The full costs of generating electricity

Abstract

The recent debate about costs of low-carbon electricity has tended to be based on a rather crude ‘cost of a generating unit divided by number of units produced’ approach. Advocates of renewables in particular talk about ‘grid parity’ when discussing the costs of generation. However, the potentially vast costs associated with managing the inherent intermittency of some renewables, notably wind and solar, are not at present fully reflected either in the stated costs of these energy sources nor in the quoted ‘subsidies’ they are receiving. It is becoming increasingly clear that the full costs – both economic and environmental – of all sources of electricity, most notably variable sources such as renewables like wind and solar, should include not only the direct costs referred to above but also indirect costs caused by, for example, the intermittency of the output. These costs are potentially very large and include the need for grid strengthening (grid-level system costs); the effect on the economics of other generators, leading to higher prices (or threats to security of supply, in itself a huge potential cost to consumers); and the greenhouse gas emissions caused by the need to vary the output of dispatchable fossil-fuelled power plants, thereby reducing their thermal efficiency. A rational approach to allocating financial resources to deliver maximum supply security and emission reduction would involve ascribing all costs and environmental effects, direct and indirect, to the source which has ultimately given rise to them. Instead of discussing ‘grid parity’, the relevant measure should be ‘system level parity’, including all of these costs which, however they are allocated, will have to be met by consumers and/or taxpayers. This would lead to a very different discussion re the way of achieving economic, security of supply and environmental goals – for example, reappraising the extent to which, in practice, variable renewables can be described as ‘low carbon’.