What Are The Cost Justifications For FITs?
A simple review of the prices paid for feed-in tariffs reveals that they are priced higher and in some cases much higher, than the tariffs for energy generated from "brown" sources such as fossil plants (coal or natural gas for instance) or nuclear. Critics of renewable energy ask "Why then would anyone want to pay higher prices for electricity when cheaper sources are available?" There are many valid reasons, and just some of them will be covered here.
Credit must be given here for the courage and leadership being demonstrated by Ontario's premier, Mr. Daulton McGuinty and the Minister of Energy and Infrastructure, Mr. George Smitherman, in their vigorous efforts and support for the development and implementation of Bill 150, the Green Energy Act and Green Energy Economy Act. The benefits that will accrue from the passage of these acts will include reduced air and water pollution, reduced greenhouse gas emissions, substantial job creation (often at community level), increased stability in future electricity prices, and a more robust electrical grid.
For once, the government might actually be ahead of the people, and Ontarians as a whole will only come to fully appreciate the wisdom of these endeavours as the years pass and progress is made in Ontario's adoption of clean, green renewable energy.
1) With FITs, the contracted price per kW is all that generators get. No cost overruns. No hidden subsidies. No stranded debts.
Ontario's electricity market, with all the players involved, is frankly, quite complicated. At the heart of the matter though are some basic facts about the costs of generation. All sources of renewable energy generation covered by the Green Energy Act, are paid for according to feed-in tariff (FIT) pricing which is fixed. If FIT generators don't generate power, or generate less than expected, they get paid accordingly. If they have cost overruns in building or operating their generation facility, that is their problem, and none of the extra costs get passed on to tax payers or electricity consumers.
Electrical generation from traditional sources are in fact quite the opposite. The construction and operation of fossil fuel plants and particularly nuclear plants, are heavily subsidized, so that the actual costs of generation are often difficult to ascertain. Nuclear, as a good example, has had an alarming history of cost overruns:
·Of the 20 nuclear reactors built in Ontario to date, not one has come in on time or on budget (1)
·Ontario residents now have $21 billion in "stranded debt" due to the high costs and poor reactor performance of its nuclear program (1)
·Every electricity consumer in Ontario will be saddled with a bill of $400 per year, every year for a decade at least, for this reason alone(2)
(1) Green Power Report, David Suzuki Foundation, WWF Canada, The Pembina Institute
(2) Nuclear Energy Myths and facts, Ontario Clean Air Alliance
2) FIT contract prices today must be compared to the costs of conventional generation over the next 20 years
Critics often compare the tariffs paid for renewable energy with those paid for other forms of generation, and claim that the renewable energy tariffs are too high. What they fail to allow for, is that other than for a small portion allowed for inflation, renewable energy tariffs are 20 year contracts, and should be compared to the costs of nuclear or fossil generation over the same period.
Renewable energy generation facilities are capital-intensive up-front (as are all types of generation), but they have no fuel costs thereafter (1). In stark contrast, nuclear and fossil generation are at the mercy of market pricing of their respective fuels. Taking nuclear energy as an example, some experts have stated that we have reached "peak uranium" and recent events confirm the potential for price volatility. The price of Uranium shot up from U.S. $10 per pound in 2003 to the astounding price of U.S. $135 in 2007, before retreating to a value of U.S. $42 (2) as of this writing in April 2009. Even at U.S. $42, that equals more than 40% increase per year compounded for four years running!
In order to illustrate these differences, the two charts below have been prepared with the following assumptions:
·Wind tariff will be $.153/kWh as has been proposed as the upper limit of resource-differentiated tariffs, so a worst case scenario.
·Wind tariff will have a 60% inflation factor, meaning that 60% of the tariff will be allowed to be increased according to yearly inflation rates.
