Tuesday, March 25, 2008

Professor Byrne on the Economics of Renewable Energy

Professor John Byrne and several co-authors just published a paper on energy policy and economics in the journal Energy Policy (sorry, subscription required). One paragraph succinctly makes the economic case for renewable energy:
GHG reductions that lessen fossil fuel demand and promote clean alternatives can mitigate energy price volatility, support local economies, and create jobs (Awerbuch, 2006; Bird et al., 2005; Center for Energy and Environmental Policy (CEEP), 2005). Technologies such as wind and solar rely on ‘‘free’’ fuel and purchasers incur only capital and maintenance costs.
Here's where the paragraph gets to the heart of the matter:
The US electricity industry is increasingly exposed to natural gas price volatility because most new generation has been gasfired, and the amount of electricity generated from this source has increased by 62% since 1997 (Henning et al., 2003; Klass, 2003; Zarnikau, 2005).
There's more:
Renewable energy and energy efficiency can serve as hedges against natural gas price variation when integrated into energy resource portfolios because both decouple the cost of energy service from fuel price (Delaware SEU (Sustainable Energy Utility) Task Force, 2007; Biewaldet al., 2003; Rickerson et al., 2005). These risk management benefits were recently brought into sharp focus by hurricanes Katrina and Rita. Hurricane damage to US natural gas infrastructure in the Gulf of Mexico in fall 2005 caused natural gas price spikes that resulted in significantly higher electricity prices and heating costs (US Energy Information Administration (EIA), 2006).
There you have it. I couldn't have said it better myself.
John Byrne is Distinguished Professor in the School of Urban Affairs and Public Policy at the University of Delaware, and Director of the Center for Energy and Environmental Policy. He has worked with Sen. Harris McDowell on the creation of Delaware's Sustainable Energy Utility. Byrne
served on a working group of the Intergovernmental Panel on Climate Change (IPCC), which was awarded the 2007 Nobel Peace Prize jointly with Al Gore.


Anonymous Anonymous said...

Professor Byrne is right about energy efficiency, and wrong about renewable energy, at least in respect of wind. The studies he cites are extremely superficial and based on data that is, in some cases, simply wrong. Wind energy is an ineffective approach to GHG reduction when compared to a number of far superior alternatives, it will destroy jobs in the near term (owing to the fact that it is 2-3 times as expensive as conventional generation today with it's possible economic benefits not appearing until well into the future), and therefore unlike energy efficiency it will exacerbate, rather than ameliorate, the impact of rising energy costs on the most vulnerable for the foreseeable future. Please push past your ideological obsession with wind and think about this problem rationally.

From Michael T. Hogan, an environmentalist with an MBA from Harvard, a MS in Environmental Policy & Planning from MIT and expertise in the electricity industry.

1:51 PM, March 26, 2008  
Anonymous Nancy Willing said...

I say that since there is a significant long-term advantage to off-shore wind that no one denies, we should try to minimize the pain of the short term costs on 'the most vulnerable' with some relief. To do that we should re-regulate the industry.

5:15 AM, March 27, 2008  
Anonymous Anonymous said...

I don't even agree with Hogan's claim about the costs of off-shore wind power short term, which is about $0.10 per kwh, 30% less than what I pay today!

Moreover, Hogan does not spell out the "far superior alternatives".

Your points are unconvincing, sir!

Perry Hood

9:23 AM, March 27, 2008  
Anonymous Anonymous said...

In fact, there are lots of people, including myself, who are (1) dedicated to the proposition that we must radically change the way we produce energy in order to avoid catastrophic climate change, and (2) completely convinced that the is NOT siginificant long term benefit to wind, off-shore or otherwise. We are building wind because we can, not because it's a particularly good idea. There renewable technologies just over the horizon that will actually be able to replace coal-fired generation (wind cannot do that), and in the meantime we are nowhere close to having exploited energy efficiency opportunities that are far cheaper, and have the added benefit of lowering electricity bills rather than raising them. No electricity is as cheap and as stable in price as the electricity we don't use. Every dollar we spend on wind, which will start out at about 11 cents/kWh for on-shore and 15-16 cents/kWh for offshore, translating into a cost for CO2 reduction of at least $100/ton, is wasted if there are energy efficiency investments available to us that will cost 3 cents/kWh and will actually reduce CO2 with a net financial benefit. And the scope for such unexploited efficiency investments is vast. "Reregulation" as you call it is completely off the point. Electricity isn't expensive because the market is determining the price - electricity is expensive because it is expensive to produce, and if you want to see it get REALLY expensive, try to raise capital for new sources (renewable or otherwise) with the threat of regulatory cost disallowances and price caps reintroduced (I started in the industry in 1980 - I remember regulated utilities going bankrupt and decades of underinvestment in new supply). If we want to do something to soften the impact of rising energy costs on poor families, we can do that with or without cost-of-service price regulation. If you're so enamored of re-regulation, why are you in such a hurry to make Bluewater's investment-banker shareholders rich on the backs of Delmarva's standard-offer-service customers? Ironically, if you'd just let the market for renewable energy work the way it was intended under Delaware's renewable portfolio standard law, you'd get all the renewable electricity you want at a far cheaper price. There's nothing magical about "off-shore" - the only reason Denmark and Germany are going off-shore is because they're running out of real estate on-shore to put up more turbines. We don't have that problem. And in the meantime, there are oceans of very cheap energy efficiency investments that are going begging because we're devoting so much of our time and energy to these glorious distractions.

