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The Externality of Avoiding Fossil Fuels

Highlights:

  • Capital-intensive clean energy technology is not well suited to developing world growth.
  • Reduced growth rates in poor countries have indirect costs in terms of slower gains in life expectancy and well-being.
  • Large costs were calculated in a hypothetical scenario where coal power plant growth is replaced by nuclear or solar PV;
    • Nuclear replaces coal: $312/ton CO2 avoided
    • PV replaces coal: $750/ton CO2 avoided
  • Slow-growing developed nations can derive significant net-benefits from clean energy deployment.

Introduction

The primary challenge the global community faces today is the need to triple the size of the global economy by 2050 while actually reducing CO2 emissions.  This task is likely to be very difficult given the importance of fossil fuels in growth of the developing world (where ~90% of the projected growth will happen).

It is critical that those who are very concerned about climate change (myself included) understand the importance of fossil fuels in developing world growth very well (e.g. the 1990-2010 transformation of Shanghai shown below). In short, the majority of the world’s homes, roads, schools, hospitals, factories and business districts are yet to be built.  This gargantuan infrastructure buildout simply is not going to happen without fossil fuels. Yes, once this heavy lifting is done (as in the developed world), fossil fuels can be left behind, but the problem is that only about 20% of the world population has reached this point to date.

It is undeniable that fossil fuels have significant externalized costs in terms of reduced life expectancy and wellbeing from pollution and climate change. However, reduced growth from forced deployment of clean energy also reduces the growth in life expectancy and wellbeing. Lower growth in poor countries therefore not only has an internalized cost (lower GDP), but also an externalized cost relative to the benchmark fossil-fueled growth path (e.g. relatively higher child mortality rates, more preventable deaths from infectious disease and, ironically, greater exposure to a more volatile climate system). This article will quantify the externalized cost of reducing the rate at which scenes like the one below are improved.

The externalized cost of sub-optimal growth

To quantify, the graph below presents the correlation between “happy life years” and GDP per capita (data from the Happy Planet Index website). Happy life years is the product between life expectancy and a general wellbeing index. In my opinion, it is the best standalone humanitarian indicator out there. As a side-note, it is worth taking a moment to contemplate how sheer luck of birthplace can be the difference between 60 happy life years and 10 happy life years.

happy-life-years-vs-gdp-per-capita

It is clear from the graph that happy life years increase logarithmically with GDP per capita. The rate of increase in happy life years is therefore directly proportional to the per capita growth rate of a country. Specifically, the best fit to the data says that the rate of increase in happy life years in any given year equals the yearly per capita growth rate divided by 13.1. In other words, if a country could grow at 13.1%, it would add one happy life year to its population every year.

Insurance companies typically value a year of quality life at $50000. Let’s now assume that, for whatever reasons, a country grows below its potential by a full 5%. My country of birth, South Africa, is a good example of such a case where widespread corruption and incompetence in government has reduced growth to almost zero. In this case, every year of sub-optimal growth would cost 5/13.1 = 0.38 happy life years or approximately 0.38*50000 = $19000 per citizen.

This rough estimate is meant to illustrate the truly enormous costs of sub-optimal economic development in developing nations. Dysfunctional political regimes are definitely the main culprit in this respect. As this article will illustrate, however, forcing the deployment of capital-intensive clean energy systems in rapidly growing economies can have a similar, albeit smaller, effect.

Let me illustrate through the example of India, the most likely candidate to perform the next Chinese-style economic growth miracle. Let’s say that India determines to use clean energy technologies to cut its rate of emissions growth by half at a cost of 2% of economic growth (6% instead of 8%). The cost of one year of this practice would be 2/13.1 = 0.15 happy life years ($7500 per person), while the saving would be  about 2.6 tons of CO2 over the remaining lifetime of the average Indian (based on 4% instead of 8% growth in current CO2 emissions of 1.6 ton/person, and life expectancy of 67 from a median age of 27). At $50/ton of CO2, this value amounts to only $130. The massive difference between the humanitarian cost and CO2 benefit is illustrated below.

cost-vs-benefit-of-massive-clean-energy-deployment

It is therefore clear that any reduction in the rate of economic growth of developing nations for the sake of curbing CO2 emissions is not an option. Unsubsidized deployment of clean energy is perfectly fine, but subsidized deployment will inevitably shift economic output from more productive to less productive areas, thereby hampering economic development. Applying pressure on developing nations to subsidize clean energy production for the sake of climate change prevention is therefore simply unethical.

Let us now quantify the cost of deploying capital-intensive clean energy technology on the growth of rapidly developing nations.

Clean electricity cost assessment

The electricity sector is the most suitable candidate for clean energy deployment. In a hypothetical scenario where a rapidly growing country like India decides to grow its electricity fleet by clean energy instead of coal, it can roughly halve its rate of emissions growth. Let us now estimate the impact of such a move on economic growth.

We will assume that an underdeveloped country has a growth potential of 8% per year under the conventional fossil-fuel driven growth path. This growth potential is the result of increases in the size and skills of the workforce as well as access to better technology and infrastructure. China has shown over several decades that this is a conservatively low estimate of developing world growth potential.

If the country has a GDP of $100 billion, it can increase its GDP to $108 billion in the next year. However, if it decides to invest in more capital-intensive energy technologies instead of coal plants, a substantial portion of this surplus productive capacity will have to be deployed to build power plants instead of better housing, schools, hospitals, roads etc.

A developing country growing GDP from $100 billion to $108 billion will have to also grow electricity production from 62.5 TWh to 67.5 TWh (based on India’s ratio of GDP per electricity production shown above using data from the USDA database and the BP Statistical Review). Coal power plants at $1000/kW and 70% capacity factor can accomplish this for $0.82 billion, while solar PV at $1000/kW and 20% capacity factor will cost $2.85 billion. $2 billion of the $8 billion surplus productive capacity of the developing nation will therefore have to go into the construction of more expensive power plants producing the same amount of power, cutting real economic growth from 8% to 6%.

Let us now do a more thorough quantification for nuclear and solar PV. Cost parameters are based on the latest IEA electricity technology cost report for energy technologies to be commissioned in 2020. Chinese costs were taken as representative of developing nation costs as follows:

  • Capital costs including 10% interest during construction: Coal: $989/kW; nuclear: $3142/kW; solar: $983/kW.
  • Operating costs: Coal: $24/MWh for fuel ($70/ton coal) and $4/MWh other O&M, nuclear: $9/MWh for fuel and disposal and $7/MWh for other O&M, solar: $10/MWh for O&M.
  • Capacity factor: Coal: 70%; nuclear: 90%; solar: 20%.
  • Capacity credit: Coal: 100%; nuclear: 70%; solar: 20%.

Solar PV capacity factor and O&M are assumed to be significantly more favourable than given in the IEA report because most developing nations have a good solar resource. Future reductions in solar costs are assumed to be cancelled out by a steep fall in value with increased market share (below).

