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.

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