In my previous post, I have argued that using the least-cost method in energy planning with planners favoring fossil fuel plants on the basis of their “lower” cost may not necessarily be the best option for a country like ours. Let us examine why this is so.
As mentioned, traditional sources of energy or fossil fuel based power generation is subject to unpredictable prices. This means that the cost of power is affected greatly by the rise and fall of the fossil-based global prices, making dependence on traditional power plants a high-risk undertaking. Planners, however, do not even consider the risks involved when putting together an energy mix.
Let us look at this example to better understand the risks of using the least-cost method.
A couple needs to borrow P5 million for a house loan, payable in 20 years. This couple is given two options:
Option 1: Borrow at fixed interest of 10 percent per annum for the next 20 years
Option 2: Borrow at varying interest rate that could range from 5 to 20 percent for the next 20 years.
Which option should the couple choose?
If the couple chooses Option B, then it is possible to pay 5 percent per annum for the first five years and end up paying anywhere between 5 to 20 percent for the remaining years of the loan. It is also possible that the couple will pay an interest rate of 20 percent for the next 10 years or 15 years, depending on the conditions of the market.
On the other hand, the couple who chooses Option B is assured of paying a fixed interest rate of 10 percent per annum only for the next 20 years.
The same analogy can be used for energy planning.
At a glance, a coal-fired power plant may seem cheaper because it can generate power initially for $1 per kWh, unlike a wind power plant that costs $4/kWh for the next 25 years. But coal is likely to diminish, which means that the lack of supply will push the price of coal upwards.
Those who have chosen to invest all resources in building coal power plants will have to shell out more money than they have expected because of the price spikes in the global market.
Unfortunately, the Philippines is one of the countries that is highly dependent on fossil-based power generation. Data from the Department of Energy in 2012 showed that the country relies heavily on coal-powered plants for power generation, making up 32.02% of the power mix, followed by oil-based plants at 19.48% and natural gas at 16.46%. Similarly, the country imports 90 percent of its coal and oil resources according to the World Wild Fund (WWF).
So, an increase in global prices will increase the cost of power generation for the country. Consumers will have to pay for higher costs of energy when global prices go up. And world consumption for fossil fuels is increasing at a fast rate, outpacing the world production increase for all three traditional power sources: coal, fossil fuel and natural gas.
The country already has one of the highest electricity costs in Asia. And in the future, the country’s power costs will even be higher due to the dependence on coal and oil-based power plants.
This is why adding renewable energy in the country’s of power generation mix is crucial. Renewable energy can provide stable prices—a fixed price for an ex-number of years; a reduction of risks brought by fluctuating prices of fossil-based fuels.
Adding Renewable Energy
Many energy planners favor fossil-based energy for fear of higher generation costs since renewable energy costs more. But studies refute the traditionally held notion that adding renewable energy into the portfolio increases the over-all cost of energy.
For example, the European Union added more wind into their mix from in 2010. Adding more Wind, which costs roughly 10 percent more, did not increase the generating cost of the EU mix. The generating cost for the mix in 2002 and 2010 were almost the same at €0.033/kWh (from Awerbuch)
Year 2000 Energy Mix for EU
- 20% old gas
- 32 % coal
- 8% oil
- 40% nuclear
- 1% wind
Year 2010 Energy Mix for EU
- 17% old gas
- 23% coal
- 6% oil
- 34% nuclear
- 3% wind
- 16% new gas
Similarly in the United States, adding more gas into the mix raises risks, but does not necessarily reduce costs. Let us look at the figures below.
US Technology Costs
The energy mix in 2002 consisted of 15% gas and 85% coal. However, studies revealed that moving to 100% gas increases risks from 8.5% to 11.5% or by 35%, but only reduces costs by roughly 9%.
On the other hand, changing the mix to add 18% wind (see mix below) reduces the risk by 23% from 8.5% to 6.6%, but has the same cost as the energy mix in 2002.
Mix with more wind
- 45% gas
- 37% coal
- 18% mix
The studies show that adding more renewable energy into the mix 1) reduces risk 2) does not significantly raise the cost of generation. There are also other benefits of adding more renewable energy such as reduction in GDP losses, which we will tackle in succeeding articles.
The point here is simple: If we want stable power prices, then local energy planners may want to consider the results of the studies done in advanced countries and work harder to achieve an energy mix consisting of more renewable energy.
Applying portfolio theory to EU electricity planning and policy-making
Shimon Awerbuch with Martin Berger