Musings: The Achilles Heel of Renewable Energy -- The Cost

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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Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
irfan | Jul. 28, 2009
If the coal monopoly & their lobbyist efforts here are too strong to break for a switch to the cleanest hydrocarbon i.e. natural gas, there is enough natural gas in USA & Canada to turn them into net exporters. This does not even include Arctic areas. At least that way, you get revenue for it and build up economy. Right now, the cheapest and easiest natural resource to take out is just sitting in the ground all over the continent.

JSurveyor | Jul. 27, 2009
I suppose everyone has selectively forgotten how high was the initial cost of the VCR, CD player, personal computer, EVEN oil in its earliest days. When you innovate and implement a new product or service the cost of production, distribution, marketing, etc. are ALWAYS high at the outset. Once demand begins to kick in and sales are creating revenues the price of these products have ALWAYS gone down, usually to a fraction of the original cost. This is a basic law of economics. Go ahead and keep your heads buried in the (oil) sand. Oil, Nat Gas, Coal are all finite resources that wreak havoc on our planet in the process of extracting and utilizing them. Wind, Solar, and Biofuels, on the other hand, are "RENEWABLE" which means "use all you want! We'll make more!" Wake up, people!

TA | Jul. 27, 2009
If we are such a large gas producer in the future (estimates only), then perhaps we can be an energy exporter to the point or re-balancing the US Federal budget and paying down the deficit. Ah, but that's politics! So, politically speaking, if we continue to be, on net, an importer of goods into the US, I believe our country will lose its lifestyle and freedoms even faster than it is right now.

ETKJR | Jul. 24, 2009
NATURAL GAS SUPPLY - Despite what those who do not know say, we are not running out of natural gas. Latest estimates by the Colorado School of Mines as regards North America Natural Gas supply (taking into account new sources in horizontally drilled, massive frac shale reservoirs) - technically recoverable reserves of natural gas are likely to reach 2,074 TCF, which at the current annual use of 22 TCF would be a 94 year natural gas supply (Jimmy Carter's comments in the 70s notwithstanding).

THIS DOES NOT INCLUDE applying this latest "new" technology to large unexplored shale formations Cody Shale in Montana , Gothic Shale in the Rockies, and Black Warrior in the Southeast US for example. Nor does it include deeper exploration plays in the GOM and other reservoirs in the US. Nor does it include offshore deposits of methane hydrates.

In fact, there is every possibility that the US can become an EXPORTER of LNG over the next ten-twenty years, if the US demand does not GROW to consume the readily available supply of natural gas for the next century, compared to the cost of oil-based energy in Europe, etc.

"We need to face the reality of demand that will outstrip oil and gas production within 5 years." - Not in my children's lifetime - or my grandchildren's - will North American demand exceed North American supply for natural gas, with the new drilling and production technologies in place and under development.

The point is, we have at least this coming century to develop alternate energy sources in an economically viable manner. We do not need to cripple the economy for feel-good emergency plans poorly planned and rapidly enacted.

My bet - Solar Thermal, including large molten salt underground storage (for continuous electricity supply even during several days of cloudy weather) AND a new HVDC transmission backbone across the continent to move this Solar Thermal electricity from the south and southwest to all parts of the nation. But we can take 40-50 years to get this in place. We do NOT have to do it in the next 5-10-15 years.

glen macdougall | Jul. 24, 2009
I think the phrase "clean coal" should be taken out of everyone's vocabulary and "marginally cleaner coal then dirty coal" should be put in its place. The world is going to have to switch to renewables regardless at some point in the future. I would rather pay a dollar cost than the environmental cost any day. Investing in new technology and preferable government legislation is what is going to make renewable energy viable. If subsidies were given to clean energy companies like the ones oil and farmers get then we would be off to a great start. It's time to get our priorities straight.

db | Jul. 24, 2009

Good points and I agree with you that a huge piece of the futucurrent re energy disaster is politics. That said, I don't agree that nuclear is our only option. In any HEALTHY market there are various players, from the biggest down to niche players. Sure Nuclear should be a part, likewise Natural Gas and likewise Coal but we should always have our eye on the fact that these fuels are depleting fast and come with a host of problems.

While I agree that in an ideal world we ought to let economics guide things, in reality it's been a long time since a purely free market existed anywhere. Neither we in North America nor the Europeans nor the Japanese nor the Chinese have a free market. The various energy markets are the same. I'm not justifying this by the way, just pointing it out.

Wind as a good example: It's often heard that nobody would built wind farms without subsidies. Do oil and gas and nuclear not have subsidies? What do we call a three trillion dollar expenditure to assure shipping lanes in the Persian Gulf? It can also be argued that no nuclear plants would be built without subsidy either.

In an ideal world we would be operating in a free market and there would be no malinvestment.

We do not live in such a world. Right now we are faced with a potential huge jump in demand compared with supply over the next ten years at the most.

The problem there is the price spikes. If there was a gradual increase in prices we could live with it. The Europeans pay way more for gasoline than we do and their economies are just fine. Price spikes, however, neither we nor they can deal with. It's also not good for the oil industry.

My proposal (like Boone Pickens) is to switch out gradually a large chunk of our transportation infrastructure over to electric or hybrid gas/diesel/electric so that we can stretch our remaining supplies to cover all possible needs, and for areas that electric is not feasible, switch to natural gas (such as our heavy duty trucking fleet).

In such a scenario, demand will still remain high for oil and gas products and the economy could potentially handle $300 a barrel (or higher) since our average MPG will be much higher. In this case it's win win for everyone. We get cleaner air, more energy security and less disruption to our economy.