·Inflation will be 2.5%
·3 Nuclear scenarios are offered for comparison, each starting at a cost of $.10/kWh:
oWith a 5% yearly increase (inflation + 2.5% fuel and general operating costs increase)
oWith a 7% yearly increase (inflation + 4.5% fuel and general operating costs increase)
oWith a 9% yearly increase (inflation + 6.5% fuel and general operating costs increase)
·Nuclear will start at $.10/kWh. Note: this is being extremely generous, since Moody's Investor services recently estimated the cost to build new
nuclear facilities at U.S. $.15/kWh
While I don't profess to be a nuclear costing expert, if one simply uses Moodys' U.S. $.15/kWh nuclear starting figure instead of the CDN $.10 used above, the figures jump even more in wind's favour.
(1) Except that hydro generators must pay a "water rental tax" in Ontario
(2) The Ux Consulting Company, LLC (UxC)
Download the spreadsheet
(3) Renewable energy sources have almost none of the external costs of fossil or nuclear generation
It is unfortunate but true, that generation from fossil or nuclear plants do not have the external costs of their generation factored in to the direct generation costs. The effects on human health are staggering, yet never factored in to the generation cost calculations. According to the Ontario Medical Association, air pollution is “a public health crisis” in Ontario. What follows are some examples of the externalities of genration:
Direct effects on humans due to air pollution from electrical generation
According to Environment Canada, the electricity generation sector in Ontario accounts for 15% of Ontario’s NOx emissions, 25% of SO2 emissions and 11% of GHG emissions. For simplicity, using the average of the pollutant figures (15% & 25%), 20%, and applying that to the costs to Ontario from the effects of air pollution according to the Ontario Medical Association, one can extrapolate figures for some of the external costs from electrical generation:
Noteworthy here, is the fact that in calculating the largest cost component, Loss Of Life, is estimated based only on the willingness of people to pay to reduce this risk. Thus, this fugure could be quite understated.
Environmental damage and human health risks not quantified in the chart above for coal generation
Note that the above figues relate only to damage directly to humans and do not include damage to the environment. While improvements have been made to the pollution performance of Ontario’s coal-fired power plants, OPG’s coal plants remain a significant source of air pollution and have the other damaging effects not included above:
•they produce approximately 20% of Ontario’s total carbon dioxide emissions, which cause dangerous climate change
•they produce 39% of Ontario’s airborne mercury emissions. Mercury is a neurotoxin that can permanently damage the brain and kidneys
and is particularly harmful to children and developing fetuses. Over 98% of the fish consumption advisories for Ontario’s inland lakes are
due to mercury poisoning
•they emit 14% of Ontario’s smog-causing nitrogen oxides emissions
•they emit lead (a neurotoxin) and cancer-causing emissions (arsenic, cadmium, chromium)
OPG’s coal-fired electricity emissions increased by 100% between 1995 and 2005.
The statistics immediately above are from Coal has got to go, Ontario Clean Air Alliance
Estimates of Total External Costs
Estimates of Total External Costs both human and environmental, were studied in a recent report by Olav Hohmeyer at the University of Flensburg in Germany. Hohmeyer is one of the world's leading authorities on valuing external costs of electricity generation, and a significant difference in his study was a far greater cost of impact from due to climate change. The figures for the following chart were taken from slide 5 of his presentation to the European Wind Agency 2004.
4) Having renewables in the energy mix can actually save money by reducing spot market costs (The "Merit Order Effect")
The market price of electricity is determined by the most expensive power station needed to satisfy the demand for electricity "merit order". Because under the German Renewable Energy Sources Act (EEG), priority is given to EEG feed-in, demand for conventional electricity is reduced. In accordance with the merit order, the most expensive power sources are the first to be cut when not needed and as a result, market prices fall. This is known as the "Merit Order Effect".
In a scientific studies commissioned by the German government, over the past three years, the merit order effect has reduced the all over cost of electricity on the German spot market by between 2.5 and 7.8 Euros per MWh (.42 to 1.3 CDN cents). This is the first study of its kind, but is significant given that the renewable energy generation feeding Germany's electricity market is more fully developed than in most other nations.
Click here to view the entire page directly from the German annual report on their EEG program, or the whole report here.
