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Jun 08 2015

Sunday Train: Making An Energy Revolution

(2 pm. – promoted by ek hornbeck)

Writing for Politico, “Energy Visionary” Vaclav Smil writes in Revolution? More like a crawl:

Undoubtedly, the U.S. is experiencing two notable energy transitions, from coal to natural gas and from fossil fuels to new renewables in electricity generation. These shifts are welcome because they promise to bring cleaner and less carbon-intensive supplies. But they cannot be rapid, and they bring their own technical, economic and social challenges. Energy infrastructure is the world’s most elaborate and expensive, and the longevity and inertia of many large energy enterprises make it impossible for any large, complex national system (to say nothing of the global level) to reconfigure itself even in three or four decades.

And the statement is, on its own terms, quite certainly correct. Yet I support calls for a “pedal to the metal” transition to low and no carbon, sustainable energy as a policy approach that we shall have to be pursuing in order to achieve what must be done. So, what gives? Is Vaclav Smil correct? And if he is, in what sense is he correct?

Railing Against Renewable Energy Techno-Optimism

Professor Smil rails against the chronic hyping of energy transitions that I have seen in the US over my own over half century banging around:

For years, even decades, we have been on the verge of mass deployment of (take your pick) fast breeder reactors, of coal-fired electricity generating plants that capture and sequester all of their CO2, of fuel cell-powered cars running on hydrogen, if not a complete hydrogen economy. We’ve been promised electric cars that will not only cost nothing to run but will also power houses while sitting in garages; or microorganisms genetically engineered to ooze gasoline.

And it is in this sense that Professor Smil is quite right. Those promising a quick and easy renewables transition are selling snake oil. The most recent US Energy Information Administration projection of Levelized Cost of Energy (LCOE) and Levelized Avoided Cost of Energy (LACE) for 2020 give some idea of where we stand.

  • The Levelized Cost of Energy (LCOE) is an estimate of the cost of electricity from various sources per Megawatt Hour (that is, 1,000 Kilowatt Hours), including fixed overheads and operating costs, for an estimate typical pattern of use.
  • The Levelized Avoided Cost of Energy (LACE) is the cost of the energy that is avoided if a particular source of energy is added to the energy mix.

What “commercially competitive” requires is the green bar for the cost of the electricity from that source sitting inside or below the black box, for the cost of the electricity that is displaced by that source. The LCOE for the renewables … wind, solar, and run-of-river hydro … has a wide range, since costs of variables vary widely based on the quality of the local resource. But in all three cases, they only spill into the LACE for the energy that they replace at the lower end of their range.

By contrast, the LCOE lies almost entirely within the LACE for advanced Natural Gas Combined Cycle , since in most cases, under present market prices, the least cost status quo replacement for one natural gas generator … is a different natural gas generator. That range of

And that is the crux of the issue, of course. Using the EPA figure of 403g/kWh for Natural Gas Combined Cycle emissions (which is about 890lbs/MWg), that is about 0.4 tonnes / MWh. So on an optimistic $50/tonne carbon price, the price of that NGCC should not be $66-$81/MWh … it should be at least $86-$91/MWh.

And its highly unlikely that a carbon price of $50/tonne is going to get us the emissions reductions we need to remain on track for plausibly remaining under 2°C temperature increase … a more conservative carbon price of $100/tonne would put the external CO2 emissions price of NGCC at about $40/MWh, and the total LCOE at $106-$121/MWh.

So wind, solar and run-of-river hydro only edge into the frame of cost-competitiveness without subsidy when competing against heavily subsidized natural gas (and even more heavily subsidized coal), given free permission to consume a scarce natural resource … but if competing on a more level playing ground, where the fossil fuels no longer gain a free ride, suddenly a lot more of our available non-dispatchable wind, solar and run of river hydro becomes commercially viable.

Instead of taking away the subsidy, we have been pursuing a policy of countervailing subsidies … similar to the way that we have long given massive subsidies to the road transport system, with smaller countervailing subsidies for public transport by bus and rail.

And just as the smaller subsidies of trains and buses in transport are criticized by those who do not bat an eye at the much larger subsidies to cars and trucks, the smaller subsidies to wind and solar are criticized by those who do not bat an eye at the much larger subsidies to fossil fuels.

