ANALYZING THE TRUE COST OF RENEWABLE ENERGY
Randy Mott, Vice president, Polish Biogas Association
After over three years of debate and discussion and multiple versions of the proposed law and its regulatory impact, the Polish Government has never provided a realistic economic analysis of the impact of support for renewable energy. The simplistic model used by the government simply adds up the support for various types of renewable energy and creates a static total price tag. “Savings” and “optimization” are only viewed as a function of their measurement on the total price tag. There is abundant actual evidence that a reasonable support system on the Polish current model can be effective without having major price impacts.
The actual economic cost of renewable energy on end-users, which is what the government professes to care about, cannot be viewed as simply the total value of the support. The new capacity created by renewable energy affects supply and demand for electricity (and heat). A fundamental concept of the free market is that increased supply lowers prices. This has been analyzed in depth in the United States under a scenario similar to Poland’s “Residential Portfolio Standard.” A 15% green energy target for the United States (RPS) was projected to only cause a “cumulative electricity and natural gas expenditures increase … [of] 0.3%.” U.S. Energy Information Agency, Impacts of a 15 Percent RPS, Chris Namovicz, July 11, 2007, EESI Briefing. The same effect was noted in a review of state RPS programs in the United States: “A review of state-level RES policies shows that utilities are successfully meeting their annual renewable energy requirements with little or no additional cost to consumers (emphasis added).” How can such a massive undertaking have so small a price impact on consumers? The answer is in several of the details ignored in the Polish Government analysis. For one, the net operating cost of renewables is lower than conventional fossil fuel operating costs. Local renewable sources also reduce transmission costs. And all new renewable energy capacity increase competition. The net impact on consumers is always lower than the static total amount of support provided.
Source: Union of Concerned Scientists, “How Renewable Electricity Standards
May 2013 Cambridge, Massachusetts.
Europeans often forget that the United States has 50 states that each has its own energy policies in this area. See UCS graphic. They are a regulatory workshop and can provide a good deal of experience, especially in this case since they generally use the same type of RPS as Poland.
“Collectively, the renewable energy requirements established by RES policies apply to more than 50 percent of total U.S. electric demand (Barbose 2012).” Union of Concerned Scientists, May 2013, supra. Yet this green electricity now totaling over 100,000 MWs has not had a major impact on consumer prices: “The Lawrence Berkeley National Laboratory, having recently evaluated 2009 and 2010 RES compliance-cost data that were available for 14 states, estimated that all but one state experienced cost impacts of about 1.6 percent or less (Barbose 2012).” UCS, supra, citing Lawrence Berkeley National Laboratory (LBNL) 2013. LBNL RPS compliance data spreadsheet, Berkeley, CA. Online at http://www.dsireusa.org/rpsdata/, accessed April 1, 2013. The support mechanisms used are the same approach as Poland’s system:
“Most states with RPS programs have associated renewable energy certificate trading programs. RECs provide a mechanism by which to track the amount of renewable power being sold and to financially reward eligible power producers. For each unit of power that an eligible producer generates, a certificate or credit is issued. These can then be sold either in conjunction with the underlying power or separately to energy supply companies. A market exists for RECs because energy supply companies are required to redeem certificates equal to their obligation under the RPS program. State specific programs or various applications (e.g., WREGIS, M-RETS, NEPOOL GIS) are used to track REC issuance and ownership. “
The experience and data from past performance in states with RPC programs establishes the fact that a Polish style “quota” system backed by Green Certificates can theoretically work quite well to both achieve the desired mix of renewable energy and to do so with a modest impact on end-user prices.
Applying these lessons to Poland, which uses a similar support system, it is clear that the Green Certificate program here was overly expensive and abused. Co-firing of biomass with coal, which has a nominal cost according to the Polish Institute for Renewable Energy, received the largest amount of support and created no new electricity production capacity. This type of policy will have the maximum impact of consumers in the form of a higher price with little or no mitigation.
Similarly, Poland provided old hydro plants, some of which were pre-war, with another major share of Green Certificates, although they were depreciated long ago and certainly did not require any investment incentives. About 70% of the Green Certificates have been awarded without creating new electrical capacity. The impact of this policy on end-user prices was nearly a one-to-one price increase. They bought the same electricity from the same places, it just cost more!
Support for renewable energy producers which adds new capacity to the supply of electricity operates in a fundamentally different economic way. A substantial body of data from multiple sources in the United States supports the notion that renewable energy supported in the RPS programs does not have a major adverse impact of end user prices. However, it is clearly possible to abuse the support system, especially feed-in tariffs, is a manner that causes over-compensation and higher prices to electricity customers. The support systems in Germany and other countries where the impact on end users is much higher were enormously more bloated than the Polish green certificate system. German solar producers got between 46-57 Euro cents per kilowatt, while the Polish system to date offers about 11.5 Euro cents (if Green Certificates are at 100% value). German biogas plants got between 25 and 40 Euro cents per kilowatt, again compared to 11.5 cents in Poland. Because of the higher feed-in tariffs, much more capacity was built in Germany than predicted when the impact of consumers was initially projected: for example, in 2010, "7,400 MW of solar panels were installed; six times as much as estimated in the reference scenario used by the environment minister." [Daniel Wetzel, Die Wel, October 25, 2012]. Similarly, in Spain, the solar subsidies got adjusted to a level that proved excessive to consumers. "The payment for PV solar was set at 41.4 eurocents per kWh, with the Spanish government anticipating 400 MW of installed PV solar between 2007 and 2010. However, the high rate that was set for PV solar spurred developers to install 344 MW of PV solar in the first nine months of 2007 alone." Environmental and Energy Study Institute (2012). "Due to the Spanish government’s subsidization of electricity, there was a cost to Spanish taxpayers totaling over $1.4 billion. In response, the Spanish government imposed a cap of 500 MW for PV solar in 2009 and reduced the payments to 32-34 eurocents per kWh. " Id. The Czech solar subsidies were also excessively high ($700 MWhr or 55 Euro cents a kilowatt hour) and resulted in a disaster to consumers of electricity: "The result was a more than 24,000 percent increase in Czech solar energy plants, from nine in 2005 to more than 2,230 by January 2010, making the Czech Republic the third-largest solar energy producer in Europe, despite the country's relatively small size." Prague Post, March 24, 2010. The problem has been that subsidies three or four times higher than Polish levels then lead to excessive development of the technology and create an even greater cost multiplier.