A simple review of the prices paid for feed-in tariffs reveals that they are priced higher and in some cases much higher, than the tariffs for energy generated from "brown" sources such as fossil plants (coal or natural gas for instance) or nuclear. Critics of renewable energy ask "Why then would anyone want to pay higher prices for electricity when cheaper sources are available?" There are many valid reasons, and just some of them will be covered here.
Credit must be given here for the courage and leadership being demonstrated by Ontario's premier, Mr. Daulton McGuinty and the Minister of Energy and Infrastructure, Mr. George Smitherman, in their vigorous efforts and support for the development and implementation of Bill 150, the Green Energy Act and Green Energy Economy Act. The benefits that will accrue from the passage of these acts will include reduced air and water pollution, reduced greenhouse gas emissions, substantial job creation (often at community level), increased stability in future electricity prices, and a more robust electrical grid.
For once, the government might actually be ahead of the people, and Ontarians as a whole will only come to fully appreciate the wisdom of these endeavours as the years pass and progress is made in Ontario's adoption of clean, green renewable energy.
1) With FITs, the contracted price per kW is all that generators get. No cost overruns. No hidden subsidies. No stranded debts.
Ontario's electricity market, with all the players involved, is frankly, quite complicated. At the heart of the matter though are some basic facts about the costs of generation. All sources of renewable energy generation covered by the Green Energy Act, are paid for according to feed-in tariff (FIT) pricing which is fixed. If FIT generators don't generate power, or generate less than expected, they get paid accordingly. If they have cost overruns in building or operating their generation facility, that is their problem, and none of the extra costs get passed on to tax payers or electricity consumers.
Electrical generation from traditional sources are in fact quite the opposite. The construction and operation of fossil fuel plants and particularly nuclear plants, are heavily subsidized, so that the actual costs of generation are often difficult to ascertain. Nuclear, as a good example, has had an alarming history of cost overruns:
·Of the 20 nuclear reactors built in Ontario to date, not one has come in on time or on budget (1)
·Ontario residents now have $21 billion in "stranded debt" due to the high costs and poor reactor performance of its nuclear program (1)
·Every electricity consumer in Ontario will be saddled with a bill of $400 per year, every year for a decade at least, for this reason alone(2)
(1) Green Power Report, David Suzuki Foundation, WWF Canada, The Pembina Institute
(2) Nuclear Energy Myths and facts, Ontario Clean Air Alliance
2) FIT contract prices today must be compared to the costs of conventional generation over the next 20 years
Critics often compare the tariffs paid for renewable energy with those paid for other forms of generation, and claim that the renewable energy tariffs are too high. What they fail to allow for, is that other than for a small portion allowed for inflation, renewable energy tariffs are 20 year contracts, and should be compared to the costs of nuclear or fossil generation over the same period.
Renewable energy generation facilities are capital-intensive up-front (as are all types of generation), but they have no fuel costs thereafter (1). In stark contrast, nuclear and fossil generation are at the mercy of market pricing of their respective fuels. Taking nuclear energy as an example, some experts have stated that we have reached "peak uranium" and recent events confirm the potential for price volatility. The price of Uranium shot up from U.S. $10 per pound in 2003 to the astounding price of U.S. $135 in 2007, before retreating to a value of U.S. $42 (2) as of this writing in April 2009. Even at U.S. $42, that equals more than 40% increase per year compounded for four years running!
In order to illustrate these differences, the two charts below have been prepared with the following assumptions:
·Wind tariff will be $.153/kWh as has been proposed as the upper limit of resource-differentiated tariffs, so a worst case scenario.
·Wind tariff will have a 60% inflation factor, meaning that 60% of the tariff will be allowed to be increased according to yearly inflation rates.
