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May 23, 2011

Mission Critical: Focusing on What Energy Costs Today

A disruptive shift in the world energy economy has rendered the commonly accepted axiom that renewable energy is expensive and fossil fuels are cheap oversimplified and outdated. From soaring coal and oil prices, to rock bottom solar module prices, the signs are everywhere that what we believe we know about energy costs today requires immediate revision. Most importantly, this shift marks the end of an era of abundantly available cheap hydrocarbons, and the ushering in of a new era of abundant, cheap, and reliable renewable energy.

The findings of the IPCC's recent special report on renewable energy underscore this shift with an attempt to bring the rapidly changing economics of renewable energy to the attention of policy makers worldwide. Take their findings on the current cost of energy: "The levelized cost of energy for many renewable energy technologies is currently higher than existing energy prices, though in various settings renewable energy is already economically competitive." This seemingly cautious statement (remember it took the body 17 years to say conclusively –- with greater than 90 percent confidence -- that climate change is human induced) is recognition that our energy axioms must change, and that they must change for good.

IPCC RE cost curve

For instance, looking at one of the "settings" where renewable energy is already competitive, the United States, we see that solar power is now cheaper than natural gas. In fact, renewable energy is so competitive that California has named its command center for integrating renewable energy onto its grid "Mission Critical." An apt name for an 81-foot video wall display that functions like an energy war room and is tasked with integrating California's 33-percent renewable energy penetration.

The truth however, is that California is by no means unique. According to IHS Emerging Energy Research renewable, energy penetration is reaching significant levels in several countries around the world with Denmark, Portugal, and Iceland all achieving greater than 21-percent penetration (excluding large hydro power) today (see map below).

Renewable Energy Penetration World Wide

But this is only one side of our fundamental energy axiom –- the other being that fossil fuels are cheap. One of the short comings of the IPCC analysis is the very narrow price band it displays for conventional energy. The high end of the IPCC estimate shows non renewable resources coming in at 10 cents/kwh. Yet we know that new coal plants in the United States can be as high as 13.3 cents/kwh while new gas plants can be as high as 16.3 cents/kwh. These costs don't even include modern pollution control equipment required to minimize a laundry list of local air pollutants.

IPCC cost-kwh estimates

More importantly, these narrow fossil fuel based generation energy estimates fail to incorporate the skyrocketing cost of fuel occurring worldwide. For example, in Slovenia, where coal is abundant, and until recently cheap, the government is likely to abandon plans to build the Sostanj Coal Plant as even a 10 percent rise in the cost of coal renders a new coal plant unprofitable. Considering that the life of an average plant is 40-50 years, and that US coal prices tripled during the 2008 oil price spike, it's fair to say this was a wise long-term decision by the government.

In China, soaring coal prices are leading to power rationing as producers are caught between increasingly expensive fuel prices and government regulated tariffs that are only slowly being allowed to rise to reflect just how expensive coal now is. A situation that was accurately predicted by the UBS 2010 Global Utilities Outlook which warned investors away from Asian coal plants whose profit margins will become increasingly thin as a result.

In India, KPMG expects the cost of fossil-fuel electricity to rise as much as 5.5 percent annually due to expensive imported coal (which may only get more expensive as the market may lose 774 million tons of Indonesian coal due to a forest clearing moratorium) and the costs of replacing aging plants. Add to that the fact, that the country’s coal deficit may triple over the next five to seven years and it is clear why KPMG also expects Indian solar prices to be the same as coal as soon as 2017.

While perhaps anecdotal, these examples are clear signals that the energy economy is fundamentally shifting, and that this shift is manifesting itself today; A point that the IPCC's findings clearly support. According to the report from 2008-2009 nearly half (46 percent) of all new electricity needs were met by renewable energy. Even more importantly, developing countries -- those "settings" where renewable energy is deemed to expensive -- currently host 53 percent of global renewable electricity generation capacity.

So while politicians and policymakers debate the need for "low cost generation" and renewable energy costs and penetration scenarios 40 years out into the future, our "mission critical" becomes clear: getting policy makers and politicians to acknowledge the fact that their understanding of energy economics is woefully outdated. At this point the energy market is moving rapidly towards renewable energy whether we decide to acknowledge that fact or not. While it’s important to understand what can be accomplished by 2050, understanding what is happening in 2011 is what matters. Luckily for us, what is happening in 2011 is nothing short of revolutionary.

-- Justin Guay, Sierra Club International Program

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