The effect of a clean energy buildout via nuclear or solar on economic growth is estimated by subtracting the additional capital cost and adding the cumulative savings in fuel costs for each year. The required yearly capital additions of clean technologies are adjusted for the lower electricity growth rates resulting from lower GDP growth. Results are shown below:

It is clear from the graph above that the buildout of capital-heavy clean energy technologies consumes a substantial portion of the surplus productive capacity of the growing country. The result is a significant reduction in growth: a bit below 1% for nuclear and 2% for solar.

From this data, we can estimate the humanitarian cost in terms of happy life years and the benefit in terms of avoided CO2 and other emissions for both nuclear and solar. The method will be the same as outlined in the first example above.

Avoided pollution costs are estimated as follows: A recent study found that coal fired power plants caused 86500 premature deaths in China in 2013. This sounds like a lot, but it is actually less than a tenth of all pollution-related deaths in China. We will assume that each premature death results in a loss of half of the 30 happy life years for Chinese citizens in the latest HPI data for a total cost of $65 billion per year (assuming a value of $50000 per happy life year as before). China generated 4200 TWh of coal-fired electricity in 2013, resulting in a pollution cost of $0.015/kWh.

The avoided cost of CO2 is assumed to increase linearly from $10/ton to $100/ton over the 30 year growth period. In addition, we assume a population growth rate of 2% and an initial GDP (PPP) per capita of $5000. The results are shown below:

It is clear that the humanitarian cost in terms of lost happy life years becomes very large over time. However, the graph also shows that the yearly humanitarian cost slowly declines over time, while the benefit of avoided pollution and CO2 increases exponentially. For nuclear, the benefit starts exceeding the cost towards the end of the 30-year period under investigation. Still, the total accumulated costs per person of $52000 for nuclear and $135000 for solar are very large. This should be added to the internalized cost per person of reduced GDP amounting to $60000 for nuclear and $100000 for solar over the same 30-year period.

When applying a discount rate of 8%, the total cost (GDP loss + happy life years loss – pollution avoidance – CO2 avoidance) amounts to $312 and $750/ton of avoided CO2 for nuclear and solar respectively. Naturally, these costs are just unacceptable.

Note that this only holds for rapidly developing countries. If we change the situation to a developed country with a growth potential of only 2% per year and an initial GDP (PPP) per capita of $40000, the results look very different (see below).

As shown above, the pollution avoidance benefit of nuclear and solar start to exceed the humanitarian cost of reduced growth much earlier. The accumulated result at the end of the 30-year period is a $27000/person benefit from nuclear and a $4000/person benefit from solar. This is just another illustration of how capital intensive clean energy technology may be a bad idea in the developing world, but makes good sense in slow-growing developed economies.

Conclusions

This article was just another way to make the same point made in previous articles here and here: capital-intensive clean energy technology is best suited to developed economies with slow or stagnant growth. Forcing the deployment of these technologies in rapidly growing developing nations leads to disproportionate humanitarian costs arising from reduced growth rates.

We therefore need to accept that the developing world will burn a lot of fossil fuels in order to get close to the living standards we developed world citizens take for granted today. In the meantime, we can clean up our own energy systems by ensuring that no unabated coal power plants are constructed and by evolving our social mindset beyond the current primitive consumerist paradigm.

In short, we need to set a good example that developing nations can follow as soon as their pollution costs start to exceed economic development benefits. Putting pressure on developing nations to subsidize uneconomical energy options while we enjoy the quality of life offered by an economy already built by fossil fuels is simply indefensible.

Schalk Cloete's picture

Thank Schalk for the Post!

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Roger Arnold's picture
Roger Arnold on Apr 4, 2017 1:32 am GMT

This is a clearly explained and useful article about a vitally important topic. I like Schalk’s use of the “highlights” section to summarize the conclusions up front. It invites readers to dig into the article to see how those conclusions are supported.

Unfortunately, the conclusions turn out to be supported by a set of assumptions that, while well stated and not implausible, are also far from self-evidently valid. They’re open to challenge, and I’m sure they’ll find no shortage of challengers among those who dislike the conclusions.

For myself — well, I really don’t know. Economic growth is not something I understand very well. I’m also half convinced that those who say they do are mostly conning us — if they haven’t already conned themselves. I’ve yet to hear anyone speaking about economic growth who passes the “Feynman criterion”: if you can’t explain something clearly and succinctly (without resort to obfuscating jargon), then you don’t really understand it yourself.

One of the key assumptions of the model that Schalk is using is that there is a “natural” rate of about 8% at which GDP in developing nations would grow, if not impeded by factors such as corruption, violent conflict, endemic diseases, or lack of energy infrastructure. A further assumption is that differences in the cost of energy translate directly into differences in the growth of GDP. I don’t see any solid basis for either of those assumptions.

Factors that have led to economic growth have been different at different times and in different countries. China’s rapid growth since the arrival of globalization has been due principally to two factors: (1) booming export businesses enabled by a cheap but disciplined labor force; and (2) state funding of massive infrastructure projects. It’s not clear that those factors will be able to drive similar growth in today’s developing economies.

Cheap labor is far less important to manufacturing today than it was in the past. Robotic assembly and automation have advanced to the point that there’s little need for cheap labor. But what else do developing nations have to offer? Many have raw materials, but extraction industries have a long history of benefiting foreign owners at little of no benefit to the people of the nations whose resources were being extracted.

The best hope that I can see for today’s developing nations lies in programs for improved public health and higher education. Those don’t take a lot of energy. Basic sanitation and water treatment, cell phones and laptops, clean cooking gas and battery operated lighting, refrigeration for medical clinics, electric-assist bicycles, cargo trikes, and taxis — none of those demand more energy than village PV installations could provide at low capital cost. Where’s the case for trying to duplicate the Western life style? And even if there’s a case, what’s a realistic path for getting there? I can’t see it happening on foreign aid, and the bootstrapping options are obscure.

Schalk Cloete's picture
Schalk Cloete on Apr 4, 2017 9:18 am GMT

Thanks Roger,

I fully agree that there are numerous assumptions that are up for debate. Primarily:
1. Happy life years increase logarithmically with GDP per capita
2. GDP in poor countries increases proportionately with electricity production
3. Greater capital expenditure per kW generating capacity displaces other growth-boosting infrastructure buildouts

I think the first assumption is reasonable. Increased GDP per capita results in better housing (with basics like plumbing, refrigeration and other labour-saving appliances), better education, better healthcare, more employment opportunities etc.All of these things obviously increase life expectancy and wellbeing. The logarithmic relationship seems to be clear from the data in the first graph (R2 = 0.81).

Data also seems to support the second assumption. I’ve investigated several developing countries and the parallel lines in the third graph in the article emerge time and time again. This relationship appears reasonable given that all the new infrastructure that is built during the growth of a developing country will require electricity to run.

