Many people continue to use the wrong metrics to assess the economics of renewables, both because they have not got to grips with what sort of product electricity is, and because they misunderstand the reasoning of economic actors in the electricity market. The result is a distorted debate based on meaningless comparisons.
A classic example is at The Conversation here, though the same site has posted numerous similarly misleading “FactChecks”. They all focus on comparing the costs of electricity from wind or coal, but this only shows that they literally do not know what they are talking about.
The first thing to understand – which The Conversation does not – is that electricity is not like pairs of shoes that can be sold at the same price tomorrow as today. The product consumers demand is not a quantity of megawatt hours but the continuous supply of electricity – its permanent availability to them in whatever quantity they require. This necessity for continuous supply places a premium on “despatchable” power from fossil-fuel, nuclear or hydro plants. This type of power is more valuable than power that cannot be controlled (wind, solar), and much more valuable than power that cannot even be predicted (especially wind). Moreover, power that is rapidly despatchable (hydro, some gas turbines) in response to sudden surges in demand or unexpected failures at other plants is more valuable still for its ability to plug gaps at short notice.
These differences in the value of different types of electricity already render The Conversation’s comparison of coal and wind power per megawatt hour useless. And rectifying its analysis is not, as pretended, just a matter of adding in “balancing costs” such as additional rapidly despatchable sources, extra storage capacity, or upgraded transmission equipment. For the insertion of a low-quality, unreliable source into the grid also reduces the efficiency and increases the cost of baseload power from coal or other sources which need to operate continuously to be efficient.
This leads to a second major unappreciated fact, which is that suppliers do not make economic decisions based on costs. Instead they make decisions based on the estimated difference between costs and revenue. If wind power can underbid baseload coal whenever the wind is blowing, existing coal stations won’t start up, and new ones won’t be built, because they cannot operate efficiently being turned on and off all the time, and therefore cannot generate enough revenue to justify operation or construction as the case may be. This in turn leads to a higher and higher percentage of unreliable power in the mix, with eventual blackouts.
The only way of assessing the true cost of wind and solar is to look at the overall electricity price before and after renewables are added to the mix. Once you do that you find overwhelming evidence from all over the world that markets with even modest shares of power from intermittent renewables have considerably higher prices than those without. That this is not a coincidence is confirmed by both the tightness of the correlation, and the equally impressive correlations over time within the same market – as the share of renewables increases, the price of electricity goes up, and it goes up very sharply with even 20-30% of nameplate capacity, or 5-10% of energy output, sourced from wind.
All this means that the analysis at The Conversation that:
in March 2016…the Australian Capital Territory government conducted its second “wind auction”. The government uses wind auctions to buy contracts for future energy supplies. The lowest price in the 2016 auction yielded around $60/MWh in current prices. This figure is based on a flat rate of $77/MWh for 20 years and assuming around 3% inflation, which is the upper end of Australia’s inflation rate target of 2-3%…
Based on recent prices for newly installed wind power of around $60-70/MWh, and recent price projections for new supercritical coal power at around $75/MWh, it is reasonable to say that – as things stand today – wind power would be cheaper than coal as a new-build source of electricity.
…is just tripe. It is tripe, first, because the coal price buys a continuous reliable supply whereas the wind price buys power whenever the wind is blowing – even when demand is low, so that taking the wind power means shutting down a coal plant that would operate more efficiently if it kept going.
It is tripe, secondly, because wind power should never be bought on a 20-year contract in the first place. Since it is intermittent and unreliable, it should be traded only on a spot basis. But if it were traded on a spot basis, its price would tend to zero as its availability increased. That applies both to the share of wind in total capacity, and to how hard the wind happens to be blowing at any given time: the general rule would always be that wind power would be cheapest when there was most of it. In this perspective, the $60/MWh figure is best seen not as a market price, reflecting supply and demand, but rather as the floor level of a price support scheme which must be paid regardless of the market value of wind power at the times when it is available.
Electricity is not unique in the time-dependence of its value. Transport offers similar examples, e.g. Uber fares, or plane fares. Imagine a company that conducts an auction to supply 100 return air trips for its staff from Sydney to Melbourne in 2018. Bidder A asks when do you want them, and when told, undertakes to meet the demand to provide all the tickets at peak periods, on Sundays and Fridays between 3 pm and 7 pm, on 12 hours’ notice, so that employees can spend whole weeks in one city or the other at the drop of a hat. Bidder B says we can supply 100 return trips all right, but we’ll give you two hours’ notice when each plane is leaving and if you haven’t got anyone who wants to go, tough. Oh, and by the way, the flight can be at 2 am. Does the company then give two hoots whether Bidder A’s tickets are $10 more than Bidder B’s?
The bottom line is that any comparison between prices per MWh of wind and coal is meaningless. The only valid comparison is between the system price of electricity with and without wind power. Once you focus on that you immediately see that wind is totally uneconomic – and that is without considering the potential huge direct and indirect losses from the blackouts it will cause.