The problem that the Member States with hyper-support schemes have to now to adjust new support to lower the average support provided to a reasonable level. The overly generous levels are generally under long-term commitments and the only corrective adjustment that the governments can make is to seriously lower new support levels. Poland absolutely does not have this issue.
However, when the Polish politicians try to use the experiences of overcompensation in other countries to cut support here, they are being disingenuous. Those high levels of support have nothing relevant to say about the current or proposed Polish system. As long as the support is only offered to technologies that add capacity and is levelized across technologies to avoid overcompensation, there is no indication that the impact of user prices will be serious. The Polish Institute for Renewable Energy study makes a major effort to define these coefficients and should only be ignored in the new law based on more compelling actual data, not political decisions.
In the same vein, the price for renewable energy in Poland is often compared to coal-fired electricity. The problem with this comparison is that the coal-fired data reflect historical cost data based on old coal-fired plants built in the 1960s that are being closed due to the infeasibility of their meeting EU emission limits after the grandfathered date of 2015. The true cost of coal-fired energy would reflect compliance with these emission standards for SO2 and NOx and other pollutants. The actual cost in the future will also reflect higher coal prices as Poland imports more foreign coal due to the economics of domestic mining. Finally, the government subsidies to the coal industry are normally overlooked. See Karaczun et al. Poland 2050 at the Carbon Crossroads. 
The comparative cost of providing electricity from different modern sources was just analyzed in the United States in January 2013. The data clearly show that some renewable energy sources are already economically attractive. These figures also contradict the Prime Minister’s erroneous perception of the relative cost of energy. The historical Polish situation with coal is certainly not representative of the future.
The fact is that the Polish Government has pushed to keep electricity prices artificially low, such that it is not economically to build even new coal plants. The price of all electricity in the future in Poland will be higher because the price will have to reflect the investment incentive necessary for growth or the electricity will have to be imported from more expensive foreign producers. This will not cause a vast amount of coal-fired energy to disappear (although 7000 MWs are closing by the end of 2015 due to environmental rules). The choice between coal, renewables or nuclear is a meaningless gesture. Poland will need all of the electricity capacity that it can construct and operate. The issue is not whether renewable energy will replace coal, but whether coal energy can meet the Polish user demand and legal requirements of the EU without renewable energy. The answer is clearly no way.
Renewable energy is a legal necessity under European law. All of the required objectives can be financially met without undue economic impact, but only as long as the system is repaired to satisfy these objectives and not other interests. Up to this point, the system has been manipulated to reduce the burden of renewable energy obligations on the state-owned power plants. The RES system can effectively meet the EU target and do so in a reasonable way, but it cannot serve other masters.
Published in Polish HERE.
 From the Pennsylvania Dept. of Energy fact sheet, supra: (1) A 2010 analysis of House Bill 2405 by the engineering consultancy Black and Veach indicates that “…the net present value of the price suppression benefit over the life of the (bill) could be $3.5 to $6.2 billion …. Notably this savings is much higher than the direct electricity cost impacts … ($1.6 billion increase for AEPS). (2) A 2009 PJM Interconnection study of the impacts of adding wind generation to the market concluded that “…15,000 MW of wind offers wholesale market price reductions of $4.50-6/MWh, translating to reductions in annual market-wide expenditures of $3.55 billion to $4.74 billion versus not having that wind in place.” (3) A 2009 PECO/Exelon study of the market impact of adding 400 MW of capacity to the Pennsylvania Peach Bottom Nuclear facility gives further support to the price suppressive effects of low marginal cost generation: “We estimate conservatively that these benefits would average $137 million per year in Pennsylvania, and more than $425 million per year in all of PJM-East.” (4) A New York State Energy Research and Development Authority (NYSERDA) analysis of New York’s Renewable Portfolio Standard (RPS) estimates that the reduction in wholesale electricity prices from the addition of renewable energy resources in 2010 is likely to be approximately $2/MWh (0.2 cents/kWh). (5) A 2009 study by Tudor, Pickering, Holt, & Co., Energy Investment & Merchant Banking, of the impacts of wind generation estimated that “…6,500 mw of wind capacity dispatched into the supply stack significantly impacts prices. Vs. no wind, the marginal price of off- peak power falls by $20/MWh during peak demand (24%), $15 off-peak (25%).
 “…a coal-based energy sector will not ensure inexpensive energy. Energy infrastructure is slowly becoming degraded. Replacement costs for this infrastructure – even for coal-based installations – are estimated at around PLN 200 billion until 202073. In order to repay these investments, energy prices for final consumers will have to increase. Climate policy measures and the necessity to incorporate external costs in energy prices will further increase the cost of coal-based energy.” Poland 2050, supra, p. 18. Polish coal imports have exceeded exports since 2008 and there is no reason to think that the trend will reverse. Id.