Michael T. Hogan

9:32 AM, March 27, 2008  
Anonymous Anonymous said...


I've developed wind farms, including off-shore wind farms in Europe, and I've studied off-shore wind extensively. I can tell you for a fact that an off-shore wind farm like Bluewater will need to receive at least 15 cents/kWh today, though it is also true that most (but not all, let's be clear) of that 15 cents can be fixed over the course of a 20-year contract. Now the federal Production Tax Credit can lower that price to you by about 1.9 cents (at taxpayer expense, of course), but there is little chance that the PTC will still be available by 2014 when Bluewater comes online. And the "30 percent less than what you pay today" is an all-in retail price, at least 50% of which (and probably more) is for transmission, distribution, administration and taxes. The generation portion of what you pay today (which is what the 15 cents has to be compared with) is probably 40% of the price on your bill. Sorry, but you really need to get your facts straight if you want to debate this stuff.

Michael T. Hogan

9:49 AM, March 27, 2008  
Anonymous Anonymous said...

...and the "far superior alternatives" are (1) efficiency - which we can mine for the next ten years and still not reach the point where it is as expensive as wind, (2) solar thermal, first for heat and hot water and later for baseload electricity when thermal storage technology has been further developed and we can construct HVDC lines to deliver it from the best locations to the major demand centers, (3) biomass-fired generation, which is carbon-neutral, baseload and dispatchable, i.e. it can replace coal, (4) distributed solar PV, which really does compete directly with the "30% more than 10 cents/kWh" you spoke of, (5) enhanced geothermal systems. That's a start.

Michael T. Hogan

9:59 AM, March 27, 2008  
Anonymous Anonymous said...

Perry et al.,

I've gone back and checked the proposed contract, and I am sorry to say that I was wrong - unfortunately for you, I was way too optimistic. Assuming a (moderately generous) 40% average capacity factor, the all-in contract price for Bluewater's power is about 14 cents/kWh in 2007 dollars. Add to that the 1.9 cents they expect to realize from the Production Tax Credit and the price to Bluewater is about 16 cents, again in 2007 dollars, rather than the 15 cents I suggested yesterday. The other thing I was wrong about was how much of the price is indexed to inflation. Turns out ALL of the price escalates at a fixed 2.5% per year beginning in 2007. So today the price is about 16.35 cents/kWh (or, if you grant them the taxpayer-funded PTC, 14.35 cents to you). By 2014, when Bluewater may actually begin delivering power, the price to you will be about 18.64 cents/kWh. No telling what Bluewater will do if they are no longer entitled to what by then would be about 2.26 cents from the PTC, but the contract gives them the right to walk away if the project is economically "unviable" - so expect them to force a renegotiation. Do you really not know this?? You are passionately supporting something you obviously do not understand. Lambs to the slaughter....

Michael T. Hogan

2:00 PM, March 28, 2008  
Blogger TommyWonk said...

Mr. Hogan, I have been reading your comments with interest, though I have not yet had the time or inclination to review your assertions point by point.

However, there are one or two points you might clarify:

For instance, what is the basis for the assertion in your first comment that wind is 2 to 3 times more expensive?

And in your last comment, you refer to "a (moderately generous) 40% average capacity factor" with which you calculate "the all-in contract price" for Bluewater. Can you explain the meaning of this calculation?

3:50 PM, March 28, 2008  
Anonymous Anonymous said...

Hi Tom,

I'm happy to clarify these points.

On the first, when I say wind is 2-3 times more expensive than conventional generation I'm talking about its current price. Onshore wind all-in (i.e. without the PTC subsidy factored in) is probably around 11-12 cents today, vs. 5-6 cents on average for conventional generation. Offshore wind is 15-16 cents today, at least (and possibly more, but the Europeans are still trying to figure out how much it will cost to get it right). The difference, of course, is that the costs of wind power are largely fixed (I still don't understand why Bluewater is asking for a 2.5% annual escalator, and I really don't understand why anyone would agree to it), whereas the costs for conventional generation will vary over time with, among other things, the cost of fuel. The numbers we see bandied about showing wind as being 4, 5 or 6 cents/kWh are nominal levelized numbers. Whether or not the comparable nominal levelized number for conventional generation is higher or lower than that depends, among other things, on what mix of conventional generation you're comparing it with and what you assume for the future price of the relevant fuels. But my point is that the price you will pay up front for wind is 2-3 times the price you're paying today for conventional generation; the bet you're making, assuming you actually get a fixed price for the wind for 15-25 years, is that it will eventually be cheaper than conventional fossil generation over the term of the contract.

