The Inevitable Self-Destruction of Renewable Economics

The historical development of renewable energy resources such as wind and solar has been characterized by one common under-pinning factor in every region on earth; the need for direct financial support in the form of construction grants, accelerated write-offs, production tax credits, and/or feed-in-tariffs.

In many areas, including 30 of the 50 States in the U.S., these financial measures have been enhanced by adding Renewable Portfolio Standards (RPS) that require that certain percentages of total electricity generation must be from renewable sources by specified dates, regardless of the cost of achieving those targets.

Where these types of supports have been implemented there has been a rapid expansion of renewable electrical generation capacity. So from that perspective these support measures have been successful. However, the financial burden of these measures is beginning to have serious repercussions in jurisdictions such as Germany, Spain, and Italy.

In Italy, as in many other jurisdictions, the financial consequences of subsidized renewables are creating an electricity paradox - an electrodox if you will; a large over-supply of generating capacity combined with sky-high prices, insufficient firm reserves, devastating economics for base-load generators, and increasing imports of electricity.

The Italian Electrodox costs 14 billion Euros per year for subsidies and the government has been asked for another 1.4 billion Euros for "capacity payments" - essentially insurance payments to non-renewable but reliable generation facilities to make sure they are available on cold, calm nights.

In Germany, the costs of "going green" are piling up and the question of who pays for the transition will be a central issue in the fall 2013 elections. Although it is unlikely that there will  a major policy shift in Germany the mechanisms required to deal with the German Electrodox have yet to be identified.

Rumour has it that Spain is giving serious consideration to shutting down as much as 15% of the country's electrical generating capacity, including the most extensive network of Concentrated Solar Plants in the world.  The Spanish Electrodox is to blame.

The high cost of moving to a sustainable energy economy should not be surprising. As many observers have pointed out, it pales in comparison with the cost of NOT transitioning to a sustainable energy environment. However, I do have a problem with promises that financial support will only be required for a limited time until renewables become cost competitive with non-renewable energy sources.

For example, in an effort to maintain the U.S. Production Tax Credit (PTC) for wind producers, a letter was written by the president of the American Wind Energy Association which essentially promises a healthy industry without supporting subsidies within 5 years.

This is nonsense.

The economics of renewable electricity generation will inevitably self-destruct because of the uncontrollable nature of the resources involved. We are already seeing that in Texas where electricity prices are negative when the winds are strong.

Because construction costs are "sunken" costs, often supported by significant subsidies, the marginal cost of electricity produced from a wind farm is very low. No non-renewable source can compete when the winds are blowing strongly. As a result it has become very difficult to make the economics work for conventional coal-fired or gas-fired plants in Texas.

The state regulator is raising the price cap on electricity to $9,000/MW-Hour in an effort to entice utilities to build more reliable generation. Apparently the concept is that if you allow a generator to charge 170x the average price for the few minutes they get access to the grid the construction cost of a new facility can be justified. Call me a skeptic but as far as I am concerned "that dog don't hunt."

A similar problem exists in Brazil where several recent electrical generating auctions have only been open to wind generators. In preparation for hosting the World Cup of Soccer and having recently experienced electricity shortages because of drought conditions, Brazil is now preferentially requesting natural gas generation proposals in order to have sufficient reliable and dispatchable electricity.

The reality is that the strength of the wind is determined by large weather systems for the most part.  Generally speaking, when one wind farm is producing a lot of electricity all neighbouring wind farms will also be producing at a high rate, regardless of whether or not there is sufficient demand to absorb that electricity.  It follows that in any kind of market that even vaguely reflects the supply/demand balance the marginal value of wind generated electricity will go down as the number of wind producers goes up.

What does that mean for wind producers in the long term?  When the wind is not blowing they will earn no revenue and when the wind is blowing they will earn very little revenue.  Not really a great business case.

Wind advocates will argue that "the wind is always blowing somewhere!"  While there is some truth to that assertion I have previously written that to build a "smart grid" capable of shunting huge amounts of electricity around North America will take decades and hundreds of billions of dollars.

The situation with Photo-Volatic (PV) solar is even worse because it is predictable. Although some would argue that the PV electricity production curve is a pretty good match to daytime demand, especially in the summer, it is certainly not a perfect match by any stretch of the imagination.

As more and more rooftop PV is installed there will be a larger and larger glut of electricity generation between 10:00 am and 2:00 pm local time. Again, in an environment where Time-Of-Use is reflected in retail prices the marginal value of PV will drop as more and more PV capacity is added to the system.

For home-owners hoping to get a relatively quick return on their investment this is not good news. The power they generate will become less and less valuable and the power they continue to have to buy, in the morning and in the evening and night, will become more and more expensive.

So what is my point?  Only that financial and regulatory support for the development of renewable energy sources is a marathon not a sprint.  And in my opinion it would make more sense for us to devote a substantial amount of this financial support to initiatives that can make renewable sources more reliable and more effective.  The goal should be to decommission non-renewable generation plants, not have them sitting idle as "spinning reserves" requiring substantial "capacity payments". 

Initiatives that will enhance the overall reliability of renewables would include more support for Concentrated Solar Power with Thermal Energy Storage, accelerated R&D to support energy storage technologies, and a greater emphasis on geoexchange and Responsive Demand programs.

The economics of renewables, from a pure dollars and cents perspective, will not make sense until hydro-carbons truly begin to run out.  If we wait until then there will not be sufficient time or resources to make the  transition to a sustainable energy environment.  So it is a good thing that we have started down this road and everything done to promote the development of renewables over the past 10-15 years has been positive.  A relatively minor course correction to enhance reliability will get us to our desired destination.

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