The third assumption is more shaky given that it is based on reasoning and not empirical evidence. However, the reasoning is quite simple. Say a developing nation has $1 billion to spend on growth-boosting infrastructure. Two spending options are presented: 1) a large solar PV plant for the whole $1 billion or 2) a $300 million coal plant producing the same yearly electricity to power $700 million worth of urban development (enough for efficient economic inclusion of ~10000 people). Which one will do the most to increase living standards? For me, it is intuitively obvious that it has to be the second one.

I’m not convinced about the viability of low-energy development pathways for today’s developing nations. Maybe if population densities were 5-10 times lower than they are, this could be an option, but most developing nations are very densely populated (and becoming more crowded every year), creating large slums that are highly inefficient both in terms of economics and happy life years. This is hard to appreciate for people who have not seen and experienced developing world slums first-hand, but densely packed poor populations present a humanitarian challenge that cannot be solved by distributed solar and batteries. As far as I can see, the economic efficiency of the modern developing world megacity is the most viable way to increase the living standards of these billions of people.

Roger Arnold's picture
Roger Arnold on Apr 5, 2017 12:05 am GMT

Good points, Schalk. For the most part, I agree with with you. With a few caveats. (There are always caveats.)

One caveat may seem incidental to the discussion — but I think it’s important to bear in mind. It’s about that term “happy years”. I know it’s intended to refer to years of good health and productivity. But I’m not comfortable allowing it to pass as synonymous with years in which individuals are emotionally “happy”.

Cultures we would label as poor, based on GDP, sometimes have a higher level of emotional satisfaction and happiness than others with a much higher level of GDP. That mostly applies to groups and subcultures within a larger society, but it can apply to whole countries. It’s possible for a country to have good public health, a high level of education, longevity, and a reasonably high overall enjoyment of life despite very low per capita GDP. Think Cuba.

Regarding GDP and electricity production, there’s no question of a strong correlation in recent history. (It can’t be long term history, since electricity is historically recent. Further back, one has to draw parallels for wind, water, and animal or slave labor power.) The correlation factor isn’t constant over time. The ratio of GDP to electricity has been trending upward as GDP has shifted from manufacturing to service jobs. That trend will presumably continue, and I don’t know of any fundamental limits on how far this “energy productivity” can rise.

The more important point to make about GDP and electricity, however, is the well-known “correlation is not causation”. I don’t think one can go in to a poor nation, build power stations, and automatically expect GDP to rise. The development process is organic, with complex interdependencies and driving factors. It’s the driving factors I worry about. I don’t know what they are, or rather what they will be in the future. The factors that have driven growth in the past — like cheap labor or land abundance — are no longer applicable or have lost their potency.

Regarding the third assumption that you mention, I think the relevant factor is not the capital expense per kW of capacity per se; I think it’s rather the exported capital per kW. If capacity can be built mostly from local labor whose pay will quickly be re-injected back into the local economy, then high capital cost won’t matter so much. It’s an economic stimulus.

That’s not to say that power plant construction in poor countries should be viewed as a public works project for the benefit of local contractors and their workers.The power capacity is genuinely needed to support economic growth, and the people paying for that capacity have a right to expect good value for their money. But straight minimization of monetary expenditures is not necessarily the best way to deliver value.

Nathan Wilson's picture
Nathan Wilson on Apr 5, 2017 2:10 am GMT

Good point about the questionable ethics of pressuring poor nations to spend their money on expensive clean energy.

However, I think foreign investment is a different issue. For example, the new nuclear plant that Russia has built in India at Kudankulam (with mostly Indian labor, concrete, and steel) was built with Russian financing. When India builds coal-fired power plants, they use their own money. In this case, clean energy allows India to grow faster, not slower.

The other thing to consider is that each dollar of clean energy investment makes more clean energy in developing nations than it does here. So prudent policy in developed nations should encourage over-seas nuclear energy investment, so maybe we’ll make more money available for clean energy over-seas projects than otherwise.

The importance of developed nations setting a good example is especially important in the nuclear case. For developing nations, nuclear energy programs have the potential to fulfill a role often relegated to space programs: they can symbolize nations technical prestige and help to encourage students to study math and science (which benefits a broad range of industries).

Helmut Frik's picture
Helmut Frik on Apr 5, 2017 9:45 am GMT

It’s not that simple. The coal for the coal power plant might cost much much more than the interest for 700 Millions spent additional on PV (if at all you have to spend more today) so the coal pwoer plant eats away the money to be spent in other improvements in the comming years.
The coal power plant might need 700 (xxx Million $) Million $ additional spendings in harbours , Railroads, water supply, as another point
The coal power plant might need 5 years to complete, and block money and const interest rates all the time, while PV starts delivering first power and improve economy 4 weeks after construction start.
And so on.

Schalk Cloete's picture
Schalk Cloete on Apr 6, 2017 10:59 am GMT

It is interesting to think about foreign investment in a very fundamental sense. If power plants are built using local resources paid for by foreign investment instead of local funds, the amount of local manpower, expertise and materials required to complete the project does not change. A similar effect can be created by financial wizardry like various debt mechanisms or simply printing money.

What is needed for this argument to work is that developed nations must use some of their manpower, expertise and material resources to build capital in developing nations. Financial resources (0’s and 1’s on some computers) are not enough.

There are of course many complex ways in which this can happen. For example, if the developed nation’s investment forces reduced consumption of imported goods from the developing nation, this foregone consumption by developed world citizens will allow developing nation’s citizens to use their time and resources to build out their own country instead of producing goods for (often wasteful) consumption in developed nations.

This issue can become a bit too complex for simple analogies like this one, but I think it is important to distinguish between financial and physical resources. This is especially true in recent times when the financial system has become completely electronic, essentially a very complex set of promises and claims on future physical resources unconstrained by anything physical (like a gold standard).

Schalk Cloete's picture
Schalk Cloete on Apr 6, 2017 11:45 am GMT

Now we are getting to some really interesting points…

On happiness, I fully agree that material wealth is not necessarily linked to general wellbeing. Traditional underdeveloped communities can certainly be happier than stressed out westerners. However, I think the issue of population density again emerges as an important point. Poor people in lots of open space can be happy (e.g. some South American countries), but I think poor people crammed together cannot (most of Asia and Africa).

Regarding electricity, I think growth rates are quite closely linked to electricity production as long as growth requires the buildout of physical infrastructure. As a rough guess, I think this continues up to GDP(PPP) per capita of ~$20000. After this point, the buildout of less energy-intensive “intellectual infrastructure” can take an ever-increasing slice of the growth pie. From this point onwards, GDP can depart from energy growth as you mentioned, but forcing an earlier separation will be costly.

About the correlation-causation issue, my view is that economic growth through physical infrastructure buildouts leads to power plant growth (not vice-versa). Almost all the productivity-enhancing infrastructure a developing nation builds (better housing, factories, business districts, schools, hospitals, mines, etc.) require electricity to run. Without this productivity-enhancing infrastructure and associated increased electricity demand, I don’t think greater energy productivity is possible.

