avoided emissions

Debate Over Economic Value of Renewables Brings Out Heavy Hitters

A recent article in The Economist describes a blog post by Charles Frank of the Brookings Institute in which he questions the  methods that have been used to compare renewable energy sources with more traditional sources like coal, gas and nuclear.

Drawing on the work of Paul Joskow of MIT, Frank claims that the generally accepted levelized cost models, which essentially divide the total lifetime system cost by the total amount of electricity produced, do not adequately discount the value of renewables sources like solar and wind based on their intermittent nature. Joskow’s reasoning is that since these intermittent sources vary their output at different times of the day and the year, that should be reflected in their value, since the demand for, and the price of electricity also varies throughout the day, at least in the commercial market.

So, given that wind, for example, produces electricity mostly at night, when the power is less valuable, that should be reflected in the value of a wind investment. Solar, on the other hand produces mostly at mid-day, when the power is most valuable, so it may be getting short-changed by the levelized cost approach.

Frank started with Joskow’s premise, then went on to perform a detailed analysis of various energy sources, based on avoided emissions and avoided costs, which revealed, he says, that contrary to popular belief, solar and wind are the least cost-effective way of producing low carbon electricity, followed by hydro, nuclear, and finally at the top of the list is combined cycle gas turbine power. Written from the perspective of building new electric generation capacity, Frank concludes, “Assuming that reductions in carbon dioxide emissions are valued at $50 per metric ton and the price of natural gas is not much greater than $16 per million Btu, the net benefits of new nuclear, hydro, and natural gas combined cycle plants far outweigh the net benefits of new wind or solar plants.”

The problem with an analysis like this is, given the rapidity with which renewable energy costs are dropping, trying to compare them with traditional sources is akin to trying to catch a falling knife. Frank’s data was obsolete by the time the ink dried on the page.

In addition, the analysis is highly sensitive to the eventual market price for carbon, which could swing the results dramatically. Also not considered is the impact of energy storage which could easily neutralize the liabilities that form the basis for Frank’s thesis.

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