Indeed, a recent report by IMF researchers attempted to total up the amount of free riding that we have allowed to those exploiting fossil energy sources, and come up with quite large numbers indeed (The Energy Collective: The IMF Just Destroyed the Best Argument Against Clean Energy):

The numbers are staggering.  The expected subsidy for fossil fuels during 2015 is projected to be $5.3 TRILLION – for one year!  This means that approximately 6.5% of global gross domestic product (GDP) will be dedicated in 2015 to just subsidizing our use of fossil fuels.  Or as The Guardian pointed out in its summary of the IMF report, taxpayers are paying $10 MILLION per minute globally in subsidies for fossil fuels.

 

Bearing the Cost of Catastrophic Climate Change

Catastrophic Climate Change is the risk that seems tailor made to hit industrial society like a baseball bat at the back of the head. A risk on anything like this scale but more visible, or more immediate, or with benefits focused on a smaller segment of society would seem likely to inspire a sense of urgency.

But, on the other hand, that could be seen as a form of selection. Problems that are more visible, more immediate, or with benefits more narrowly distributed are more likely to be addressed before they reach this level of risk, so its precisely this kind of problem which we find so hard to address under our existing political and social institutions that will provide the ones that threaten to take out industrial civilization.

And so Vaclav Smil may seem like a pessimist when he writes:

I measured how long it typically takes for a particular energy source to go from 5 percent of the market (that is, more than a negligible contribution) to claim large shares (25 percent to 30 percent) of total energy supply.

The repeated answer is that it takes decades of gradual penetration. After crude oil claimed 5 percent of the total American energy supply in 1905, it took 28 years to reach 25 percent, and the rise was even slower for natural gas, 33 years from 1924 to 1957. Today, despite the attention lavished on solar cells and wind, those up-and-coming renewables have yet to reach even the 5 percent mark.

The evidence drawn from and the point regarding earlier energy transitions is quite on target (even if the dig “despite the attention lavished on solar cells and wind ignores the fact that the attention has consisted of subsidizing them to a much smaller extent than the subsidy in kind granted established fossil energy sources of being allowed to emit for free or for a quite minimal fee).

However, there is a much more important implication of that evidence than providing an opportunity to criticize techno-optimists. The critical implication is that if we just sit back and wait for “price reductions and commercial advantages” to do the job, it will take too much time. The deeper implication changes the stress of Vaclav Smil’s thesis, that is it: “impossible for any large, complex national system (to say nothing of the global level) to reconfigure itself even in three or four decades.”

It is impossible. If it must be reconfigured, we must reconfigure it. The technical progress achieved with windpower and solar PV will not by itself drive a “revolution” of sufficient scale to keep the grease in the ground that we need to keep in the ground. They are, in short, merely part of the pre-requisite for an Energy Revolution. If we want to have an Energy Revolution of sufficiently rapid pace to be plausibly compatible with the survival of our industrial economy and society, we will have to do that revolution … we cannot simply wait around for the invisible hand of the market to do it for us.

 

Marginal Pricing and the Sabotage of Variable Renewables

Indeed, one of the challenges we will have to face up to in the coming decade is that the way that we price energy can sabotage the process of eliminating our addiction to fossil energy.

On May 28, Jesse Jenkins at the Energy Collective looked at the issue of how much wind and solar can be integrated into the grid in A Look at Wind and Solar, Part 2: Is There An Upper Limit To Variable Renewables?.

The question itself would seem to be a fairly well settled one. As covered in the Sunday Train previously, studies which analyse the renewable portfolio required for a “high renewable” or “100% renewable” target find that reliance on variable renewables alone is not the most cost effective way to reach the target. A certain proportion of the total energy supply must come from dispatchable renewables.

What is significant here is not the existence of a limit on the integration of solar and windpower, but how low the limit is, and why. As Jesse Jenkins explains:

First, as a growing body of scholarship concludes, the marginal value of variable renewable energy to the grid declines as the penetration rises.

Indeed, where renewable energy earns its keep in the energy market – and is not supported outside the market by feed-in tariffs – the revenues wind or solar earn in electricity markets decline steadily as their market share grows. Here’s why.

The misleading part of this explanation is not in the technical sounding terms, but in what sounds like an innocuous “ordinary english” turn of phrase … “where renewable energy earns its keep”. Consider the two following alternatives, and which of them you would think of as referring to “earning your keep”:

  • Somebody who has substantial college bills to pay is so desperate for work that they are willing to work for far less than a living wage;
  • Somebody is willing to do a job for pay that is as cheap or cheaper than any other available alternative

If you figured only the first is “earning your keep”, and rejected the second as representing a lazy layabout that is not earning their keep, you use the phrase in the same way that Jesse Jenkins has. On the other hand, if you think that somebody willing to do a job for pay that is as cheap or cheaper than any other available alternative is actually “earning their keep”, you use the phrase differently from the way that Jesse Jenkins does.