The only point where I disagree is the economic stimulus part. Economic stimulus is much like debt – it only makes sense when the debt-financed activity increases productivity so that the debt can be easily paid back with interest in the future. Economic stimulus through less productive infrastructure buildouts therefore does not make sense to me. One can create jobs by printing money to pay some people to dig holes and others to fill them back up again, but this will obviously not lead to economic growth. Building clean energy infrastructure is definitely much better than digging holes, but it is still a less effective economic stimulus than the alternative of fossil fuel plants and other productivity-enhancing infrastructure that can be built with the same amount of resources.

Schalk Cloete's picture
Schalk Cloete on Apr 6, 2017 12:09 pm GMT

The higher running costs of the coal plant is fully incorporated in the graphs in this article. The compounding effect of the reduced growth rates caused by the forced buildout of capital-intensive alternative energy sources completely overwhelms the saving in running costs.

I’m afraid that including the supporting capital needed to build and operate the power plants will only make the case weaker for PV. For example, the capital cost of factories needed to make solar panels, inverters and other supporting equipment is higher than the capital cost of coal mining and distribution infrastructure.

Efficiently constructed coal plants in rapidly growing developing nations typically take about 3 years to complete. The longer construction time is fully accounted for in the article by adding a 10% interest during construction (calculated in the referenced IEA report). This significantly increased the capital cost of the coal plant relative to the solar plant.

Jarmo Mikkonen's picture
Jarmo Mikkonen on Apr 6, 2017 2:22 pm GMT

The top ten countries in world happiness index happen to be wealthy countries:
https://en.wikipedia.org/wiki/World_Happiness_Report

6 of the top ten also belong to top 10 in per capita electricity consumption. Electricity in these countries is generally cheap.

The fact is that all good things in life (education, health care, infrastructure etc.) cost money. If you spend a lot of money on electricity generation, there’s less money for other purposes. It is always a matter of choice.

Bob Meinetz's picture
Bob Meinetz on Apr 6, 2017 2:58 pm GMT

Jarmo, agreed – and in many cases abundant, cheap electricity makes education, health care, industry, and other benefits possible.

Max Kennedy's picture
Max Kennedy on Apr 6, 2017 4:38 pm GMT

Unfortunately doesn’t account for the cost of the effect of global warming that negates virtually all gains from using fossil fuels. A bit of happy now for major OMFG later. Not the choice of wisdom!

Tyler Caine's picture
Tyler Caine on Apr 6, 2017 5:18 pm GMT

Good discussion and great article, Schalk.

I think Roger brings up some good points and I’ll echo his caution in the assumption that repetition or reconstruction of the western landscape is actually the best course for the rest of the world (or even for us right now). I think we have a lot to learn and improve, which we will hopefully do relatively quickly in order to update the “goal” in the eyes of developing countries.

I definitely understand the use of things like this Happy Planet index linked to life insurance costs as a way to try and compare relative cost/benefit values of fossil fuels. This is essentially trying to ascribe a quantitative value to a qualitative item–always a tricky task. Again, I understand its use in trying to portray the broad strokes of an idea, but I think it’s important to note that the door swings both ways on these things.

The environmental and cultural externalities of growth with fossil fuels could be imposing damage on degradation on aspects of the biosphere that have qualitative value to us which is equally as difficult to measure. Does the expanded use of fossil fuels mean that water and air pollution also rise? (I imagine so.) At the end of the day, is there really a price for clean water? It’s not really valuable, it’s invaluable. The same could be said for the landscapes that are harmed for the extraction and transport of these resources. How do we put a price on the mountaintops that we’ve removed or the rivers we’ve polluted in the U.S. for the sake of cheap coal? Hard to say.

The last thing is that I also think we are approaching a time where automation will result in the prospect of growth being recalibrated against both energy required and human population size. Economic growth could occur with much fewer people and each person requiring less energy. If that is paired with factors that historically dampen population growth (equal rights, education & empowerment of women, access to contraception) we could end up with a road that defies some of the traditional/historic thinking on what it takes for economies to grow. We can only hope so, anyway.

Guy Ventner's picture
Guy Ventner on Apr 6, 2017 5:19 pm GMT

I think too many people forget that technology can dramatically reduce demand. The argument of coal vs natural gas vs PV misses the bigger story….I just replaced my 120w light bulb with a 10W LED….90%+ reduction in DEMAND. Your argument is like saying I need better horses to pull my wagon….while I move 100x more stuff with a boat…for a fraction of the energy. Same for high efficiency appliances and heating and cooling.

We could deliver free light bulbs across the world and reduce demand 90%! Instead we subsidize wind and solar which operate less than 40% of claimed capacity while also keeping all the infrastructure….because they operate at the vagaries of the
wind and sunshine.

My pet anyone with thermostatic temperature that is 10 degrees cooler in the summer and 10 degree cooler in winter. Who hasn’t been in a restaurant/business in summer with a temp of 65 degrees….JUST WANTON WASTE. I am sure the offices of the USA EPA are 68 degrees in the middle of summer as are many noted “climate Campaigners” in Hollywood and Washington homes.

Robert Hargraves's picture
Robert Hargraves on Apr 6, 2017 6:03 pm GMT

I agree to… “Putting pressure on developing nations to subsidize uneconomical energy options while we enjoy the quality of life offered by an economy already built by fossil fuels is simply indefensible.”

Thus we at ThorCon focus on emission-free, liquid fission power that is cheaper than coal-fired electricity. Avoiding investments in expensive renewables, this liquid fission energy source avoids diverting money from improvements to developing nations’ productive capacity investments. Actually lowering capital expenditures for power plants even makes more money available for such productive capacity betterments.

Our articles support each other.
http://www.theenergycollective.com/roberthargraves/2400772/clean-doable-...

Engineer- Poet's picture
Engineer- Poet on Apr 6, 2017 6:11 pm GMT

I’ve done that too.

Guess what?  My house’s consumption is still something like 15 kWh/day (about 600 watts continuous), because most of the electricity goes to run the refrigerator, the freezer, the furnace and the dehumidifier.  Oh, a few kWh here and there for the car as well, but my YoY consumption went DOWN the August after I got it.

Jarmo Mikkonen's picture
Jarmo Mikkonen on Apr 6, 2017 7:21 pm GMT

We could deliver free light bulbs across the world and reduce demand 90%!

Guy, I think you are missing the point here.

Schalk is talking about developing countries where 1.3 billion people do not have access to electricity. And “access” is defined as yearly consumption of 250 kWh in rural. That’s half what an average US fridge consumes in a year. In urban areas, “access” is defined a as 500 kWh annually.

Throw in 1.5 billion additional people by 2050, electric cars replacing ICE engined cars, electric heating replacing gas, A/C for developing countries. I don’t think electricity demand is heading south.

greggerritt greggerritt's picture
greggerritt greggerritt on Apr 6, 2017 7:50 pm GMT

I find this article to be very poorly researched. it is based on the phony assumption that we can grow the economy significantly over the medium term. Growth is slowing all over the world. In the industrial countries growth is almost dead. We still need growth in poor countries, but it will be slow. Very slow with the only places growing rapidly those undergoing rapid urbanization. As the urbanization slows, so will growth.

