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The cost of renewable energy put in perspective

Steven Weissman, associate director, Center for Law, Energy and the Environment | November 28, 2011

Would you be willing to pay 3 ½ cents a day to reduce the pollution from the electric power you use by 40%?

In a recent article, the San Francisco Chronicle talked about the high price of adding renewable energy to the grid. Citing a study prepared by the California Public Utilities Commission’s Division of Ratepayer Advocates, it reported that, on average, new contracts for renewable power are 15% more expensive than power from a natural gas plant.  he implication is that consumers should brace themselves for big rate increases as the new solar and wind projects come on line.  Perhaps it’s worth taking a minute to look at the actual numbers.

The utilities in California must deliver a third of their power from renewable sources by 2020.  Their renewable shares are already close to 20%. The question, then, is what the rate impact would be from expanding to reach the 33% goal. Let’s be conservative about this.  California Governor Jerry Brown is hopeful that the utilities will actually deliver 40% renewable power within the same time frame. So, let’s assume an additional 20% increment of renewable power.

If, as predicted, that new renewable power costs 15% more than the best alternative (natural gas), what would the effect be on consumer rates and bills?  Here is the math:

Purchasing 20% more power at a 15% mark-up adds 3% to the overall cost of power (.2 x .15 = .03).  The electricity itself comprises about half of the customer’s bill, so the additional cost of power would result in a 1.5% increase in the utility’s revenue requirement (if the current revenue requirement is 2X, the impact of the added renewables can be represented as 2X + .03X = 2.03X; the percentage change looks like this: 2.03X/2X = 1.015).

Rates would have to be raised by 1.5% to cover the added cost.  For customers with an average rate of 18 cents per kilowatt hour, that’s an increase of .27 cents (a quarter of a penny) per kilowatt hour. Customers using 400 kilowatt hours per month would pay an additional $1.08 per month. That’s on top of a current bill of $72.00.  For the typical family, the added cost is 3 ½ cents per day.

In our current economy, no rate increase is trivial. But this particular one is small. The utilities could raise rates twice as much this year alone just to cover inflation. And just think about how much this small increase can buy.  Since California regulated utilities already get about half of their power from sources with little or no greenhouse gas emissions (hydroelectric, nuclear, and existing renewables), that additional 20% renewable power can knock out about 40% of the emissions that remain. Not a bad deal, for 3 ½ cents a day.

Cross-posted from the environmental law and policy blog Legal Planet.

Comments to “The cost of renewable energy put in perspective

  1. His assumptions are wrong – wind and solar renewable energy costs much more than 15% over fossil fuel. Solar is over 500% more costly that natural gas.

    Secondly California is talking about 33% from renewable, not 20%.

    There is huge risk from the complete havoc that unpredictable wind and solar power generating resources contributed to the prudent operation of the grid. Until bulk electricity can be stored efficiently – renewable energy will be very expensive. There are also huge environmental constraints against wind and solar, and many groups, from the Sierra Club to Robert Kennedy Jr are fighting wind projects.

    Peter Bryce of the Manhattan Institute, has an exhaustive study on the cost of renewable energy:


  2. Ignoring the fact as Damon has pointed out that there is not a 1:1 trade-off for capacity of these renewable sources, the entire notion of simply raising the price to account for more expensive sources is not realistic. Surely everyone understands that once a megawatt is put on the grid, distinguishing the source is nearly impossible. The determination where energy is actually supplied from is trivial and only takes place in energy trading market places. Simply adding an extra 0.27c/kWh will not ensure by any means that generation at fossil plants will be reduced. The energy system is much more complex. A fossil plant with a market to sell energy will not reduce its power because one utility customer wont buy from them. The energy will simply be put on the grid as long as anyone is willing to buy it. And if its cheaper, it will be bought.

    The power content label in CA is such a crock. These so called “green” consumers shell out .27c/kWh more to purchase from renewable sources while that amount is just subtracted off someone else’s bill. And who’s bill do you think it is? Mostly commercial and industries loads which account for more than half of the load on the grid anyway. This is by no means a fix to the system. The only fix is to make renewables economically competitive. Most of these “green” energy companies see articles like this one and say to themselves, “people are willing to pay more for the same energy, why would we lower our prices?”

  3. Integration costs, those costs of managing the intermittency of renewable (variable) generation, are highly dependent on grid management practices. For example, the Bonneville Power Administration (BPA) recently reduced their integration costs levied against renewable (variable) energy resources by almost 40% when it moved from 1 hour to 30 minute scheduling. Additional reductions will be possible in moving to 15 minute scheduling, as well as with greater balancing area coordination and improved weather forecasting. But even at 30 minute scheduling, BPA’s renewable integration costs are only about 5 – 10% of the energy costs, so the cost of integrating renewables for the typical family will be at most about 1/3 of a cent per day. Bottom line: adding the cost of intermittency hardly changes the authors results at all.

  4. Responding to Damon’s comment about intermittency and the price of renewable energy: Damon suggests that you can’t just assume a straight swap of renewable kilowatt hours for those generated by fossil fuels because you still may need some natural gas backup to balance solar when the sun doesn’t shine, and wind when the air is calm.

    While it is true that natural gas power will fill in the gaps in some circumstances, that doesn’t change the calculation. The utilities’ renewable energy requirement is measured in khws delivered, not in power plant capacity. If the grid is properly managed, fossil fuel use will decline when the renewables are feeding into the grid. If the generators keep extra fossil plants spinning while the sun shines and the wind blows, there would be additional cost, but it should not be necessary to do that, and it is up to regulators to make sure that the most economic approach applies.

    None of this is to suggest that there won’t be additional costs related to reliance on renewable energy if it leads to otherwise unneeded transmission lines and storage facilities. But continued use of fossil fuels will lead to new costs as well, as fuels become scarce again (they will, some day) and environmental compliance costs climb.

    The points are that the simplistic concern about renewable energy raising rates needs to be carefully examined, and we need to ask ourselves how much of a cost to health and the planet we are willing to absorb to avoid a percent or two of higher utility charges.

  5. Sorry, probably too dim at this stage of the morning, but are you factoring in the effects of covering intermittency there, ie a kWp or kWh of rewenables is not a straight swap for a kWp (nameplate) or kWh (generated) of demand-callable fossil-fired generation.

    I’m all in favour of a zero-carbon (or nearer-ZC) grid, but I don’t think your linear analysis is right at first blush.



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