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Relative cost of electricity by generation source

Politicians, academics and commentators are often tempted to generalize about the relative costs of electricity from different sources. In practice, there is no such thing as a representative cost of production from a particular technology. Circumstances vary widely from project to project, and so consequently do the economics. Whilst one may choose an arbitrary set of assumptions on which to base calculations of costs for the purposes of comparison, the results will reflect mostly on those assumptions, rather than on the underlying merits of one technology compared to another. Assumptions can be, and frequently are, chosen with a preferred outcome in mind.

Notwithstanding the above caution, it is a necessary activity for governments and planners, in order to get some idea of the advantages and disadvantages of various approaches.

Hence, when attempting to state the costs of electric power, then to have any real meaning, the competing sources costs need to be compared on a similar basis of calculation (discount rate, lifetime etc) with the same assumptions applied to each source - typically this means looking at a number of single studies that each covers all the various sources - wind, nuclear, fossil etc and treats them all on the same bases. Simply quoting the price of one source can be very misleading, as can quoting the cost of (say) wind from one study, and comparing it with the cost of (say) nuclear from another study, since these may be based on different assumptions. It also needs to be made clear whether the calculation is simply of the raw cost at the generator terminals, or whether allowances have been made for intermittency, unreliability and variability, all of which factors apply to all sources to a greater or lesser degree.

When calculating costs, several internal cost factors have to be considered[1]. ( Note we are not here talking about price, ie actual selling price, since this can be affected by a variety of factors such as subsidies on some energy and sources and taxes on others):

  • Capital costs (including waste disposal and decommissioning costs for nuclear energy) - tend to be low for fossil fuel plants; high for renewables and nuclear; very high for waste to energy, wave and tidal, PV and solar thermal.
  • Operating and maintenance costs - tend to be high for fossil (ash disposal, emissions clean up) and low for renewable and nuclear.
  • Fuel costs - high for fossil fuel and biomass sources, very low for nuclear and renewables, possibly negative for waste to energy.
  • Expected annual hours run - as low as 3% for diesel peakers, 30% for wind, and up to 90% for nuclear.
  • Revenue recovered from heat sales can be offset against running costs, and reduce the net costs in the case of CHP and District heating schemes.

To evaluate the total cost of production of electricity, the streams of costs are converted to a net present value using the time value of money.

Another collection of cost calculations is shown here:[2] and [3]

BP claims renewables are on a decreasing cost curve, while non-renewables are on an increasing cost curve.[4]

Beyond the power station terminals, or system costs

The raw costs developed from the above analysis are only part of the picture in planning and costing a large modern power grid. Other considerations are the shape of the load or Load Profile, i.e. how it varies second to second, minute to minute, hour to hour, month to month. To meet the varying load, generally a mix of plant options is needed, and the overall cost of providing this load is then important. Wind power has poor capacity contribution, so during windless periods, some form of back up must be provided. However all other forms of power generation also require back up, as these are never 100% reliable either. To meet peak demand on a system, which only persist for a few hours per year, it is often worth using very cheap to build, but very expensive to operate plant - for example most large grids also use Diesel generators [5] at peak or extreme conditions - the very high cost being justified by not having to build more expensive other capacity. See Intermittent energy source

In the case of wind energy, whilst there are additional costs in terms of increased back up, and grid interconnection to allow for diversity of weather and load, these have been shown in the pan-European case to be quite low, showing that overall wind energy could cost about the same as present day power.[6]

When a new plant is being added to a power system or grid, the effects are quite complex - for example, when wind energy is added to a grid, it has no marginal cost, and therefore will always offer the cheapest power - this will tend to force the next most expensive plant of the system. A mid range fossil plant, if added, will only force of those plants that are marginally more expensive. Hence very complex modelling of whose systems is required to determine the likely costs in practice of a range of power generating plant options, or the effect of adding a given plant.

With the development of markets, it is extremely difficult for would be investors to estimate the likely impacts and cost benefit of an investment in a new plant, and hence in free market electricity systems, there tends to be an incipient shortage of capacity, due to the difficulties of investors accurately estimating returns, and the need to second guess what competitors might do.


See also



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