The problem with this model of growth is that it kills lots of people and desroys the ecosystems people need to have healthy in order to eat. All of the growth currnetly going on STILL depends on the destruction of forests. This has two problems. One MILLIONS of people still depend directly on these forest for their daily bread. No forest, they end up in shanty towns or are killed by governmentents to remove them from the forest. Second, this model witll continue to make climate change a bigger and bigger killer, with the poorest countries the most vulnerable.

Mark Heslep's picture
Mark Heslep on Apr 6, 2017 8:27 pm GMT

The conclusion leaves out some alternatives in my view:

“… capital-intensive clean energy technology is best suited to developed economies…. We therefore need to accept that the developing world will burn a lot of fossil fuels in order to get close to the living standards we developed world citizens take for granted today. ”

This appears true as long as clean energy is capital intensive relative to coal. But alternatives such as next generation nuclear and combustion technologies such as non-CO2 producing combustion may yet prove inexpensive. Creating affordable tech is much more likely to reduce developing world emissions than by “setting a good example” using expensive clean energy developed world. The West has run this play several times already; see affordable transportation, affordable communications.

Mark Heslep's picture
Mark Heslep on Apr 6, 2017 8:36 pm GMT

I just replaced my 120w light bulb with a 10W LED…

Sure , LEDs reduces load over incandescents. And that choice was far more capital intensive, at least 10X more. See the article above on the consequences of capital itensive choices in the developing world.

Mark Heslep's picture
Mark Heslep on Apr 6, 2017 8:39 pm GMT

Our articles support each other.

As written, Schalk’s dismisses the notion of cheap nuclear, a mistake in my view.

Roger Arnold's picture
Roger Arnold on Apr 6, 2017 10:29 pm GMT

The situation is quite complex. We need to avoid the pitfall of overly generalized “one size fits all” statements about energy supply.

In particular, keep in mind that the utility value of electricity — or anything, really — varies tremendously with what it’s being used for. What make renewable energy systems expensive in the developed world is that we’re operating at a point on the volume vs. specific utility curve where the applications require power on demand. Solar and wind inherently cannot provide that. So solar and wind are always operating on top of an underlying system that is capable of meeting full demand when solar and wind are not producing. However, if you take away the “on demand” requirement — or rather relegate it to applications that have high enough specific utility to be run from storage batteries — then wind and solar can provide economical energy to the “as available” applications that are left. Those applications include battery charging for phones, computers, and lighting, hot and cold storage, and water pumping and filtration.

As Schalk has noted, that approach can work well in a rural village environment; it’s not so helpful for cities with urban slums. That looks to me like a hard nut to crack. But if industrialization is the answer, then renewable energy systems do seem like expensive luxuries. Clean coal or clean gas solutions, however, are possible.

Darius Bentvels's picture
Darius Bentvels on Apr 7, 2017 11:19 am GMT

It’s opposite: Investment often does not take away local GDP growth!
The idea that capital / resources needed for investments in clean electricity generation take away GDP grow capabilities in underdeveloped countries is highly questionable.

There are many examples of the opposite. E.g:
Abu Dhabi auctioned a.o. ~350MW of PV-solar. It resulted in a foreign consortium offering to install, operate, and decommission the plant for less than 2.5cnt/KWh.

Similar occurred in India, etc. Though slightly higher prices as earlier and less sunny.*)
Those consortium’s usually don’t take investment money from the local capital market as they operate on the world market. So they insert capital into the country!

Even the argument that the installation takes labor away that would otherwise be spent to more GDP increasing activities doesn’t apply:
Near all of the installation work in Abu Dhabi will be done by foreign workers (Indians, etc) paid by the consortium. In India it’s mostly done by Indians, which decrease the high unemployment. So in India the installation work itself increases GDP already.

Similar applies for nuclear as remarked by Nathan in this thread.

So, as indicated above, investments mostly increase development speed in development countries. Also because those countries can get cheap loans for such investments (e.g. Maroc for wind along its coast & solar in the Sahara).

General
The general agreed relevant index which shows the drain which electricity consumption takes from an economy is the leveled costs of electricity (LCOE) delivered. The manipulation with investments etc. in the post, only hamper a clear picture of the situation.

Other starting points in the post
The prices stated for PV-solar in development countries are far to high and those for nuclear are far too low. Just consider the price-levels at which old nuclear plants now get / need subsidies in order to cover their operating costs only (ZEC’s in USA, etc) and realize that the high investment & decommission costs should be added.
______
*) All experts expect that the price decreases will continue during the next decade or two. German Agora think tank predicted 2-3cnt/KWh for Germany in 2050 despite its poor insolation (high latitude).

Schalk Cloete's picture
Schalk Cloete on Apr 7, 2017 3:56 pm GMT

Thanks Tyler.

I certainly agree on the problems with putting a monetary value on things like happy life years and damages associated with fossil fuels. In this article I tried to be as consistent as possible by using the same value per happy life year when quantifying both the costs in terms of reduced growth and the benefits in terms of avoided premature deaths from pollution. I can also add that, according to the model used in this article, the externality of coal power has to be a massive $300/MWh for the pollution avoidance benefits to break even with the costs from reduced growth.

The point of automation is an interesting one. I certainly see the great potential of advanced technology to increase energy productivity in the world economy, but I do think that, in order to access this potential, a country will need to have reached a certain level of development. My rough estimate of the point where a country can truly start capitalizing on advanced technologies to start decoupling GDP from energy growth is GDP(PPP) per capita of $20000.

Schalk Cloete's picture
Schalk Cloete on Apr 7, 2017 4:05 pm GMT

As Mark mentioned, the problem with LEDs (and most other forms of energy efficiency) is that they increase capital costs (the main topic of this article). Yes, a household can greatly decrease electricity consumption by installing LEDs, buying top Energy Star rated appliances, insulating the house and buying the most efficient heat pump for climate control. The problem is that the upfront cost of these options relative to less efficient alternatives outweigh the savings if you apply the 10%+ discount rates applicable to developing countries.

Schalk Cloete's picture
Schalk Cloete on Apr 7, 2017 4:23 pm GMT

I must say, if the technology you describe in your article really becomes available at $1200/kW, it will have my full support. Putting this nuclear technology at a cost of $1350/kW (to include interest during construction) into the model used in this article shows better growth (and of course lower pollution costs) than coal, making it a clear winner.

I certainly hope your group manages to translate these highly attractive numbers into reality.

Schalk Cloete's picture
Schalk Cloete on Apr 7, 2017 4:25 pm GMT

Well, I say that nuclear at >$3000/kW would not be a good idea (although still better than PV). If the capital costs reduce by 60% as projected in Robert’s article though, it is a totally different story…

Schalk Cloete's picture
Schalk Cloete on Apr 7, 2017 4:35 pm GMT

Aside from climate change, I don’t think there are any hard physical limits to rapid China-style industrialization of developing nations. Growing countries in this way will require substantial retroactive climate change mitigation in the second half of this century, but the massive gains in global productivity from unlocking the human potential of billions of developing world citizens will make this possible.

