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How Much Will Electricity Cost?

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Australia is on an inexorable path towards greater reliance on renewable energy.

We are told by the supporters of increased use of renewables that the cost of this power is going down all the time and that it will soon be competitive with coal fired power.

This is a misleading statement because it relies on comparisons of the levelised costs of energy and takes no account of the system cost of adding variable renewable energy to the grid.

The system cost will determine the prices to be paid by electricity users in the future and so is fundamental to energy policy.

These issues have now been analysed by Stephen Wilson from Cape Otway Associates on a commission from the Energy Policy Institute of Australia.

The Wilson analysis shows that the introduction of variable renewable energy will substantially increase the system cost and that, once the ratio of renewable energy exceeds a certain threshold, the system costs become unsustainable.

Mr Wilson draws the following conclusions: “Australia faces the replacement of more than two thirds of its power generation capacity over the next three decades. It is believed by many renewable energy advocates that variable renewable energy (VRE) options could replace coal- and gas-fired capacity without compromising the reliability of the power system.

However, there is little understanding of the likely costs of doing so.

“To be deployed at system-wide scale in the future generation mix, wind and solar need backup or storage. This analysis provides an indication of the cost level of technology pairs that is more realistically comparable with traditional dispatchable generation. The results imply that at current costs VRE options are unaffordable at scale. The costs of the VRE options considered by this paper vary from an estimated $125/MWh in the case of the wind/gas option to $1,200/MWh in the case of the rooftop solar/battery option at the household level.”

In Mr Wilsons view, the Levelised Cost of Energy (LCoE) approach does not provide an adequate foundation either for formulation of sound energy policy or for system planning.

Using his methodology, the cost of generated power from existing coal fired power stations is between $10 and $40 per Megawatt hour (MWh).

The all-in cost from a new state-of-the-art coal plant is estimated at $75 to $85 per MWh.

The fuel-only cost for an Open Cycle Gas Turbine gas peaking plant is about $100 per MWh.

Of course these costs could change if a carbon price was introduced but it is still likely that the difference between the cheapest of the variable renewable options and the cheapest of the fossil fuel options would be about $100.

In order for renewables to be competitive the carbon price would have to be of that magnitude.

Confronted with these realities renewable energy interests will probably continue to press for the maintenance of the renewable energy targets.

The probable consequences for the cost of electricity and Australia’s competitiveness are likely to be dramatic.

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