On your second question, the 40% capacity factor I referred to is a conventional way to measure the utilization of a power plant. It means that the kWh the plant produces in a given year will be 40% of what it would produce if it operated at full rated load for every hour that it is expected to be available to run. A comparable number for a very good onshore wind site would be on the order of 30-35%, and for a typical gas-fired combined cycle plant would be 90-92%. The importance of this number to the price is that one of the price components is a "capacity" price, equal to $19.75/kW-yr in 2007 $s. To express that in cents/kWh you have to assume a capacity factor and then figure what it works out to for each kWh that is produced during a given year. The 40% capacity factor I assumed is about what people are assuming right now for a reasonably attractive offshore wind resource.

I hope that's helpful.

Michael T. Hogan

4:37 PM, March 28, 2008  
Anonymous Anonymous said...

Sorry, I misspoke...I said the capacity component was $19.75/kW-yr. That's actually the REC price per MWh. The capacity price is about $70.65/kW-yr. That's the number I used for the original calculation, so the original answer is the same. Sorry for any possible confusion there. So to be clear, the energy component is about $98.50/MWh, the REC component is about $19.75/MWh, and the capacity price is about $70.65/kW-yr, which at a 40% capacity factor works out to about $20/MWh, bringing the total effective contract price (in 2007 $s) to just under $140/MWh or 14 cents/kWh.

Michael T. Hogan

4:44 PM, March 28, 2008  
Anonymous Anonymous said...

So, Mr. Hogan, give us all the details about your claimed role in "developing" offshore wind projects in Europe. You look awfully young to have such a distinguished background!
The solutions you offer are interesting. However, I suggest there is no need for an exclusionary approach. Also, to my knowledge, there is no research supporting your contention that energy efficiency can replace generation. California shows us that EE and conservation alone are not the answer. If anything, the rising demand for more power by India, China et al, suggests to me that whatever EE efforts are made will be insufficient to counter increased costs for domestic coal. Offshore wind is Delaware's greatest potential contribution to the regional energy grid, and we need to get on with it.

5:03 PM, March 31, 2008  
Anonymous Anonymous said...

I'm flattered you think I'm so young. As it happens I'll be 51 in April. Still a spring chicken as far as I'm concerned, but I've managed to pack a lot into 27 years in the business. My exposure to wind in Europe was as a senior executive with Centrica, the largest retail electricity and gas supplier in the UK; because of the Renewables Obligation associated with our retail position, we were (and they are) the largest sponsor of onshore and offshore projects in the UK. While I was not directly responsible for our UK wind projects, I have worked on wind projects in the US and Canada, and I've been directly responsible for about $8 billion in project financed power projects in various countries. I don't know if you'd call that "distinguished," but I have been busy. I would never claim that efficiency can "replace" generation, but I would say that any rational person would invest as much as possible in the most cost-effective options available to achieve a given objective, and only once those options have been exhausted would you move on to less cost-effective approaches. If our goals are to meet the demand for energy services (not energy) and reduce GHG emissions to 80% below 1990 levels in doing so, the rational approach would be to exploit every energy efficiency opportunity that offers a net economic benefit before we even consider investing money on options that will cost us money. Given the scale of cost-effective energy efficiency opportunities available, we could not only eliminate any need for new resources for the next ten years or so, but we could actually reduce our consumption well below current absolute levels. In the meantime, we can continue to invest R&D in renewable technologies that have a long-term future, ones that can replace the services that coal and nuclear plants currently provide at the same or lower cost. Wind cannot do that, and it is highly unlikely that it ever will be able to do so. But solar thermal, advanced biomass, enhanced geothermal and solar PV all offer real promise in that respect. That's where our renewable investments should be going for now, into advancing those truly promising technologies, and the big money should be going into exploiting the massive energy efficiency opportunities available to us.

Michael T. Hogan

9:38 PM, March 31, 2008  
Anonymous Anonymous said...