Another important point to consider about climate change is that industrialization really is a poor nation’s best defense against a more volatile climate. Without industrialization, densely populated poor nations will be terribly exposed to the wide array of climate change consequences.

I agree that material growth in developed nations is probably a thing of the past. The biggest givaway is that real benchmark interest rates have been below zero for many years now. This is a clear admission from the markets that the future will be smaller than the past.

Mark Heslep's picture
Mark Heslep on Apr 7, 2017 4:39 pm GMT

I doubt that ” All experts expect ” the same outcome on anything, though they do have a consensus that the cost of intermittent power rises sharply with increasing penetration (i.e. value falls sharply), even if the cost to manufacture pv cells goes to zero.

Schalk Cloete's picture
Schalk Cloete on Apr 7, 2017 4:45 pm GMT

I’m talking about “real” growth here. The example I gave in an earlier comment is to compare the alternatives of 1) a $1 billion solar development and 2) a $300 million coal plant powering $700 million worth of urban development. Both options build capacity that can generate the same amount of electricity, option 2 just adds an additional $700 million worth of productive infrastructure. Although the GDP impact of the two options are both $1 billion, the “real” GDP impact of the second one is substantially greater than the first.

Please also see my views on economic stimulus in an earlier comment.

Schalk Cloete's picture
Schalk Cloete on Apr 7, 2017 5:06 pm GMT

An increasing CO2 cost rising linearly from $10/ton to $100/ton is included over the 30 year growth period studied in the article.

Mark Heslep's picture
Mark Heslep on Apr 7, 2017 5:31 pm GMT

Another important point to consider about climate change is that industrialization really is a poor nation’s best defense against a more volatile climate. Without industrialization, densely populated poor nations will be terribly exposed to the wide array of climate change consequences.

Agreed. The above should be an inarguable given in these discussions.

The biggest givaway is that real benchmark interest rates have been below zero for many years now. This is a clear admission from the markets that the future will be smaller than the past.

Real rates on debt heavy government borrowing have been below zero for some time, which says something about government policy. But borrowing in the US private sector remains strongly positive.

Roger Arnold's picture
Roger Arnold on Apr 7, 2017 7:36 pm GMT

Ah no, Mark. Alas, it’s perfectly valid to say that “all experts expect” this or that. One merely has to apply the right definition of “expert”: someone who agrees with the “correct” conclusion. If they disagree, it’s a prima facia case that they’re not experts.

Sounds absurd — certainly irrational — when stated that way. But it’s human psychology. It’s how our minds work, unconsciously, if we haven’t been taught to watch out for it. We have to learn to value objectivity and prefer an uncomfortable truth to a comfortable falsehood.

Being wrong sucks, but it happens. The best defense is to recognize the possibility, and always be willing to reevaluate one’s own beliefs in the face of new evidence.

And if this comment doesn’t get downvoted for arrogant pretension, people aren’t paying proper attention.

Engineer- Poet's picture
Engineer- Poet on Apr 7, 2017 8:00 pm GMT

Downvoted?

Something with THAT much great sarcasm?

Reading it will give you your RDA right there.

Darius Bentvels's picture
Darius Bentvels on Apr 7, 2017 10:52 pm GMT

History shows an ~8%/a price decrease of PV-solar since 1977, so ~40years now.
Many studies incl. those of organizations such as IRENA predict that PV solar will decrease ~60% in price in the period 2015-2025. So it’s clear that the price decrease will continue as Agora predicted.

So those PV-solar prices will decrease towards below 1.5cnt/KWh in developing countries.

What with high prenetration?
The fast Power-to-Gas (PtG) developments combined with cheap storage in earth cavities indicate the max. price in a PV-solar dominated generation mix.

The conversion PtG-storage-GtP is widely expected to improve towards an overall efficiency of 40%.
So if the PtG facility buys during overproduction for on av. 1cnt/KWh, the resulting price of the regenerated power will be 2.5cnt/KWh. Add 2cnt/KWh for the equipment costs, etc. then the max. price will be ~4.5cnt/KWh.
Hence at the whole sale market of such country the power price will fluctuate between ~1cnt/KWh and ~4.5cnt/KWh (remarkable similar to present German whole sale prices, where the av. price is moving towards 2.5cnt).

Don’t see a role for nuclear in such free competing power market, as those prices are far below any price of new nuclear which is now estimated at ~15nct/KWh.*)

____
*) Except those assumed by Thorcon who didn’t any experiment with their MSR design. They also think they can do their MSR vessel and piping with standard stainless steel where ORNL found that such material wears too fast and developed expensive Hastelloy-N for their experiment. And then found that even that Nickel steel won’t last very long, so the Chinese MSR scientists installed a separate team to find better steel.

Note that similar price decreases occur for wind. Though there the price decrease is less fast, as the fundamental mechanisms are more limiting (higher, bigger wind turbines, whose production and installation is more efficient). And the limits are more clear; on land not much roads support moving huge parts >200ton; on sea the strength of the long blades.
Though wind is already at 2-3cnt/KWh at several places such as the Maroc coast, etc. So the needed cost decrease in order to take (in combination with solar, etc) the role of fossil, is not so much any more.

Schalk Cloete's picture
Schalk Cloete on Apr 8, 2017 12:29 pm GMT

True. I’m pretty skeptical that we will see such cheap nuclear within the required timeframes, but it would certainly be great if we did.

Mark Heslep's picture
Mark Heslep on Apr 8, 2017 2:49 pm GMT

There is no utility scale PtGtP. There is however 49 GW of coal still installed in Germany.

Roger Arnold's picture
Roger Arnold on Apr 8, 2017 5:00 pm GMT

I’ve been curious about that wondrous 2.42 cents per kWh figure for the 350 MWp solar PV field in Abu Dhabi. It “does not compute”.

Fierce competition among panel producers in different Chinese provinces have recently driven prices down to USD 0.43 cents / Wp — which everyone seems to agree is below production cost for all but (perhaps) the newest and very most efficient producers. Nobody is making any profit, but they’re cruising on government support and banks that aren’t willing to call in non-performing loans and risk bankruptcies. But that’s how things go with price wars and semi-state owned businesses.

Panel prices, however, are only part of the cost of a PV installation. Installation and “balance of system” costs for utility-scale have until recently been about $1.60 on top of panel costs (for single axis tracking arrays). Latest estimates from NREL, however, are now down to $1.49 / Wp, total (panels included). I know costs in other parts of the world can be lower, but since a major part of the installation costs for utility-scale systems is for the mounting hardware and power controllers, I wouldn’t think they’d be dramatically less.

The bottom line is that I don’t believe a 350 MWp installation, even in a desert with no cost of land or permitting, could be less than $500,000. And the output can’t be more than 650 million kWh per year — and that’s with single-axis tracking arrays and 100% cloud-free days. At only 2.4 cents per kWh, that’s only about $15 million of revenue per year. Even an no interest at all, and no operational cost, that’a a 33 year payback time for the up-front capital. No way is that feasible! There has to be something else going on.

