Wednesday, January 27, 2010

Pricing Green Electricity -- Feed in Tariffs

The basis of today's blog is an article by Ronald Bailey in Reason Magazine on Renewable Energy Feed-In Tariffs. Go to:

From the article: "Green power advocates in the United States have started pushing for a European-style subsidy scheme in which homeowners or businesses that install solar panels or windmills can sell their excess power back to the grid at inflated prices. Utilities are required by the state to pay above-market rates for this environmentally-friendly power. However, a recent report by the independent German economics think tank, RWI, noted that the solar electricity feed-in tariff of 59 cents per kilowatt-hour in 2009 is more than eight times higher than the wholesale electricity price"

It is this type of journalism that one typically finds in the main stream print and TV media that quite frankly, drives us up the wall. In this type of reporting, both sides of an issue are usually being disingenuous (whether it be Republicans Vs. Democrats, Red State Vs. Blue State, the radial Environmentalists Vs. the Drill Baby Drill crowd).

In the media typically found today, Journalists most often start with an "IDEOLOGY" and then cherry picks data to prove their case. Let's review how Mr. Bailey manipulates data (cooking the books) to prove his ideology. The starting point is to understand what an electricity grid is and how it works.

An electricity grid is comprised of all generating sources (coal, nuclear, natural gas, renewable) to meet peak demand. During a season (e.g., fall, summer, etc.) and/or time of day (e.g., night versus daytime) a specific generating unit will be dispatched (run) to meet the System's demand requirements based on its variable cost (which is primarily its fuel cost). Everyone must understand that a generating unit's capital cost (the cost of originally building the facility) has little to no impact on how a unit is dispatched. Capital cost can be thought of as "sunk cost" -- things like financing costs that must be paid to lenders/investors whether the unit runs or not. This explanation explains why nuclear facilities are typically run first (low fuel cost) as base load units although their capital costs are very high.

Understanding how the integrated resource grid works shows how Mr. Bailey manipulates data in an attempt to prove his ideology where he compares the wholesale price of electricity (which includes all sources of generation) to the cost of a renewable option of wind energy. Now -- if Mr. Bailey compared the cost of a new peaking natural gas or oil fired unit to the wind option, this would be a correct and "fair" comparison.

But the story just doesn't end with a discussion of only marginal cost in a dispatch grid. The Story must include both marginal costs (primarily fuel) and capital costs. When an electric utility builds a fossil fuel plant (say to meet peak demand requirements) its capital costs are included in a "rate base" where recovery of these costs are included in the "overall price" of electricity that the utility charges its customers. If this peaking unit does not run very much (say, by having a mild winter or cool summer), the actual cost (marginal fuel cost plus fixed financing cost) can result in a cost per kWh much, much higher than any of the feed-in tariffs that Mr. Bailey referenced.

For example, look at this concept this way. If you bought a new car, monthly car payments would be due whether you drove the car 10 miles a month or 1,000 miles. However on a cost per mile driven basis (gas plus the car payments) the miles driven would have a huge impact -- a pragmatic truth that Mr. Bailey does not address.

We just wish the main stream media practiced some intellectual honesty, so that meaningful discussions on energy policy can occur. If Mr. Bailey can show that feed in tariffs for peaking renewable energy are dramatically higher than what customers are and have been historically paying for peaking natural gas and oil units -- then he should make this Apples to Apples case.

1 comment:

Richard said...

A good article, and highlights the national differences in the approach to promoting renewable energy sources.

Having survived the 2010 Comprehensive Spending Review (CSR) 'Feed-in' tariffs remains a cornerstone of the Government's initiatives to hit renewable energy targets.

The premise is this: allow residents to benefit from energy they provide back to the national grid. Putting solar PV panels on your home's roof turns it into an asset that provides cheap electricity to the home but allows the owner to benefit from the power they provide back - all it generated from the sun's source.

The direct incentive is to move to a lower footprint model, good for everyone. Suppliers like Homesun then coordinate this for home owners and provide free solar panels to eligible homes, providing a practical option for owners and even providing free installation of the PV panels.

Early days for the PV sector, and a long way to go to increase the general awareness and acceptance of solar panels providing solar energy on a home by home basis. But even the first signs of success should be enough to encourage other nations to follow suit, and take this big and important step forward.