Sustainability Energy (I): The real situation of Renewable Energy Sources

This is the first of a set of three papers conveyed to establish certain variables, drivers and facts, from both economic and technical perspectives, that commonly drives some journalist or energy sector professionals to wrong or weak conclusions unfortunately put on “black on white”.

Thus, in this first paper we are going to provide the general picture of Renewable Energy Sources (leaving out of the analysis the Hydro Power Generation from reservoirs or dams), hence uniquely those most predominant currently: Solar (mainly Photovoltaic) and Wind Power Generation.

Why RES are not competitive economically nowadays?

Simplifying, it can be concluded that the generation share of a system (technologies and power plants connected in a certain interconnected grid) is optimized by the demand evolution and generation’s Variables Cost of each power plant or technology in case they are considered as a whole. The so many times referred as the Marginal Cost Theory. Of course it is not the aim of the present paper to describe this theory, many references and lectures can be found out in internet.

It doesn’t matter if a Central Planner (some States of US) manages the generation share by launching auctions of certain capacity and technology as long as the demand grows or in the other way around is the market mechanism (Rest of US and EUROPE) which fit the optimal generation share. The common “before RES” generation share in western countries consisted on a base of Nuclear Power Plants (cheapest and complicated to operate for security reasons), coal power plants, Gas power plants (GT or CCGT) and very seldom, peaking fuel turbines (the most expensive ones, that only operates very few hours a day). Since power companies are usually private, they are to make benefits, and given the fact the above mentioned technologies can modulate or generate at discretion, they get those incomes from the operating manoeuvre (regardless strategies, management, fuel price risk hedging etc…), so they ask higher prices or are dispatched in a merit order, and consequently they cover their CAPEX and OPEX and get a certain net benefit. Now, what can RES power generators do to cope with this fact?, they have almost no variable cost (maintenance) but in the other way around they are entitled with very high investment cost (much higher than conventional generators’ ones) and they are constrained by a fact, they depend on random environmental circumstances to deliver energy, no chance to choose the peak hours and consequently getting the higher energy prices. How regulators are fitting this fact? They are obviously leashing the links by means of grants (tax credits or feeding tariffs schemes, apart of compensation in concept of loss of profit to conventional generators), no other suitable solution is available if Policy and Rule makers are concern and committed with GHG emissions reduction.

What was and still is the rationale to keep on trying to bring RES generation to a competitive scheme?

The answer can be summarized as follows: Every stakeholder thought at the earliest 2000 that by one hand commodities (coal, gas and oil) prices would have increased more rapidly than they are doing actually. By the other hand everybody expected at that time that the maturity of technologies and GHG market scheme would have pushed the RES to a total economical competitiveness.

The first prediction failed due the financial crisis and the second one simply didn’t occur; the technology has suffer a notable and remarkable improvement but the weather conditions (solar irradiation and wind flows) do not follow markets or customers’ behaviours what set the demand. This latter was a wrong misconception from the very beginning.

Let’s make a simple estimation according the preliminary assumptions:

Future Gas Prices: 25-30 €/MWh (settlement price at 11/15/2011)
Yield (power generated over heat power) of CCGT: 55% (those which set the highest prices)
Then we may assume the price of energy in peaking hours is in a range of 60 €/MWh (what fits with EU Energy Prices)
Natural Gas Emissions: 0.4 CO2 Tonne/MWh (much less pollutant that conventional coal power plants)
Current future settlement prices for EUA: 10 €/ Tonne CO2 (settlement price at 11/15/2011)

Some references of RES power generation CAPEX:
Solar PV 4000 US-$/kW (the lowest offered by incumbents PV manufacturers)
Wind Power Generation (one of the cheapest wind generators has achieved 1000 €/MW)

There are only 6 hours of peaking hours per day what means a mean of 2000 hours at peak hour prices per year (in addition is a rational value for generation factor of PV technology at nominal capacity).

Let’s assume a plant of 1 MW F-V;
CAPEX: 3,100,000.00 € (according the current exchange rates)
Leverage: 75 %
Interest Rate: 6% (currently commercial Banks are offering higher rates in Europe)
Annual payment (25 years of amortization period; principal plus interests): 163,077.00 €
Annual revenues: 120,000.00 €
Annual deficit: 43,077.00 €
Annual incomes for reduction of CO2 emissions (Displacement of CCGT power plant generation): 8,760.00 €
Annual deficit according GHG trading scheme (cap and trade): 34,317.00€

Only a price of EUA allowances of almost 50 €/Tonne would make the power plant profitable (leaving out the Gas price)

Obviously in a real case this simple estimation should be more accurate (many critical conditions have been deliberately left out), but notwithstanding this above sample gives a range of values to bear in mind when dealing with RES power generation economic competitiveness.

As a conclusion, we can sustain that we are rather far from the point to release grants to RES power plants if GHG emissions reductions commitments want to be met and in order not to hamper the RES promotion which provides other undisputed “intangible” global benefit apart of the environmental aspect as is the case of the energy dependency release.

Remark:

In Spain by 2007 a Royal Decree was enacted which settled a Feed-In Tariff of 44 c€/kWh  440 €/MWh what jointly with another wrong measures led to increase the PV RES sources in 10 times the amount expected by the year 2010 with disastrous impact in the Tariff Shortfall which reached 20 billion Euros this year.