norman rogers
We are often told that wind and solar energy are, if not cheap, at least cost-competitive with fossil fuels. Big mistake! Compared to energy sources such as natural gas, wind or solar energy costs approximately five times more per megawatt hour.
We are told that wind and solar power will save us from climate disaster. If climate catastrophe is imminent, the only thing that can save us is nuclear energy. Wind and solar power are extremely expensive ways of reducing CO2 emissions. The more wind and solar power is built, the cost of removing carbon dioxide increases disproportionately.
The United States is wasting $1.5 trillion on wind and solar power, and only a little more than 10% of our electricity comes from wind and solar power.
Fossil fuels are not dirty. The environment of a modern natural gas or coal-fired power plant is pristine. Carbon dioxide is not a pollutant, but an aerial plant nutrient that greens the planet. Carbon dioxide allows plants to grow faster using less water.
The cost of generating electricity from wind or solar is simply not worth mentioning. It's worth the price someone is willing to pay. This is a generally accepted economic principle.
If the government requires utilities to buy a certain amount of electricity at a certain price, that's not a free market. This is central planning. Central planning can work, but it is rarely as effective as voluntary exchange of goods and services. Central planning creates unexpected twists and turns and often results in low productivity.
I will first discuss the value of wind and solar energy in the free market, and then discuss the effects of widespread government intervention through subsidies and mandates.
When commentators compare the cost of wind or solar power to the cost of fossil fuel power, they everywhere use LCOE, or levelized cost of electricity. Comparing the LCOE of natural gas to the LCOE of wind or solar is a logical error. The correct comparison is to compare the marginal cost of natural gas to the LCOE of wind or solar. In the United States, the marginal cost of generating electricity from natural gas is about $20 per megawatt hour, and the LCOE for wind or solar hovers around $100 per megawatt hour, about five times that per megawatt hour.
LCOE includes the amortization of the cost of building the power plant. Marginal cost is essentially the cost of fuel to generate electricity.
Under what circumstances would a utility or grid operator be willing to buy wind or solar power? For the sake of discussion, let's assume that the utility will replace some of its natural gas generation with wind or solar generation. If coal power was to be replaced, the argument would be the same; if hydropower was to be replaced, the argument would be different. No one is going to replace nuclear power with wind or solar power because nuclear fuel is too cheap.
Utilities cannot do full replacements, scrapping natural gas plants and replacing them with wind or solar farms. This is not possible because wind and solar energy are unstable and the power provided is affected by weather and daily solar cycles. Their unstable nature cannot be addressed remotely at reasonable cost through batteries or pumped hydro.
When the sun is shining or the wind is blowing, utilities will be willing to reduce the amount of electricity produced by natural gas plants and replace that electricity with wind or solar power if the price of wind or solar power is below the marginal cost of generating electricity. Note that I'm talking about marginal cost, not levelized cost of electricity.
The marginal cost of a natural gas plant is almost entirely fuel cost. If the price of natural gas is $3 per MMBtu and the natural gas power plant is a combined cycle power plant, the marginal cost of generating electricity is approximately $20 per MWh. In countries that do not enjoy cheap natural gas, marginal costs will be higher.
If wind or solar power costs more than $20, replacing gas-fired power with wind or solar power will be a money-losing proposition. If less, then this will be a profitable endeavor. this value Under these conditions, the cost of generating electricity from wind or solar is $20 per megawatt hour.
The levelized cost of electricity for natural gas plants includes initial investment amortization reserves. It also depends on the utilization or capacity factor of the plant. Capacity factors have little to do with the characteristics of natural gas generation, as practical utilities overprovision their generator capacity to account for peak demand and the possibility of plant maintenance.
The LCOE of a wind or solar farm is almost entirely the capital cost spread over the megawatt-hours of electricity generated, with due regard for the time value of money. The marginal cost is close to zero because there is no additional cost to generate additional megawatt hours, and there is no cost savings if fewer megawatt hours are generated. If a power plant generates less electricity because the grid cannot accept all the available wind or solar energy, the cost per megawatt hour increases proportionately. Flooding the grid with wind or solar energy is a growing problem.
departure from the free market
The most important government intervention is state intervention Renewable Energy Portfolio Method. These laws define renewable energy and set quotas for the proportion of the state's electricity that must come from renewable sources.
