waste biomass, renewable heat, may not receive enough attention • Energy efficiency certainly doesn’t!

37. The Midlands Energy Consortium