Critics of the British Government's energy and emissions plan point to its goal of turning the most expensive and least consistent fuel sources -- wind and solar -- into base load electricity sources for the country. The result, according to the critics, is that power costs will climb sharply and reliability will be at risk. In their view, the British Government is turning electricity economics on its head to the detriment of consumers.
In the U.S. the Obama administration's energy and carbon emissions policy seems to be based on similar feel-good concepts. The Administration is favoring wind, solar and biomass over nuclear, natural gas and clean-coal. By approving regulatory and/or government mandates for using renewables, the mix of fuel sources will change as well as the trajectory of future electric power prices. The possible economic problems from these mandates are only now becoming more visible. We clearly will hear much more about this issue in the coming months and years.
An article on the green power movement in China published in The New York Times highlighted the cost issue in that country. The author reported on the issue of solar power projects being proposed and built in China and the cost of the power they will produce. The Chinese government in recent years punished three of its largest power companies by restricting them from building more coal-fired power plants because they had failed to comply with environmental regulations at existing coal-fired plants. To meet their growing power needs, the companies agreed to pay $0.59 per kilowatt hour for electricity to be generated from new solar facilities.
Since then the renewable energy frenzy has mushroomed in response to the Chinese government mandate for renewable fuel use. Since most power plants are built and operated with loans from Chinese state-owned banks, the issue of power plant economics has become increasingly important to the government. Poor project economics may mean low electricity prices but likely loan losses as the power companies don't earn enough to pay off the cost of the plants. Thus this spring when the government solicited offers to build and operate a 10-megawatt photovoltaic solar power plant, the lowest bid was for a $0.10 a kilowatt hour price. The government rejected the bid as too low as it reasoned that the state-owned bank would lose money on the loan to finance the plant. The subsequent winning bid was for a rate of $0.16 a kilowatt hour. This rate is well below the earlier $0.59 rate, but a two-thirds drop in raw material costs has helped to lower the breakeven price for new plants. The generating company's general manager, however, was quoted as saying the bid price was probably too low and that $0.22 to $0.23 cents a kilowatt would have been fairer.
At the same time these power deals were being entered into the electricity grid was buying power from new coal-fired power plants at $0.04 to $0.05 a kilowatt hour. Wind turbines have been selling electricity recently at $0.07, down from $0.10, a kilowatt hour several years ago. The Chinese government is supposedly accepting these higher renewable energy prices because it is concerned about the country's limited coal reserves - only 41 years at current consumption rates.
In the United States, many electric utilities provide an option for its customers to purchase "green electricity" at a premium price. We have yet to meet many people who elect this option except politicians such as the mayor of Houston. People understand that the utility cannot segregate the electricity it delivers to one's home but it can buy an equivalent amount of power from a clean-energy generator and charge the higher price to those customers who want to "feel good." The problem becomes when electricity suppliers need to commit to more green-energy then they are selling.
The cost problem is highlighted by the situation at the municipal electricity provider, Austin Energy, in Austin, Texas. In 2000, Austin Energy decided to buy clean-energy from a wind farm in West Texas so it offered it through a program, GreenChoice, which sells electricity generated only from renewable sources. When the first batch of green electricity was offered to consumers, Austin Energy provided them with a 10-year fixed price guarantee. That has worked well for some consumers as there have been periods since 2000 when traditional fossil fuel prices have spiked making conventional electricity more-expensive than the renewable energy price.
The rising cost of developing new renewable energy sources has pushed new GreenChoice batches of power up in price to where they are now three times more expensive than the standard electricity rate. That reflects the fact that renewable energy costs have climbed by fivefold since 2000. The impact is that the higher renewable energy price adds about $58 a month to the electricity bill of the average home in Austin. Since commercial enterprises buy 83% of the green energy volume, their budgets for electricity are taking large hits, especially difficult in this recession.
GreenChoice has been trying to sell its latest batch of green power for the past seven months. The power is so expensive Austin Energy has only been able to sell one percent of the volume. The economic problem for Austin Energy is growing as it now has committed to buy power from a solar plant that will cost two-times the price of the current unsold green energy. All this at a time when the Austin City Council has mandated that Austin Energy generate 30% of its electricity from renewable sources by 2020. So what's the likely solution? Austin Energy is considering possibly spreading the higher cost of green energy across all customers as one option. They are also hopeful that new transmission facilities will be built that may reduce the current cost of bringing wind power from West Texas. Whether this later development happens or whether spreading the cost across all the customers is fair are not necessarily the right questions. The financial viability of the utility certainly is. Austin Energy was created to sell the power from coaland natural gas-fired plants owned by the city of Austin. In an era where social issues outrank bad business judgments, just living in this country, or Austin, Texas, may mean all citizens are going to be sharing the pain of subsidizing uneconomic decisions for a few.
G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.
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