Consider a windfarm operator and a natural gas turbine operator competing in the artificial markets we have constructed for the wholesale sale of electricity to utilities. A wind turbine has very low operating costs, and so its commercial cost is almost entirely dominated by the cost of repaying for its purchase and installation and the lease for the location it has been placed to harvest the wind. Indeed, its variable operating and maintenance costs are so low that in the EIA 2020 LCOE estimates, its rounded to $0: essentially all of its cost are capital costs or fixed operating and maintenance costs of $73.60/MWh.

Meanwhile an advanced Natural Gas Combined Cycle (NGCC) turbine has over 70% of its cost as variable costs … $53.60/MWH, versus $17.90/MWh capital costs and fixed operating and maintenance costs, for a total of a (heavily subsidized) $72.60/MWh.

So, suppose that you have a wind turbine and a natural gas generator. When the wholesale price is $80/MWh or higher, both will sell into the market and both will receive a price above their long term break-even price. When the wholesale price of power is $60, both the windfarm and the NGCC plant will sell into the market and both will operate at a loss. And if the wholesale price of power drops to $50, it no longer makes sense to burn the natural gas to operate the NGCC plant, so it shuts down, leaving the windfarm on the grid.

And at what price does the windfarm shut down? $40? $30? $20? $10? Well, consider the position of a windfarm operator having the choice between earning $1/MWh to help with $73/MWh average fixed cost … or else shutting down and earning $0 to help with the same fixed costs. $1/MWh would still likely see the windfarm selling their power.

The problem here with commercial viability is not that the windpower is “too expensive” to “earn its keep” … the problem is that its fuel costs are “too cheap” and it is therefore too willing to sell at prices that are far below its break-even price.

So the economic value of an energy source is the value of what we can do with the energy, but if we decide to construct a marginal pricing auction market for wholesale electricity, the market value also depends on the ability of the energy source to turn down bids for electricity that are too low for the energy source to survive.

The alternative to marginal pricing is a feed-in tariff (FIT) that Jesse Jenkins refers to as being “outside the market”, is a feed-in tariff (FIT), a fixed rate paid for power from a high fixed cost, low marginal cost energy source, irrespective of the price in the marginal-pricing market.

  • When the market price is higher than the FIT, the system saves the difference;
  • When the market price is lower than the FIT, the system pays the difference;

So the FIT is similar to insurance, in that it saves money when electricity is expensive, and costs money when electricity is cheap. However, it doesn’t just reduce the price risk of relying on a marginal pricing market: if the FIT rate is set low enough, it also saves the consumers money. That is:

  • There is a “neutral” FIT rate at which the savings on fossil fueled energy is equal to the price paid to the extra renewables for the power they generate
  • Setting the FIT above this rate acts as a subsidy to the producer
  • Setting the FIT below this rate acts as a subsidy to the consumer

If there is a consumer-subsidy FIT that would result in a lower price to the consumer than forcing the windpower to to sell into a marginal pricing market, then the limit on windpower is clearly not an inability to earn its keep … its the unwillingness of the marginal pricing system to pay it as much as it earns. The adoption of a marginal pricing system is, in effect, a subsidy of energy sources with substantial fuel costs, at the expense of energy sources with low fuel costs or no fuel costs.

In the US, we have coped with the problem of sabotage of renewable electricity by marginal pricing by adding producer tax credits and investment tax credits at the Federal level and a patchwork quilt of renewable portfolio standards at the state level. However, the actual solution is straightforward:

  • Require fossil fueled and other GHG emitting energy sources to pay a carbon price for their power;
  • Increase that carbon price over time to bring it closer to the actual cost of the carbon emissions; and
  • Allow for the sale of power through a Feed In Tariff to those low-carbon and no-carbon energy sources that benefit from stable prices from the power that they sell.

Note that the combination would substantially accelerate the roll-out of renewable energy sources without requiring any additional technical “revolutions”, and also that both of these will be hard as hell to get implemented.

Indeed, given our current political landscape, getting both of these at the levels required to substantially accelerate the roll-out of variable renewables is completely impossible.

That is, after all, why it is called a “Revolution”.

 

Conclusions and Conversations

So, our Energy Revolution will not be handed to us on a platter … it will be won by us in the decades ahead, or we will all be toast.

What is your favorite act of Energy Revolution?

1 comment

  1. BruceMcF

    … behind the Great Firewall of China, he would be grateful for any crossposting of Sunday Train links onto Facebook, Twitter or any of the other social media networks that have regular access from China blocked.

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