The price of green electricity

Following significant investment, the past decade has seen a rapid fall in the price of renewable energy. Some now believe that renewables are cost competitive to fossil fuels (as well as their obvious benefits). However, making economic comparisons between electricity generation technologies is actually surprisingly difficult.

When quantifying the cost of generating a unit of energy, you need to consider all of the costs associated with producing it. On top of the fuel cost, this includes the costs of building, operating, and decommissioning the power plant. Historically, we only needed to compare fuel-combustion technologies, and this meant that the only substantial differences were in fuel price. However, now that a more diverse range of technologies is available, a more rigorous comparison is necessary. Essentially we need to work out all of the costs incurred over the lifetime of a plant and divide them by the amount of energy generated. This is referred to as the levelised cost of energy. Lazard publishes annual estimates for the maximum and minimum levelised cost of energy using different technologis, and the 2019 estimates are shown below.

The estimated range of cost for various generation technologies. Data source: [1]

The large gaps between the upper and lower bounds reflects the large number of variables that affect the final cost. To name a few, the amount you pay your workers, the size of the plant, and (for renewables) the quality of natural resources available. Nuclear is expensive because the power stations are expensive to build, decommission, and operate. Solar panels are much cheaper than wind turbines, but you won’t get as much energy out of them, so the cost per unit energy is similar. In terms of fossil fuels, gas is much cheaper than coal (perhaps the real incentive behind phasing it out). Oil is now so expensive that I’ve excluded it from the graph, there is very little oil generation left in Europe – with the exception of in Croatia, not sure why.

When looking to decarbonise the electricity mix, these costs need to be considered in conjunction with the carbon intensity of each technology. Again, the whole life-cycle needs to be considered (it is currently impossible to manufacture a wind turbine without emitting carbon). The graph below shows the total emissions attributed to each kWh of electricity (in equivalent CO2) for the different technologies. Note that there is an argument that the emissions from waste/biofuels shouldn’t count as they would be eventually emitted anyway, but frankly I don’t want to touch that debate with a stick.

The carbon intensity of electricity by generation type. Data source: [2]

Comparing both graphs, it is clear that wind and solar are the overall winners on green value-for-money. However, this is only looking at the cost of generation, which is not the only cost associated with running an electricity system. Wind and solar are uncontrollable, which is to say that you can’t decide when and how much the plants will output. This means that running a system with a large amount of solar or wind requires a method of energy storage and/or an excess generation capacity. Either of these will add cost that isn’t incurred with controllable power generation sources. Therefore, while nuclear power is much more expensive to generate, at least some of the difference will be offset by other system costs.

One way to compare the costs of running an electricity system with different fuel mixes is to look at the variety of systems that already exist. Given their similar electricity demand and available resources, there is a surprising range of fuel mixes across Europe. The graph below shows a subset* of the European countries on axis of carbon intensity and consumer electricity price. The size of the marker is proportional to the annual electricity consumption of the country, while the different colours show the composition of the fuel mix. Generation sources are grouped into fossil fuels (coal, oil, gas), sustainable fuels (biofuels, waste), nuclear, and renewables (solar, wind, and hydro). Note the data are from 2018, which (considering the pace of renewables investment) already makes them out of date.

*chosen to show a broad range without sacrificing aesthetics – apologies to Portugal, which is hidden behind the UK.

The carbon intensity vs. consumer price of various electricity systems. Data source: [3-5]

I will be the first to say that consumer electricity price is a poor metric for true system cost. Varying government subsidies, physical geographies, and connections to other systems are just some of the factors which cloud the comparison. However, it is still interesting to look at the systems which are achieving low carbon intensities at a low cost.

The first point to make is that there seems to be little correlation between the price consumers are paying for their electricity and its carbon intensity. Norway, Sweden, and Finland all achieve low costs with a high renewable penetration, but this is using hydropower, which doesn’t suffer from the intermittency issues that wind and solar do. 

Denmark is by so way the leader in terms of intermittent renewables – with almost 50% of demand being met by solar or wind power. The competition for second place is between Germany, the UK, Ireland, Spain, and Portugal all in the 20s. However the Danish consumers pay a high price for the privilege. This premium could be explained by the higher system costs associated with running on highly intermittent generation.

France is another interesting case study. Relying heavily on nuclear power to achieve a low carbon intensity theoretically gives them the highest cost of energy generation. However, they have a relatively low consumer electricity price. This could be due to government subsidies, or because of the lower systems costs associated with nuclear power (likely both). I have no interest in getting into a nuclear power debate, suffice to say there a pros and cons outside of those mentioned here.

Overall, it is quite difficult to work out whether the low carbon electricity systems of the future will be cheaper or more expensive than their existing counterparts. Existing systems were designed with large fuel-burning power plants in mind, so it is unsurprising that switching to smaller variable sources will incur additional costs. However, with the price of wind and solar energy already low, and still dropping, it is easy to imagine that a system designed for to run using such generation might be cheaper. Obviously, regardless of the answer to this question, transitioning to lower carbon electricity systems is necessary. However, perhaps this transition won’t come with the high price tag that some expect.

[1] Lazard, LCOE Perspectives, 2019
[2] IPCC Working Group III – Mitigation of Climate Change, Annex II.9.3 Lifecycle greenhouse gas emissions. pp 1306-1308.
[3] Country Specific Electricity Factors, Association of Issuing Bodies (AIB) 2018.
[4] Electricity Prices in Europe Compared, Selectra, 2018.
[5] the World Factbook, Central Intelligence Authority, 2014.

