As the energy is essentially free, renewable electricity costs, like those of nuclear electricity, are almost entirely dependent on the up-front construction costs and the method of financing these. Minimising the initial investment, relative to the expected energy yield, is critical to commercial viability. But revenue is also dependent on when, and where, the energy can be delivered to meet the demand patterns of energy consumers.
For example, if it requires four times the capital investment in equipment to extract one megawatt hour (1 MWh) of useable electricity from sunlight, as compared to extracting it from wind, engineers need to find ways of quartering the cost of solar capture and conversion equipment; or increasing the energy converted to electricity fourfold; to make solar directly competitive.
Similarly if a technology produces electricity when consumers don’t want it; or produces it so far from the consumer that most of it is lost in transmission; then the revenue available will be proportionately less than a similar investment that better matches demand; or is located close to where it is consumed.
In most developed nations, including Australia, electricity is a traded product with the market price fluctuating from hour to hour; day to day; season to season; in five minute intervals, according to supply and demand.
Without government intervention in the market, supply and demand determines the return that is available to an investment; while the engineering solution and qualities of the resource determine the energy that a particular investment can theoretically deliver.
Before intervention, current renewable technologies, with the exception of hydro- electricity, are substantially less competitive, in terms of return on investment, than fossil fuels or nuclear electricity. It follows that wherever alternatives are in use there are other factors at play: such as the cost or practicality of a grid connection; or a government intervention in support of renewables.
In Australian electricity markets this intervention takes the form of Renewable Energy Certificates (RECs) described later. Other governments have other instruments such as cap and trade carbon reduction schemes; carbon taxes; energy buy-back schemes; and tax breaks; to achieve similar ends.
In Australia grid losses are of particular concern. Australia’s population of just over 21 million is highly concentrated in a few large cities; just eight cities accounting for over 70% of the population. The largest Sydney; Melbourne; Brisbane; Perth and Adelaide account for 63% but are separated by distances of between 670 and 3,600 km; ‘as the crow flies’. This is similar to the continental USA and a substantially greater area than the entire EEC.
Transmitting electricity over such distances results in significant losses. The market price received by a generator is therefore influenced by transmission costs and the point on the grid into which electricity generated is injected. A renewable energy project remote from the points of high demand will receive a lower price than one adjacent.
Very high voltage DC (HVDC) technology can reduce the net grid loss problem over long distances, and this is in use for links to Tasmania and South Australia, but it adds at least two costly voltage translations and the additional capital cost, together with the low capacity factor of wind and solar, precludes its use in most, if not all renewables dedicated situations.
Even with the present substantial and probably increasing REC cross-subsidies from electricity consumers, transmission factors limit the economic distance an exploitable wind or solar resource can be from the main electricity grid and electricity consumers.