The real cost of renewables

We are at the start of a period of significant investment in renewable energy in South Africa. Renewables will bring many advantages for the country. For simplicity in this blog I will deal mainly with the benefits of wind power, but these benefits will occur with solar, particularly solar PV, as well.

The headline cost of wind energy on the South African electricity system is R1.25 a unit. This is the support price that is paid by the single buyer’s office for 20 years. The price of wind generated power then falls to the marginal cost of operating and maintaining the wind farm.

A cost of R1.25 appears high. But, let us look at what happens on the system when wind power is introduced and examine if it is the only relevant cost element.

The fuel cost of wind is free. This means that in most electricity systems wind will be dispatched first. For those not familiar with the term, the word dispatch refers to the order in which generating equipment is added to meet additional demand. So wind generation will be brought on whenever the wind blows. Other more expensive units are brought on later. Dispatch is always done using the marginal cost of operating the generating unit. Marginal cost is in reality the fuel cost. Fixed or sunk costs, such as the cost of capital, or the cost of paying staff, are not relevant or considered by the dispatcher when deciding what generating unit to bring on next. Wind and solar always come on first because their fuel cost is the lowest; because they are free fuels.

We are at the start of the wind programme in South Africa; a start which will see 1600 megawatts brought on line by 2013. Most electricity will continue to be generated with local coal. Wind will effectively replace the really expensive generating units. These are located in the Western Cape; they use diesel fuel transported to the plant by road tanker, and the generating units are quite inefficient. The cost of each unit generated is, according to ESKOM, in the region of R1.5 to 1.9 depending on the price of diesel.

This effect of replacing expensive units with cheaper ones is called the merit order effect. Wind wins every time here. Wind generated electricity will either replace diesel generated electricity altogether, or in part, or it will delay diesel generation being brought on. Every way the consumer wins. It is hard to say exactly how much the consumer will save because both electricity demand and the production of wind vary. At best, with a good wind blowing, and slightly lower demand, each unit of wind will be worth on average of R1.7 (the cost of what it will be replacing) as against a cost of wind of R1.25. In this scenario wind has a negative cost. Each unit saves the consumer money. At worst the situation is no different to what happens now, when there is too high an electricity demand and all generation units are pumping out electricity.

Having been involved with generation of electricity most of my working life, I can say that coal and wind work very well together. Coal plant can be turned up and down readily without loss of efficiency. It copes very well with any perceived variability of wind. However, it should be pointed out that wind in South Africa has the very good characteristic of blowing when it is needed most – during the day time. Unlike wind in Europe, which results from storms which arrive randomly, wind in this country mainly happens because of heating of the land mass. This occurs with predictable regularity, every day, during the day time. In Europe wind delivers 52% of its electricity output during the day, in South Africa it will deliver 65%.

Mainstream has calculated what the shape of generated electricity from wind would look like with 30,000mw installed on the system. In world terms wind in South Africa has a beautiful profile. Over the period when electricity is at its most expensive, during the evening peak, electricity is delivering almost 50% of its nominal capacity. Simply put, in South Africa wind energy can be relied on.

In our last blog we referred to carbon fines, and the fact that wind generated electricity does not attract any. The current fines are around €13 per tonne of CO₂. From the ESKOM annual report we see that one kg of CO₂ is released for every unit of electricity currently produced. A unit of wind generated electricity produces no CO₂, so saves €0.013. This would have the effect of reducing the price paid for the unit of wind produced electricity by R0.12. The real price would be 1.25-0.12=R1.13, a reduction of 10%. If the price of carbon fines were to go to €40/tonne, as predicted, then the real price paid for wind energy would be R0.89. This would represent a reduction of over 30%. I would be confident that over the life of wind farms in South Africa, the saving will be at least that much.

A wind farm will last at least 100 years, with occasional replacement of the most stressed components. During this time three full capital investments in new coal plant will have to be built, as against one and a half for wind. For the last 80 years (after the support period has expired) the wind plant will operate at its very low marginal cost, with no fuel, water charges or carbon fines, and minimal operation and maintenance charges.

Wind can be planned for. It is easily forecasted and it will form a vital component of the low cost renewable electricity needed by South Africa to power its homes, businesses, mines, factories and transport over the coming centuries.