·Inflation will be 2.5%
·3 Nuclear scenarios are offered for comparison, each starting at a cost of $.10/kWh:
oWith a 5% yearly increase (inflation + 2.5% fuel and general operating costs increase)
oWith a 7% yearly increase (inflation + 4.5% fuel and general operating costs increase)
oWith a 9% yearly increase (inflation + 6.5% fuel and general operating costs increase)
·Nuclear will start at $.10/kWh. Note: this is being extremely generous, since Moody's Investor services recently estimated the cost to build new
nuclear facilities at U.S. $.15/kWh
While I don't profess to be a nuclear costing expert, if one simply uses Moodys' U.S. $.15/kWh nuclear starting figure instead of the CDN $.10 used above, the figures jump even more in wind's favour.
(1) Except that hydro generators must pay a "water rental tax" in Ontario
(2) The Ux Consulting Company, LLC (UxC)
Download the spreadsheet
(3) Renewable energy sources have almost none of the external costs of fossil or nuclear generation
It is unfortunate but true, that generation from fossil or nuclear plants do not have the external costs of their generation factored in to the direct generation costs. The effects on human health are staggering, yet never factored in to the generation cost calculations. According to the Ontario Medical Association, air pollution is “a public health crisis” in Ontario. What follows are some examples of the externalities of genration:
Direct effects on humans due to air pollution from electrical generation
According to Environment Canada, the electricity generation sector in Ontario accounts for 15% of Ontario’s NOx emissions, 25% of SO2 emissions and 11% of GHG emissions. For simplicity, using the average of the pollutant figures (15% & 25%), 20%, and applying that to the costs to Ontario from the effects of air pollution according to the Ontario Medical Association, one can extrapolate figures for some of the external costs from electrical generation:
Noteworthy here, is the fact that in calculating the largest cost component, Loss Of Life, is estimated based only on the willingness of people to pay to reduce this risk. Thus, this fugure could be quite understated.
Environmental damage and human health risks not quantified in the chart above for coal generation
Note that the above figues relate only to damage directly to humans and do not include damage to the environment. While improvements have been made to the pollution performance of Ontario’s coal-fired power plants, OPG’s coal plants remain a significant source of air pollution and have the other damaging effects not included above:
•they produce approximately 20% of Ontario’s total carbon dioxide emissions, which cause dangerous climate change
•they produce 39% of Ontario’s airborne mercury emissions. Mercury is a neurotoxin that can permanently damage the brain and kidneys
and is particularly harmful to children and developing fetuses. Over 98% of the fish consumption advisories for Ontario’s inland lakes are
due to mercury poisoning
•they emit 14% of Ontario’s smog-causing nitrogen oxides emissions
•they emit lead (a neurotoxin) and cancer-causing emissions (arsenic, cadmium, chromium)
OPG’s coal-fired electricity emissions increased by 100% between 1995 and 2005.
The statistics immediately above are from Coal has got to go, Ontario Clean Air Alliance
Estimates of Total External Costs
Estimates of Total External Costs both human and environmental, were studied in a recent report by Olav Hohmeyer at the University of Flensburg in Germany. Hohmeyer is one of the world's leading authorities on valuing external costs of electricity generation, and a significant difference in his study was a far greater cost of impact from due to climate change. The figures for the following chart were taken from slide 5 of his presentation to the European Wind Agency 2004.
4) Having renewables in the energy mix can actually save money by reducing spot market costs (The "Merit Order Effect")
The market price of electricity is determined by the most expensive power station needed to satisfy the demand for electricity "merit order". Because under the German Renewable Energy Sources Act (EEG), priority is given to EEG feed-in, demand for conventional electricity is reduced. In accordance with the merit order, the most expensive power sources are the first to be cut when not needed and as a result, market prices fall. This is known as the "Merit Order Effect".
In a scientific studies commissioned by the German government, over the past three years, the merit order effect has reduced the all over cost of electricity on the German spot market by between 2.5 and 7.8 Euros per MWh (.42 to 1.3 CDN cents). This is the first study of its kind, but is significant given that the renewable energy generation feeding Germany's electricity market is more fully developed than in most other nations.
Click here to view the entire page directly from the German annual report on their EEG program, or the whole report here.
Sun, Wind and Water
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