Michael Hogan,
Interesting reply but flawed in view of the urgency of the need to reduce carbon emissions within the next 10 years. There's no consensus on how much advantage can be gained by EE nor have you presented any research indicating that EE will satisfy demand. There's no way to predict when such a study would be completed to determine the effectiveness of EE. We can and should move immediately to reduce carbon emissions through utility-size offshore wind. The massive, permanent wind resource in the Atlantic is well-established. The wind resource will not diminish. BWW provides a fixed price for 25 years with a fixed 2.5% INFLATION adjustment. The technology is proven and you have not disputed it. Nor would I expect you too given your tangential involvement in Europe with the company which, according to your statement, must be involved in Britain's present project to power the whole country with offshore wind within ten years. Unlike some of your other new source ideas, this is well beyond the speculation stage. The feds are behind offshore wind development and I very seriously doubt we will see the loss of PTC. Which power companies in the US have you worked for, Michael? Since the only person who showed up at the last hearing to oppose BWW was the President of Delmarva Power, perhaps you will understand why so many see the opoosition as BS. Come down here, Michael, and check out the cancer/heart disease/asthma wards, and maybe you'll understand the other benefits we will get once the offshore wind project gets going. I absolutly dispute your claim that offshore wind will not affect pollution from coal plants. Yer wrong on that one.

10:05 PM, March 31, 2008  
Anonymous Anonymous said...

I don't know who you are, but you're a nutter. Offshore wind is far from proven. The Danes have encountered major performance and cost issues, and the entire second round in the UK, which was, as you point out, meant to be the major focus of their wind effort going forward, is stalled at the moment over the same issues of cost and performance. There is little better proof that offshore is unproven than the fact that, despite (or rather because of) several examples of utility sponsored offshore wind projects in Denmark, the project financing community has been unwilling to go anywhere near it. You obviously didn't bother to stick around at the hearings after DP&L and BWW testified - kind of like the press. There were a several experts, including myself, who gave testimony regarding serious concerns with the BWW proposal. None of you amateur energy policy experts really wanted to hear that, though. You couldn't be more uninformed about energy efficiency. There are masses of studies - by DOE, the ACEEE, the California Energy Commission and the CPUC, the Massachusetts DOER, and on and on and on - showing that we could cut electricity demand within two years by as much as 15% from current levels all at a total cost of less than 4 cents/kWh. That's a TOTAL cost of 4 cents/kWh, within two years. That's at least 4 years before BWW will spin their first turbine blade. And as much as you fervently might hope that BWW will have any greater impact on the operation of the Millsboro plant or any other fossil fuel plant in Delaware than an onshore wind farm elsewhere in PJM, you're demonstrably, indisputably wrong. There's not a shred of evidence to support that contention, PJM has confirmed that it is not the case, and if you knew anything about the least-cost-dispatch operation of a regional power grid you would know it is not the case. And Britain has never announced any plans to "power the entire country with offshore wind within ten years" - where in heaven's name do you dredge this stuff up???? You're hopelessly uninformed - please stick to topics that you know something about, whatever that might be.

Michael T. Hogan

11:30 PM, March 31, 2008  
Anonymous Anonymous said...

Michael T. Hogan,

"Still think wind power isn’t mainstream? Think again. The United Kingdom’s Energy Secretary John Hutton unveiled a set of proposals to encourage the uptake of offshore wind turbines in England. The proposals call for the offshore wind industry to provide up to 33 gigawatts of energy by 2020, enough to power every home in Britain!

The scheme would call for nearly 7,000 wind turbines, each of which could be powerful enough to provide electricity to 8,000 homes. To put it in perspective, all of Britain’s current power stations can output over 75 GW, meaning that it could be expected that wind could provide over half of the country’s energy needs. At the moment, Britain wishes to meet a goal of having wind provide over 8 GW by 2020, and it’s this target that the Energy Secretary wishes to raise.

This development is not without controversy; after all, having thousands of wind turbines in the ocean would be visible from the coast, and a full environmental impact assessment has yet to be made. However, the plan is certainly a welcome development in the push for eliminating the need for fossil fuels.

Hutton said: “The UK is now the number one location for investment in offshore wind in the world and next year we will overtake Denmark as the country with the most offshore wind capacity.”

+ Giant offshore wind farms to supply half of UK power @ Times Online"
December 12, 2007 - http://www.inhabitat.com/2007/12/12/thousands-of-wind-farms-to-power-england/

Mr. Hogan. Leave your insults in the latrine, where they belong. Spend more time doing your homework!

4:07 PM, April 01, 2008  
Anonymous Anonymous said...

(1) that's a far cry from "powering the whole country with offshore wind within ten years; (2) 33 GW of offshore wind, if it ever gets built, would produce about 20% of Britain's energy requirements; (3) it will never happen in that time frame, if ever - wind is still not project financeable, and there's no one who's going to spend the $132 billion required to build that much offshore wind without it; talk is cheap, much cheaper than offshore wind; (4) at about the same time, the UK government announced 11 GW of new nuclear construction and about 5 GW of new coal-fired construction for the same time frame. Move on to something you understand and leave this discussion to people who know what they're talking about.

7:55 PM, April 01, 2008  

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