Darius Bentvels's picture
Darius Bentvels on Apr 9, 2017 12:48 am GMT

Utilities own and operate important part of the PtG installations in Germany. E.g.
E.on, the biggest utility in Germany, operates Falkenhagen (2MW) since 2013, Windgas Hamburg (1MW), and …
Check the project map you can find in the link in my previous comment.

I agree that it’s all still in the pilot phase. Also because efficiency improvements, etc. are implemented.
Regular roll-out is planned to start in 2024. PtG won’t be needed in Germany until the share of wind & solar is much higher. So not before 2030.

Darius Bentvels's picture
Darius Bentvels on Apr 9, 2017 1:23 am GMT

The rumor that the Chinese export their solar panels for prices below cost-price is going around now already ~5years. The import tariffs of USA and the EU (~45%) in the past 3-5years are based on that dumping idea.
Those import tariffs generated a mini trade war as China implemented higher import tariffs (55%) for EU clean silicon, etc.
Very unproductive.

Why would China subsidize the export of solar panels for so many years? The Chinese internal market is far bigger than any foreign market, as China itself installs far more solar panels than any other country.

balance of system costs
Your assumption about balance of system costs is based on single axis tracking, But that is uneconomic with the low panel prices, hence no longer done.

As the Fortune article also indicate (Chile 2.9cnt/KWh), earlier prices in sunny regions elsewhere were already below 3cnt/KWh.

Engineer- Poet's picture
Engineer- Poet on Apr 9, 2017 4:04 am GMT

You won’t reduce the capital costs of nuclear infrastructure by 60% without a lot of investments at higher prices

On the contrary, it could be done with the stroke of a pen.  Just eliminate most of the paperwork burden and the ridiculous ALARA exposure limits behind so many of them.  Simply cutting the staff required to handle NRC paperwork from sixty-odd to a handful would slash costs immensely.  Cutting something like the NuScale license application from 15,000 pages to less than 1000 and the approval cycle from 40 months to less than 12 would be immensely helpful.

This is the only way that solar and wind have become cheaper than fossil and nuclear energy.

Nonsense.  In additions to subsidies and outright mandates, solar and wind have been exempted from legal challenges and even have the luxury of other customers picking up the cost of connecting them to the grid.

Roger Arnold's picture
Roger Arnold on Apr 9, 2017 4:57 am GMT

Your reply, Bas, is not very helpful towards addressing the issues I was asking about. It’s also not particularly accurate.

You refer to “the rumor” the “the Chinese” export their solar panels for prices below cost. As a famous physicist is reputed to have said about a student’s hopelessly muddled thesis, “that’s not even wrong”.

For starters, in this context, there’s no such thing as “the Chinese” — a collective whole that operates with a unity of purpose. The solar industry in China is not one state-run monopoly. It’s not even a cartel, where independent producers jointly agree on production quotas to maintain prices. There are multiple producers in multiple provinces, and there is hard competition among them for the export market. Solar production capacity in China is heavily overbuilt; panel prices would not be nearly as low as they are if it were only foreign competition that a monolithic Chinese producer faced. They could still dominate the global market with panel prices more than 50% higher than the present 43 cents a watt. Do you know of any companies anywhere in the world eager to get into the silicon PV panel market and compete with such prices? No, 43 cents is most certainly the result of a price war. The strongest and most efficient players are able to survive, but margins are razor thin to non-existent.

As to “the rumor” that panel prices available in exports from China are below manufacturing cost, it’s not a rumor. It’s a demonstrable fact. Only it doesn’t apply across the board; it applies to those manufacturers who have been living on consistently negative cash flows year after year at the sufferance of state banks. But as I said, the strongest and most efficient can survive at those prices; they’re the ones who set them. Welcome to capitalism, comrade!

All this is beside the point. I’m not arguing that the “real” cost of silicon PV panels is higher than $0.43 / Wp. I’m saying that even at that price for panels, along with a very aggressive assumption of $1.00 / Wp for installation and “balance of system”, zero operation and maintenance cost, zero percent interest on capital, and the most generous assumptions about output per day, a price of only 2.43 cents / kWh still makes no sense. And yes, I’m aware of the Chilean bid and others that have been reported. They don’t make sense either. Yet there they are. I have to conclude that they don’t mean what you and many other solar PV crusaders are asserting. They don’t reflect “the cost of solar”.

I’m not privy to the contracts, nor have I been able to find any articles that explain them. Perhaps they’re not, as usually implied, promises by the plant builder to sell the plant’s entire output to the licensing authority at the bid price. Perhaps they’re simply a floor price at which the licensing authority agrees to buy any output that the builder can’t sell at a higher price. A guaranteed alternative to curtailment? I don’t know. But I’d like to.

Darius Bentvels's picture
Darius Bentvels on Apr 9, 2017 7:04 am GMT

Here in NL we don’t have ‘NRC-like’ paperwork as our supervising body is strongly pro-nuclear.
Still the operating costs only (so without capital costs, etc) of our NPP (Borssele) are €40 to €45/MWh.

The lousy safety supervision delivered dangerous situations such as the air-inlets of the diesel emergency generators ~4meter below sea-level in the period from 1973 until 2012, while the chance on flooding was official once in 10K years. EU stress-test improved the situation; now the diesel generators are also protected.

It’s owners are losing a lot of money with present prices in the Dutch market (~€31/MWh). They hope that prices will rise, or on subsidies such as the ZEC’s in New York state when CDA becomes member of the new coalition govt.

They need those subsidies also because they looted the decommission fund which now contains only ~€175mln while ~€1billion is needed (compare Vermont Yankee)..

Darius Bentvels's picture
Darius Bentvels on Apr 9, 2017 9:20 am GMT

Roger,
Yes, sharp competition is going on in the huge expanding Chinese market since at least 2011.*) Constructing new, more efficient automated mass production factories, who compete older factories off the market, etc. So price levels decreased towards below 50cnts and will decrease further towards ~20cnts.**)

It’s the struggle to become one of the few surviving contenders in the huge global PV-panel market of coming decades. Similar as occurred with TV’s, mobiles, laptops, etc.
It’s ‘normal’ in an upcoming free market. Also in China.

Don’t think a Chinese producer can dominate the global market with higher prices. He will be competed off the market by his (Chinese and other) competitors.

Your business model estimation
Estimate that the rack costs + the balance of system + installation costs will be <40cnts/Watt. Though they didn't flood the world market yet, internal Chinese inverter competition is also hot.***).
The 2.43cnt/KWh will deliver an ~5% return on investment in sunny Abu Dhabi. Not much but acceptable to gain a foothold in the big Arabic market.
_____
*) The Chinese themselves install yearly more than EU+USA.
In 2015: 15GW while USA and EU installed 7GW each.

**) Note that PV-panel prices in USA and EU are substantial above the world market due to the import tariffs, etc.

***) Huawei is starting here in NL with inverters. I estimate that they can undercut all other prices here. However, I think they will avoid that in order to avoid new EU import tariffs on inverters. Similar in USA.