Dr. Charles Laser LLD/HC | Jul. 24, 2009
I have been in the oil exploration business or around it for more than fifty years. I can tell you that we have enough oil and natural gas to last hundreds if not thousands of years. Historically we ALWAYS found just enough oil and natural gas when the price was high enough to explore. We have not drilled even 1% of the earth's potential reservoirs, onshore or offshore. For example our studies show we have the same source rock and geologic conditions for Saudi size oil wells in Nevada, USA (home to the two largest oil wells in fifty years in Nye County) and our studies in the 80s showed potential for world-class oil fields in Iowa where no oil has yet been found. We have vast untapped reserves offshore. There is no other cheaper source of energy when balanced out over time than oil and natural gas. Most of the so called "green" technologies will not work due to the laws of thermodynamics, and government subsidies will only push consumer energy rates much higher over time. We need to drill many thousands of new wells here in the U.S. to deeper depths and we will soon reduce our dependency on foreign oil.

Charles Laser - President Laser Exploration, Deerfield Beach, Florida

TA | Jul. 24, 2009
We need to face the reality of demand that will outstrip oil and gas production within 5 years. If we wait until that moment to invest in renewable energy, oil at $300/bbl and natural gas at $15/MMBTU will wipe out any capital we have to build the renewable generation facilities.

We need to invest now, pay a little up front - preferably by spreading the cost out to the entire U.S. through nationwide energy consumption taxes not by just the charging the small local utility base. Don't penalize a smaller locale just because they are in the right area to generate the renewable energy today. This is a national security issue not a "green" issue.

DWK | Jul. 24, 2009
As all of us associated with the oil and gas industry are aware, the oil commodity cannot help but become much more valuable as time wears on. Do we need to develop additional sources of energy? Most assuredly. But we must be judicial in its practical implementation based on the basics of economics, not emotion.

Since Texas has a unique position due to its solitary power grid, it allows a rate schedule based on factors that are not tied to economics, but politics. That is the primary reason our utility rates do not stand up well to close scrutiny. As long as politics, not economics, are the driving factors behind our woeful energy policies, we will continue to be in an ever degrading position among the world's powers. Are you listening, Washington?

In addressing the implementation of massive wind farms and solar arrays, the logistics involved in transmitting this power from the remote areas where it has been thus utilized is a major cost factor in itself. Mr. Pickens didn't give on this concept for no reason, he knows how to turn a dollar. I don't know if many of you have seen for yourselves the wind farms of West Texas, but it's easy to see why you place them in remote areas. They are indeed a visual abomination on the landscape. It also appears that the only practical avenue for future power generation remains nuclear. No one seems to want to embrace its long-term advantages compared to other sources. Even though the negatives of high initial cost and environmental issues are of major concern, these factors can be dealt with and overcome.

db | Jul. 23, 2009
While those that work in the oil and gas industry benefit greatly from the huge runups in price that take place mid to late boom, the rest of us don't. You talk about inconsistent supplies. Really? Does the sun come up every day? Does the wind not blow somewhere every day? Do the tides not flow every day?

I get your position and I get the position that there is plenty natural gas. Conventional crude, however, is getting harder and harder to maintain at current volumes and with India and China adding two million cars per year its not going to be long before were paying $5 a gallon for gasoline due to all the extra demand.

How do you propose China fuels its fleet when it has pushed demand up high enough that crude costs $300 a barrel? What will happen to our economy.

We need everything we can get our hands on to maintain a stable economy and allow the Chinese to grow.

The answer to that is not more oil (because there won't be enough to go round all the demand). It is a plug in hybrid electric vehicle that can use BOTH electricity AND oil.

David | Jul. 22, 2009
Great article and a heads up for those who think they can sit on the sidelines. If we don't start pushing the advantages of natural gas to congress we can be assured the switchgrass and prairie fan people will. I personally don't want to spend my retirement in poverty because of a misguided energy policy.

Bob Paglee, Sr. | Jul. 22, 2009
When politicians ignore economic reality to worship in the Temple of Green Energy, they and their fellow parishioners have deliberately elected to suffer the consequences. But when the mostly agnostic general public finally realizes they too have suffered greatly, having been misled at great cost by those false prophets, a popular rebellion will eventually ensue. Let's pray that it occurs before the economic damage becomes irremediable.

David Brunette | Jul. 22, 2009
With gas fired generation only 25% utilized, seems silly that costly green energy is being forced upon us when all you need to do is to increase utilization of existing clean gas fired electrical generation with abundant and inexpensive natural gas. The environmentalists are impacting the land with large footprints of wind farms and solar plants all the while creating more pollution associated with construction and transportation required in the process.

Ralph | Jul. 22, 2009
I must object strongly to allowing the concept to continue where those that made good decisions are forced to pay for the mistakes of those who made bad decisions. I was raised and firmly believe that if you behave badly, you have to pay the piper; conversely, if you make good decisions, work hard and take care of what you have, you reap the rewards. This "spreading the pain" has more negative aspects than are being presented in that if I know someone else is going to have to pay for my bad behavior, then I am less likely to be concerned about the consequences and therefore continue making bad decision after bad decision and live an irresponsible lifestyle. After all, I'm not going to have to pay for the piper!

Herman | Jul. 21, 2009
I knew that renewable energy was a fluke and would cost a lot more than its backers said it would. Clean-coal and natural gas are the true way of renewable energy, so that people can afford it and jobs will be generated by it. Go Clean coal and natural gas!


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