Thu Nov 1st, 2012 at 07:05:51 AM EST
The Imperial College, London, report that demolished fantasy forecasts for the UK of massive balancing needs supplied by use of Open Cycle Gas Turbines (OCGT), led to some discussion concerning the importance to the system of Combined Cycle Gas Turbines (CCGT). (See UK Wind Power "Debate" : Latest). Ernst & Young (commissioned by Spanish and Portuguese energy companies Acciona and EdP), have brought out a report throwing new light on the comparison between wind turbines and CCGTs, for the EU27 and for specific European countries.
Wind technology was selected as the reference renewable energy source in this study and is compared here to Combined Cycle Gas Turbine (CCGT). This is based on the idea that natural gas is progressively becoming a significant source of electricity generation due to lower CO2 emissions compared to other fossil fuels and to its price competitiveness. The analysis presented in this report could be extended to other renewable or conventional energy sources.
The present study provides insight on a number of costs and benefits of renewable energy policy measures, which are currently not systematically taken into account in the decision-making process:
► Job creation (direct and indirect) of policy measures in the renewable energy sector
► Contribution to the GDP and additional tax revenues
► Energy security
► Integration of wind capacities on the network
► Environmental externalities (CO2 emissions)
► Impact of wind power on electricity pool prices
Several existing studies have analysed the respective Levelized Cost of Energy (LCOE) of these two technologies but did not include a comprehensive analysis of their additional economic costs or benefits.
Value Creation of Renewable Energy Policies (pdf)
In other words, comparisons based on the levelized cost, expressed in per MWh over the estimated lifetime of the capital investment, do not take into account positive and negative externalities that the report proposes to quantify.
(Added to the Wind Power series.)
Details and methodology can be found p.48 ff of the report. But this chart shows an overall synthesis of total costs and benefits for wind and CCGT across the EU27:
This reads from the outer edges - wind on the left, CCGT on the right - in to the middle, where the total costs are shown in euros/MWh. The two outer columns represent the LCOE: the standard metric used for comparison, according to which wind levelized costs are higher than CCGT levelized costs. Two LCOE items are common to both wind and CCGT, capital expenditure (CAPEX) and operating expenditure (OPEX). (It is the size of the capital investment that raises wind's LCOE, compared to the low capital outlay involved for CCGT). In addition, CCGT has fuel costs (zero for wind) and the cost of CO2 emissions (zero for wind).
In the next column moving in, are negative external costs that are added to the LCOEs. For wind, it is the cost of grid integration (not including connection to the grid, already included in CAPEX, see p.58 for details). For CCGT, security of fuel supply, or the "additional cost attributed to natural gas consumption due to the economic losses generated by price fluctuations" (see p.57).
The third columns moving in show the contribution of each technology to GDP (details from p.50 on):
- directly, via the expenditures necessary to building and operating the plant
- indirectly, via the additional activity of suppliers selling goods and services to the companies building and operating the plant
- through induced effects, via increased consumption from the additional income generated throughout the supply chain (Keynesian, that's K-e-y-n-e-s-i-a-n, multiplier)
The contribution to GDP is subtracted from the subtotal costs of the two outer columns. And the result, in yellow, shows a considerably higher cost per MWh for CCGT than for wind - since capital and operating expenditure for wind make a higher contribution to domestic GDP creation (while fuel costs for CCGT mostly contribute to GDP in gas-producing countries outside the EU27).
Along with estimating the contribution to domestic GDP, the report offers numbers for local job creation. These are presented under the same headings, Direct, Indirect, Induced, with the same logic as described above. For the EU27, this chart sums up the findings:
Tax revenues for each technology are calculated, under the headings VAT, Corporate tax, Local taxes, Income tax, Social taxes. As there is no common EU tax system, these estimations were made for specific countries only (details p.54 ff.)
The tax revenues mostly come from VAT and corporate taxes. Depending on domestic tax policy, social taxes can also be a significant
source from employees and employers.
More country studies
Ernst & Young carried out the same cost and benefit analysis as for the EU27, for the above six EU countries seen separately: Germany, France, Spain, Portugal, Poland, the UK. This chart sums up the net costs calculated for each of these countries, compared to the total EU27:
Merit Order Effect
The merit order effect by which renewables reduce wholesale electricity prices is briefly considered (p.44 ff), citing evidence we have previously seen from Germany, but presenting new estimations for Spain based on data from the Comisión Nacional de Energía.
From which it appears that wind power lowers prices, each year, by more than the cost of the subsidies allocated to wind (even though these rise in the aggregate as more wind capacity is built), resulting in net savings.
For five of the six countries studied, as for the EU27 taken as a whole, the net costs of wind are lower than the net costs of CCGT. Wind also creates more local jobs and contributes more tax revenue to national and local authorities. Through the merit order effect, it reduces electricity spot prices to an extent that "buys back" subsidies, if not more.
Case of the UK
The UK stands out among the six countries considered, as also against the overall EU27 numbers. The net costs of CCGT are lower than those of wind, (though in roughly the same bracket).
This results from the share of locally-produced fuel in total gas consumption: at 63% this is much higher than for the other countries considered, or for the overall EU27. Consequently, fuel purchases for CCGT contribute more to domestic GDP.
In terms of job creation, "the UK's gas plant value chain is more effective in creating new jobs": Ernst & Young estimate job.years per million euros invested as 9 for UK CCGT, 8 for UK wind.
Tax revenue generation is calculated as identical for the two technologies.
No evidence is offered concerning the merit order effect on spot prices in the UK.
Ernst & Young present (p.36 ff) further analysis on the influence of the load factor on net cost estimation. The load factor chosen for the wind estimation was 24%. However, UK wind net costs become cheaper than CCGT's with a wind load factor of >28%, or with a CCGT load factor of <48%. (By comparison, for the EU27, wind net costs are lower than CCGT's whatever the load factor of either technology).
In addition, the report presents (p.39 ff) a stress test on the future evolution of the domestic gas share in the UK (the main variable influencing CCGT net costs).
CCGT net costs rise above those of wind from 0.8% annual decrease in domestic gas share. A projection of that rate of decrease gives:
with a decrease in the domestic share of UK by more than 0.8 point/ year, the Net cost of wind will become lower than the net cost of CCGT. This scenario, in which UK will have a domestic share of 37 % in 2040, can be considered as realistic.
In other words, UK policy-makers would be ill advised to bet on gas against wind.