Darius Bentvels's picture
Darius Bentvels on Apr 10, 2017 10:07 am GMT

Roger,
Fortune indicates that the 2.42cnts/kWh was a bid. Final price: 2.3cnt/KWh (super-wondrous in your terms).

Furthermore GTM research predicts <2cnt/KWh for a PV solar contract this year already. Candidates are a.o. Saudi Arabia (~350MW farm), UAE, etc.

So that price of 2.3cnt/KWh isn’t wondrous after all. Especially as:
– one may expect further price decreases when 1GW solar farms are auctioned (economy-of-scale);
– the price decreases are widely predicted to continue during next decade…

Present panels are at ~20% efficiency (~300W/panel), race-cars use panels with ~33% efficiency, so >50% improvement. And 33% is not the end as top solar cells are at 46%. Developed by a cooperation of Fraunhofer ISE (Freiburg, Germany) and Soitec and CEA-Leti (both in France).
Though improvements above 33% may become difficult.

Roger Arnold's picture
Roger Arnold on Apr 10, 2017 6:37 pm GMT

Perhaps it’s all self-evident to you, Bas, but it isn’t to me. Basic questions:
Who’s the buyer? Who’s the seller? What exactly is it that’s being bought and sold? On what terms? With what stipulations?

Auctions are most often associated with sale of an item or service, in which case it’s the high bid that wins. The other type of auction, where the low bid wins, is an offer by the bidder to fulfill a contract at the bid price. But 2.3 cnts/KWh isn’t a price, it’s a rate. How many KWh does that rate apply to, over what period of time? And what exactly is the contract that the bidder is promising to fulfill?

In the worst case for the bidder, the contract would be something like “If you, Abu Dhabi Electricity and Water Authority, agree, I the bidder promise to raise the necessary capital and build a 350 MWp solar farm at the location you specify and will operate and maintain it and will sell you all of the output it ever produces at a fixed price of 2.3 cnts/KWh.”

That’s the implied contract that you — and apparently the author of the Fortune article you may be going by — seem to assume. I don’t credit that interpretation, because the numbers don’t work. Under the most favorable realistic assumptions, sale of the output at 2.3 cnts/KWh will be insufficient to ever recover the initial investment, much less make a profit.

At the other end of the possibility spectrum is that the contract being bid is a more or less standard PPA — a power purchase agreement. It would be something like: “If you, the bidder, can supply it, I, Abu Dhabi Electricity and Water Authority, agree to purchase from you X kWh per year of energy at a minimum price equal to your bid.” A PPA does not obligate the party to whom it’s awarded to actually deliver anything; it’s a guarantee of a minimum market for a certain amount of power at a stipulated price if the awardee can deliver it. It’s typically used by the awardee to help attract investors for a proposed project.

A PPA at 2.3 cnts/kWh would be no big deal. It would simply assure prospective investors that the plant they’re being asked to fund is guaranteed that minimum price for whatever it can produce. It will never have to curtail output when there is an excess of supply. But the investors might reasonably expect to sell most of the output at a much higher price. Of course, if there’s only one potential customer, ADEWA in this case, the customer could refuse any price higher than the agreed minimum. OTOH, if they really need the power…

That’s why there’s so much devil in the details of the contract, and why it’s impossible to draw sweeping conclusions about what the bid actually means without knowing those details.

Bob Meinetz's picture
Bob Meinetz on Apr 10, 2017 8:01 pm GMT

Roger, you’ve nicely summed up, with examples, why FERC’s capacity “market” for electricity is little more than smoke and mirrors, invented to extend business-as-usual indefinitely.

An emissions analogue is the market for carbon “credits”, which in their 20+ year history have yet to be proven to reduce carbon emissions one iota.

Though both “markets” succumb to the most cursory scrutiny, renewables advocates remain vulnerable to their charms. And atmospheric carbon creeps upward.

Jesper Antonsson's picture
Jesper Antonsson on Apr 10, 2017 8:59 pm GMT

Right. The PPA is one of many ways solar is de-risked by governments, others being accelerated depreciation, currency guarantees and investment subsidies.

When alt-fact sites like CleanTechnica calculates the “unsubsidised price”, they just take the PPA rate and add any explicit subsidies. This not only ignores stuff like free land and grid connection, it more importantly ignores the effect that combined derisking and subsidies has on capital costs.

What many don’t understand is that for these up-front capital projects, a reasonable 8% discount rate might make the levelized cost 5x higher than the 0% discount rate that you might approach when almost all risk has been transferred to taxpayers and rate payers. The difference in levelized cost is not merely a theoretical construct, but represents real costs that those tax/rate-payers are shouldering.

Jesper Antonsson's picture
Jesper Antonsson on Apr 10, 2017 9:18 pm GMT

The 2.43cnt/KWh will deliver an ~5% return on investment in sunny Abu Dhabi.

Dear Bas, if I assume 20% CF, 30 years of life and apply a 5% discount rate as you suggest, then check what capital costs I need to have to reach 2.43 cents/kWh LCOE, guess what I arrive at? 65 cents/kW!

Are you saying we have an all-in installation cost, including land, transmission/wiring, solar panels, mounts, inverters, roads, service buildings and perhaps a fence, of 65 cents/kW? Assuming, of course, zero O&M costs with no guards, no accounting, no inverter breakdowns, no dust removal, no road maintenance and so on.

No way. With a 5% discount rate and the contractor shouldering all costs without any derisking from the government, 6 cents would be optimistic indeed.

Darius Bentvels's picture
Darius Bentvels on Apr 11, 2017 8:49 am GMT

Roger,
Your problem is that your reference is US & EU pricing which is artificially high due to the high (~50%) import tariffs & high margins.

I read that the PPA ($2.3cnts/KWh) is for a period of 20years. You can find the winning consortium at Internet.

Estimate that your idea that the consortium may ask an higher price in times of power shortage, won’t work in Abu Dhabi. Their rulers won’t accept such manipulation (it’s not USA). It also implies that those involved will loose their chances in next auctions in the whole Arabic world.

Furthermore; Within a few years auctions will deliver PPA’s with prices below 2cnts/KWh. So if the consortium tries such price manipulation ADEWA may declare the 2.3cnt/KWh guarantee invalid. Then they have to compete against the 2cnt/KWh newer solar farms…

Your objections are similar to those last year when the first Dutch Borssele offshore wind farm (750MW) was auctioned and won in July for 7.3cnts/KWh during 15yrs (below cost price, etc). The critique stopped when:
– an highly similar Borssele offshore wind farm was auctioned and won in November for 5.5cnts/KWh.
– the Danish auctioned a near shore wind farm in the N.Sea for 5cnt/KWh during only 11years (thereafter whole sale which is ~3cnt/KWh here).
I expect similar regarding these solar farms.

Accept that Bob Dylan’s song: “Times they are changing”, is more valid than ever regarding electricity generation.

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