Are renewables really cheaper than conventional energy?
or the flaws of LCoE in a deregulated market
Last April, I heard John Rowe, chairman emeritus at Exelon, speak at MIT. His talk titled “The Future of Nuclear Power, or the Lament of a Life-Long Nuclear Guy” struck a chord with me.
I am a nuclear guy and hearing Rowe speak about the impending death of nuclear energy was disheartening. Rowe talked about how increased regulation had raised the cost of operating a nuclear plant to the point that it was no longer commercially feasible to build more plants. To compound the problem, he said, the LCoE of natural gas and renewables were now lower than nuclear.
All you need is LCoE..
LCoE stands for the Levelized Cost of Energy and is a metric that helps compare the costs of producing electricity from different sources. To calculate the LCoE of an energy sources you sum up all the costs over the lifetime of a project and divide by all the energy you expect that project to produce. LCoE makes it simple to compare generators that have very different cost structures. For examples, the marginal cost of producing solar or wind is close to zero while the fixed costs can be high, a CCGT plant on the other hand has a significant margin cost (i.e, the cost of natural gas) but is not too expensive to set up.
LCoE has become increasingly popular especially with business executives, policy makers, and bankers. Lazard and co., for example, created this beautiful chart as part of a report comparing different electricity generators in 2014.
Exhibit 1: Lazard’s levelized Cost of Energy Analysis — Version 8.0, Sep 2014
LCoE is quick, straightforward but INCOMPLETE! Despite its popularity, LCoE is not an apples to apples comparison. A lower LCoE does not make a technology more profitable than a technology with a higher LCoE.
Right here, right now
The reason for the mis-match between costs and profits is timing. Electricity markets are unique in that there is no storage (not yet, at least). This lack of storage means that supply has to match demand at all times. Moreover, electricity demand swings wildly during the day. All of which leads to wild swings in electricity prices.
Here’s a famous (infamous?) snapshot of negative electricity prices in Texas (notice how rapidly prices change during short time intervals):
Exhibit 3: Texas ISO (ERCOT) realtime prices from Sep-14 to Mar-16
B%@#h better have my money
The above variation in electricity prices is what users of LCoE fail to account for when comparing different generation sources. The right generator needs to produce electricity at the right time. For example, developing a wind farm that produces energy at an LCoE of $50/MWh makes no business sense if the market prices at night(which is typically when wind production is at maximum) is close to 0. Unintuitively, in the same market it might be profitable to install a diesel generator that produces electricity at $200/MWh provided it can generate electricity at peak load during mid-day.
So, are renewables cheaper than conventional energy? And what about nuclear?
The answer to the first question is tough and depends on the market. In countries with small renewable penetration like India, the answer is generally yes. That said, as renewable penetration increases the case for more renewables becomes weaker and weaker.
And as for Nuclear, unless operational costs some down soon, the end seems near.