Without getting too complicated, renewable energy is generally defined as any energy source other than fossil fuels, nuclear power, or hydroelectric power involving dams. Most energy sources that pass this test are too expensive or unscalable. Wind and solar are too expensive and intermittent, but they are scalable. The result is that renewable energy is almost always wind or solar. Some states allow hydroelectric power from dams to be considered renewable energy. Hydro has limited scalability as the best sites have already been developed.
The Renewable Energy Portfolio Act requires the purchase of increasing amounts of renewable electricity. For example, California requires that 60% of its electricity come from renewable energy sources by 2030.
The second most important government intervention is federal subsidies, tax credits and complex tax provisions called tax equity financing, which subsidize about 50% of the cost of building a wind or solar farm.
Mandatory purchase of renewable electricity changes the nature of the renewable electricity market. Without authorization, owners of wind or solar farms are doomed to beg utility companies to buy power at prices well below the cost of generating it. The farm will soon go bankrupt. But with the mandate, utilities are knocking on his door, begging them to mandate the purchase of renewable energy, regardless of price. The Renewable Energy Portfolio Approach transforms the market from a buyer’s market to a seller’s market.
There are a handful of companies with the expertise and financial resources to build multibillion-dollar utility-scale wind or solar farms. Although nominally they compete through bidding to sell electricity, they constitute an oligopoly. In other words, competition in the market will not be as fierce as it would be if there were more players.
The most common deal structure is for a developer to build a wind farm and sell the power to a utility company. As the market moves in favor of the big companies, they are able to demand a long-term contract, called a power purchase agreement or PPA, usually for 20 years, to guarantee that all the power from the project comes to the market at a fixed price. This long-term market and price guarantee is of tremendous value.
PPAs are a subsidy because by removing market risk, farms become less like businesses and more like Treasury bonds. The price per megawatt hour can be lower because lower rates of return are feasible. The risk has been eliminated. With a guaranteed market, farms can be sold to conservative investors such as infrastructure funds or pension funds. I estimate that the PPA lowers the required rate of return from 12% to 8%, thus subsidizing a third of the cost of renewable electricity.
This subsidy is not free. The utility took on significant debt and risk by signing power purchase agreements. There are many reasons why a utility would want to exit a PPA within five or ten years. For example, lower-cost nuclear power.
Between the Renewable Energy Portfolio Act and federal subsidies, wind or solar farms receive about 66% of the subsidies. For example, if the LCOE for wind or solar power is $100 per MWh, it will be $33 per MWh after subsidies. That's still more than the $20 electric bill. To close the gap, utilities must raise rates to cover the additional $13 per megawatt hour. The final subsidy comes from electricity customers.
Reasons for huge subsidies
The first reason is that reducing CO2 emissions will prevent climate catastrophe. This justification fails for several reasons. Reducing U.S. carbon dioxide emissions will accomplish little because the emissions problem is in Asia, where emissions not only dwarf ours but have soared due to the growth of coal-fired power generation.
The cost of reducing CO2 emissions through wind or solar energy is very high, costing more than $300 per ton of CO2 reduced. The subsidy is the cost of removing carbon dioxide. Increasing wind or solar power generation above 50% is becoming increasingly difficult due to the intermittency of wind or solar energy. Carbon offsets can be purchased for as little as $10 per ton, but are not enough to offset the entire power system's carbon dioxide emissions. Significant reductions in emissions at reasonable costs require nuclear power, which is generally prohibited by renewable energy portfolio laws.
The second reason is that fossil fuels or nuclear fuels will be exhausted. There is enough fossil fuel in the United States to last hundreds of years, and enough nuclear fuel to last thousands of years. It would be unwise to turn the economy upside down in order to predict theoretical events centuries into the future.
A third reason is that fossil fuel plants cause air pollution, and nuclear plants can release harmful radiation. Modern coal or gas plants are clean for the environment. Nuclear power plants have been proven by hundreds of nuclear power plants that have been operating for decades. The most serious accidents are easily controlled.
Finally, increased carbon dioxide in the atmosphere greened the planet and dramatically increased agricultural yields. Carbon dioxide is food for air plants.
When will people across the country wake up and stop the bleeding?
Norman Rogers writes about energy and is the author of “Energy Stupid.” A more detailed discussion and computational details are located in https://windsolarcon.org.
This article was originally published by RealClearEnergy and provided via RealClearWire.
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