The Impact of COVID-19 on the Electricity Network

Over the past couple of weeks, many of us have seen significant changes to our daily routines. The implications of these are far reaching, but my niche interest is in how the electricity network has been affected.

In the UK, we benefit from a relatively secure power system. Last August, parts of the nation experienced a blackout for the first time in recent history. Politicians, journalists, and the general public were eager for someone to blame for this (for the record, the fault was caused by a lighting strike, but if you’re desperate to point a finger it should be at the two power stations that failed). However, it also highlighted how we take for granted our secure supply of electricity, which is rare in many parts of the world.

A stable system requires there to be a constant balance of the supply and demand of electricity – in other words, at all times there has to be approximately the same amount of power going into and out of the grid. Given that many power stations take time to power on or off, this is a complex task requiring a mix of accurate forecasting and contingency planning. For 24 hours a day, several National Grid employees sit at control desks constantly monitoring the state of the system (when I visited two years ago, there were at least three people split between two locations). Therefore, it is not surprising that the lights have stayed on over the past week, but some things have changed.

Electricity use is a footprint of human behaviour, and so anytime there is a significant change in behaviour, we can expect a change in electricity use. Even without social distancing, the electricity demand changes throughout the day, and between days. Influencing factors include: the weather, the school calendar, and the TV schedule. The largest single uses of electricity in the UK are heating and lighting, so the largest energy demands are seen in the winter (when it is cold and dark). 

The graph below shows the demand profile for a typical week in March, with last week’s demand overlaid (please note the false origin). The ‘typical’ data was taken from the last 8 years, and the shaded area covers a 80% confidence interval. It is clear that overall energy demand has been lowered as a result of the lockdown; it is particularly interesting to look at the difference between Monday and Tuesday (when we moved from ‘work at home’ to ‘lock down’).

GB power demand last week compared to an average March week. Data source: [1]

This change can be further understood by breaking down the national electricity use into three categories: domestic, commercial, and industrial. Over simplifying slightly, domestic is what we use in our homes, commercial is used by shops/offices, and industrial is used in manufacturing. Domestic demand is the smallest of these, but is responsible for the evening peak, and therefore plays a disproportionately large role when it comes to maintaining the system.

It is likely that commercial and industrial load has fallen, due to shops and businesses being closed. Since the 23rd, Transport for London has been running a reduced tube and rail service, and this will also account for some of the drop. However, working and spending more time at home will increase domestic electricity demand. Octopus Energy have published a report in which they claim that their average customer increased their electricity demand by 4% during the first week of working from home. It should be noted that these consumers will include a number of retired or self employed people, who will not have seen as large a behaviour shift. This means that areas with a large number of office workers are likely to see a larger increase in network loading, which might necessitate upgrades – it will probably be months before we can know this for certain.

One of the benefits of a fall in demand, is that energy supply becomes a “buyers market”. Renewable energy such as solar and wind tend to be cheapest because they have “zero marginal cost” (basically, you don’t have to pay for fuel). Therefore, we can expect our use of high carbon fuels to drop. The graph below shows the percentage of demand that was met by “low carbon” fuels last week, and over a typical March. However, it should be noted that we have seen a general shift over the past few years to a lower carbon electricity mix, so even without the lock down we might have seen last week’s fuel fix outside of these bounds.

Low carbon fuel mix last week compared to an average March week. Data source: [1]

The laws of supply and demand say that a lower demand with the same supply should result in a lower cost. The graph below shows the average price paid by energy suppliers for electricity on each day. Note that the market operates in 30 minute periods, so there is price variation throughout the day which has not been shown. The price varies significantly day-to-day, but there does seem to have been a general reduction in cost.

The average price paid for electricity on the wholesale market. Data source: [2]

Those unfamiliar with wholesale prices might be surprised that average prices range from 1-3p/kWh, while consumers pay an average of 15p/kWh (most are currently on a flat rate). Infrastructure maintenance and profit margins account for a lot of this difference, however there are also costs arising from real-time balancing of the system’s supply and demand. Operator intervention is necessary because the electricity market mechanism will not necessarily arrive at a solution that can satisfy demand safely; an ex-colleague once explained real-time balancing to me as the process of engineers fixing the mess that the economists have made, but other opinions are available.

When a large percentage of demand is met by renewables the system frequency is more volatile, and so balancing can become more difficult (and expensive). If you are interested, National Grid have recently published this article describing the technical challenges they are facing in more detail. Additionally, when there is more uncertainty in demand (say, because the nation has just gone into lockdown) there is a higher chance that expensive reserve power will need to be utilised. Therefore, my expectation was the daily balancing costs would have increased over the past couple of weeks. However, the daily balancing costs (shown below) have not changed significantly.

The daily cost of balancing the system over per MWh of demand. Data source: [3]

Digging into the costs (which comprises a range of different balancing mechanisms) reveals that transmission constraint resolution heavily dominates the total cost. This is when the suppliers chosen by the market could cause sections of the network to become overloaded (e.g. because there are too many suppliers in one part of the country). This problem is not significantly affected by the changes to demand, which explains why the balancing costs do not seem to have been affected. In my view, these costs demonstrate a fundamental failing of the electricity market mechanism. However, given that I initially wanted this post to be impartial and factual, I’ll save this rant for another day.

To summarise, the electricity system is currently operating at very low costs. Unfortunately, consumers (who will see an increase in their domestic energy consumption) will see none of these savings. Maybe, after all of this is over, we could think about creating a fairer system?

[2] Elexon Portal SSP/SBP/NIV
[3] National Grid ESO, Daily Balancing Cost (Balancing Services Use of System)