The cost of energy sources

The source cost of renewable energy is typically zero.  This includes:  solar, wind, tides, waves and geothermal energy.  But in all of these cases the cost of the conversion equipment is very high; generally many times that of converting fossil fuels. 

The price of fossil fuels coal, oil and gas respond to market demand.  

Because oil, gas and coal are broadly interchangeable, with a lag due to the conversion investment required, big differences in the energy cost relationship between one fossil fuel and another are usually temporary.

Steaming coal is used almost exclusively in power-stations.  Australia has good coal deposits adjacent to its major energy markets.  Coal fired power-stations are usually built close to a ‘captive’ mine and have long term contracts.  The lower effective fuel cost and greater efficiency possible from a single dedicated fuel source;  large boilers tailored to the coal; and optimised turbo-generator sets more than offsets the grid losses involved in transmitting the energy to consumers in nearby cities. 

There are additional environmental benefits of generation near mine-sites in the country.  Coal burning releases ash; dust; acidic oxides of nitrogen and sulphur; and more radiation than several nuclear stations; in addition to carbon dioxide.  Coal burning is best kept away from large conurbations.

Shipping coal by train or road is costly; dusty; consumes energy and lives are lost in road and re-handling accidents.  This can be minimised if conveyor belts do most of the materials handling.

Some fossil generation can generally be located even closer to consumers.  For example, gas co-generation can supply a cluster of buildings in the middle of a city; with virtually no grid overhead; or losses. 

Natural, renewable, resources are cleaner but good wind and solar-thermal sites are frequently remote from the grid, requiring a dedicated transmission line to connect.  This transmission line needs to carry the peak currents three to ten times those of a conventional power-station.    If the distance is great the cost of the transmission line can easily be the most expensive component in a project. 

For example, Capital Wind Farm, the largest in NSW, connects to the grid via a 33kV transmission line just 10 km long.  Nevertheless at a cost of about $71m this short transmission line contributed around a third of the total cost of the project. At this was partly funded by the transmission provider some of this cost born by the general consumer; rather than the project owners.

If NSW customers were supplied from wind farms in SA (they are not - although NSW customers pay for it through the LGCs) there would be implicit cost overheads on a similar scale through the entire transmission network.

The impact of the carbon tax on fuel price is not yet apparent.  The tax makes the apparent cost of (somewhat randomly selected) fossil fuels higher and in a free market place should depress their price.  But the market is not free to move due to contracts, the special relationship between generators and their captive mine and the impact of alternative markets like exports.

The price a generator is prepared to pay for coal is heavily influenced by the price available in National Electricity Market (NEM).  This is now higher due to the tax.  This suggests that there may be little price movement at least in the short term. 

But if electricity demand falls due to the tax, and with it the NEM price, we might expect some fall in the mine-gate price as well, minimising the overall impact on coal demand.  This interplay of market forces may well see a return to previous demand levels for coal; or a very marginal dip in the overall upward trend in coal mining; and burning.

In NSW lower industrial demand for electricity has already been contributed to by recent cutbacks in the aluminium industry and manufacturing generally; as a result of the high Australian dollar. 

There has also been a long term trend to increased energy efficiency; spurred on by a decade of increases in the electricity price. A number of domestic lighting and consumer electronic products have become significantly more energy efficient and commercial buildings have implemented a wide range of energy saving measures.

These have certainly reduced the amount of fuel required relative to what might have been. But we can expect the longer term growth in demand for energy to rise inexorably; given projected population growth and higher standards of living; in Australia and overseas.

This energy needs to come from somewhere.  In the next twenty years this will be predominantly from fossil fuels. The coal is still going to be burnt but at a slower pace domestically where the difference is likely to be taken up by gas; increasingly derived by ‘fracking’ coal seams.

Generation

If you don’t understand where electricity comes from or how it is transmitted there is a short (simplified) primer on this website:  Read More…

Generation is not regulated to the same degree as the grid infrastructure as it is deemed highly competitive (unless you are a generator receiving carbon tax compensation).  It is intended that eventually investment decisions relating to new power-stations will be market driven and regulation will be minimal.

There are around 260 electricity generators competing to supply electricity to different points in the National Grid.  

This competitive position has not yet been achieved as some government owned companies still own much of the generation infrastructure, restricting some investment choices by setting price ceilings and revenue targets. 

Governments also interfere in the technology options that generators will be permitted.  For example, they continue to apply additional emissions criteria perhaps favouring coal seam gas over coal; rather than relying on rational cost penalties for environmental damage (like carbon trading or fines for methane release) and consequent commercial behaviour; and they impose bans on certain technologies, like the various nuclear options.

As previously mentioned the dispatch price between the National Electricity Market (NEM) and generators is struck every five minutes and averaged to the NEM spot price every half hour for each of five generation regions.

The Australian Energy Market Operator (AEMO) dispatch method is impacted, some say distorted, by the MRET certificates.  In meeting a particular demand AEMO calls for offers to supply.  It then stacks these from lowest to highest; the final and highest price being the last to complete the stack.

Because wind generators have zero fuel cost, and receive 1 LGC for each MWh provided, they have negative effective energy cost and bid at the lowest price.  If wind is available it goes to the bottom of the stack.

The price of coal to a particular station determines the lowest price they can bid without losing money.

At the moment this is around $14 per MWh of thermal energy, on today's coal market.  Large generators are around 36% efficient. The price they get for electricity thus determines how much they can pay for fuel. The marginal fuel cost, for coal, on the open market, is presently around $40 per MWh.  But the coal price too fluctuates in response to demand.  Thus if electricity demand goes up generators make more money; more coal is required and the coal price also rises.

Less efficient thermal stations, and those burning more expensive fossil fuels, will be at the top of the AEMO stack and are most likely to miss out when demand is low.   But base load stations need to keep spinning even when there is no load, so they need to bid low to come into the stack and burn coal, even at a price of fuel (and electricity produced) at which they will lose money.

The effect is to suppress the market price and make some thermal stations unprofitable, even though they are essential to meet demand at peak times.

 At the same time the consumer is paying more than twice the price of thermal power for wind generated electricity, as a result of the cost to retailers of the LGC’s The base load generators see non of this higher price.  It all goes to the renewables - predominantly to Wind.

This may well be a good thing for wind power; but not everyone in the industry is delighted.  Some suggest that this is removing the market incentive to invest in new base load capacity. 

In other words, at the same time that lower cost base load generators are being squeezed and made increasingly unprofitable, the consumer has to pay an increasingly high price for the electricity generation component of their bill; after taking into account renewable electricity certificates and the carbon tax.

Now, in addition, rooftop photo-voltaic (PV) solar is beginning to add power to local distribution grids in mid-summer, when the market price is at its maximum and thermal stations have previously been assured of a profit.  Again the retailer pays for STC’s that subsidise the price of solar.

While again we might applaud the lowering of the peak market price and the reduction of peak grid currents at this time, we will not be so pleased if failure to invest in new generation capacity results in even higher prices; and future brownouts and blackouts.

While at first sight there appears to be a well established competitive generation market, the renewable energy targets and the associated certificates (paid for by our retailer and appearing in our bill) may be having an increasingly adverse effect on future investment decisions; with potentially disastrous outcomes ‘down the track’.