Renewable Energy: how it reduces the cost of power

From 100percent.org.au. To get a printable pdf version of this fact sheet click here.

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For years the prevailing public view has been that renewable energy will make electricity more expensive. Now, as more countries move towards a renewable energy future, evidence is showing that more renewable energy in the mix actually results in cheaper power, and offers to do the same for Australia.

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International experience: enjoying the benefits

Some of Europe’s early adopters of wind include Germany, Belguim and Denmark. In April 2010 a study showed how wind power was causing a drop in the overall cost of power in these countries. It found that in 2009, the average wholesale electricity price fell in these countries by between €3 and €23 per MWh ($4.3 – $32.8 per MWh based on an exchange rate of A$1=€0.7). If this reduction in wholesale prices occurred in the Australian market and was fully passed on to the consumer, it would lower household electricity bills by up to 15%.*

Europe is not alone in reaping the economic gain of wind power. Since 2005 in the United States, the average wind project has been producing electricity at less than the national average wholesale price (see Figure 1 below). The only exception to this being 2009 as the global economic downturn lowered the cost of wholesale electricity, which you can see as an anomaly in the last data point. In short, this means that the effect of wind power in the US for the last five years has been to reduce the overall cost of electricity.

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Figure 1 – Average Cumulative Wind and Wholesale Power Prices Over Time, from the US DoE Wind Technologies report 2009

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What does this mean for Australia?

Studies from some surprising sources show that increasing Australia’s share of renewable energy would produce the same economic benefit here. A study from the Business Council of Australia (BCA) shows that increasing renewable energy in Australia through the Renewable Energy Target (RET) would result in a lower cost of power, compared to without the RET (see Figure 2).

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Figure 2 – difference in wholesale electricity price with and without the MRET. From the BCA report: Modelling Success, page 134

A study for the National Generators Forum** backs up this conclusion, finding that the RET would reduce the electricity pool price by 5%. Based on the figures in the National Generators Forum report, electricity retailers would be $10 billion better off in 2015 with the RET than without it.

The Business Council of Australia and National Generators Forum haven’t exactly been the biggest supporters of renewable energy over the years for reasons outlined below. However, even their own reports can’t avoid the fact that renewable energy is a good thing for electricity prices.

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How is renewable energy lowering the cost of power?

Renewable energy has a few important advantages over conventional fossil fuel power that produce these economic benefits. Because renewable energy power plants are normally smaller and more distributed through the electricity network, it makes for an electricity grid that is more stable, with numerous points of power supply and more resilient to disruptions to infrastructure or peaks in demand. Further, most renewable energy power plants have zero fuel costs. As they are greenhouse pollution-free, they don’t have to worry about carbon costs. Less moving parts on many power plants also means renewables are easier to maintain and operate. Basically, when a renewable energy power plant gets built, it will run for next to nothing.

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Why then is it more expensive to purchase green power?

In complying with renewable energy target policies, electricity retailers need to prove that they have bought enough renewable electricity from the wholesale market. This comes in the form of renewable energy certificates, each one representing a unit of clean energy. The certificates and the energy they represent have a set price, which the retailers pay and then pass on to the consumer.

However, that’s only one side of the story. In buying electricity from a market with lots of renewables contributing, the total cost to retailers will actually drop thanks to the economic benefits of renewable energy. Unfortunately, while retailers are all too happy to pass on the economic costs of buying certified renewable energy, we consumers don’t necessarily see them pass through the savings from renewables.

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So if renewable energy makes power cheaper, why are policies to support renewables opposed so much?

For most of us, renewable energy brings only benefits from cleaner, safer and more affordable power. The only real losers are the generators of old, dirty fossil fuel electricity. So competition is a major factor as renewables and fossil fuels are both in the same game of providing electricity.

But the major economic benefit of renewable energy is felt at times of peak electricity demand. When there is a major surge in demand – for example, on a hot summers’ day when lots of air conditioners are on – the wholesale electricity price often skyrockets hundreds or even thousands of times above the normal price. Peaks might not last long, but they are a major earner for the electricity generators. An example of these spikes in electricity cost can be seen in Figure 3.

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Figure 3 – Victorian wholesale electricity prices in late January 2009. Peaks are clearly visible during the day on both the 28th and 29th of the month. Graph produced from data accessed from the Australian Electricity Market Operator.

The benefits of renewable energy, outlined above, help to manage the electricity supply and demand, and soften the spikes in wholesale prices during peak times, meaning they are not as profitable for fossil fuel electricity generators. That’s why renewables are met with such strong opposition from the fossil fuel industry: they are threatening the profits of a few companies.

We can’t let the vested interests of a handful of dirty energy companies prevent a future of safe, clean, reliable and affordable power. We need to make the shift to a 100% renewable energy future now!

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*Assuming a final delivered electricity price of 20c /kWh is reduced by 3c / kWh).

**CRA International, 2008. Market Modelling to Assess Generator Revenue Impact of Alternative GHG policies, prepared for the National Generators Forum.