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
Deliver
Economic Benefits,” 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. “[1]
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.[2] 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. [3]
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.
[1] http://en.wikipedia.org/wiki/Renewable_portfolio_standard#California
[2] 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%).
[3] “…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.
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