Future Energy Prices in Australia

If a huge electricity-generation replacement cycle lies ahead for Australia to replace the current fleet of aging coal-fired power plants, what technologies offer the best deal?

Coal

In November 2005, the Intergovernmental Panel on Climate Change released a report entitled "Carbon Dioxide Capture and Storage." In it are some estimated costs of carbon capture and storage (CCS), which raises significantly the cost of fossil-fuel generated electricity.

Source: "Special Report Carbon Dioxide Capture and Storage," Intergovernmental Panel on Climate Change, 2005

If industry estimates are to be believed, carbon capture and storage will cut greenhouse gas emissions by 80-90%. But that means .1-.2 tonnes of greenhouse gas emissions per megawatthour will still occur. To this must be added another .05 tonne for upstream emissions generated by digging up and transporting coal from coal mines to the power plant. Valued at $36 per tonne, these residual emissions of .15-.25 tonne per megawatthour of electricity generated will add significantly to the already-higher costs of carbon capture and storage when both are applied. Offsetting this, of course, is the declining cost of the technology. IPCC experts estimate carbon capture and storage will drop 2-3% per year in price over the next decade.

Nuclear

A 2006 study produced for the Australian Nuclear Science and Technology Organisation (ANSTO) concluded the costs of nuclear power using latest generation technology such as the AP1000 would fall with widespread deployment. Assuming an aggressive rollout of the AP1000 worldwide over the next 15 years, the study concluded the technology would fall to about 5c cents per kilowatt over the medium term. These estimates, however, assumed an artificially low cost of capital provided by lavish government subsidies and excluded insurance costs -- which would have to be borne by the public sector willingly or unwillingly.

Source: "Introducing Nuclear Power To Australia," Australian Nuclear Science and Technology Organisation, 2006
"Uranium Mining, Processing and Nuclear Energy -- Opportunities for Australia?" Office of Prime Minister and Cabinet, 2006

While nuclear plants emit little or no greenhouse gases in creating electricity, they do create greenhouse gases in the upstream process of blasting, digging, trucking, crushing and refining and enriching uranium ore. Furthermore, lesser and lesser grades of uranium will have to be mined if uranium demand rises. Lower grades require more processing. This in turn could push up the greenhouse gas footprint of nuclear to where it becomes little better than natural gas. When carbon costs are properly applied, this will significantly raise the cost of nuclear power above the selectively-presented prices above.

The worse the uranium ore grade used, the higher the greenhouse gas emissions of nuclear power. Use of poor ore grades, which would occur with a major rampup of nuclear, would generate greenhouse gas emissions from the nuclear cycle worse than natural gas

Source: "Nuclear Power, The Energy Balance," Van Leeuwen, Smith, 2005

Nuclear power also creates long-lived, open-ended waste problems. Naturally, nuclear industry experts insist such “back end” costs are negligible. Independent experts estimate back end costs at 2c per kilowatthour. Whom to believe?

The United States is instructive here. Its Yucca Mountain nuclear waste repository in Nevada was scheduled to open in 1997, but now isn't scheduled to open before 2017. During this time Yucca Mountain has cost the US government US $8 billion and is still 10 years away from opening. In Hanford, Washington, a nuclear waste preparation plant has tripled in cost in six years to US $11.55 billion. This suggests the back end costs of nuclear waste are considerable.

This isn’t to say nuclear waste problems can’t be overcome with greater competence than that shown by the United States. But it does indicate a burden of proof exists to convince the public that industry and government are up to handling such a responsibility before nuclear power plants are built.

Renewables

In 2005, the Australian Bureau of Agricultural and Resource Economics (ABARE) offered some forecasts of the future price course of renewables.

Source: "Near Zero Emissions Technologies," ABARE eReport 05.1, 2005, page 29/43

 

From this information some trends can be derived, most importantly the expected downward annual rate of price change in the various technologies.

Annual Price Fall

As can be seen, the costs of renewables such as concentrating solar power, solar PV and wind and geothermal are expected to fall 5-8% per year in coming years. That's double the rate of nuclear and carbon capture as estimated by the Intergovernmental Panel on Climate Change.

Why?

Three reasons:

--Renewables are in a period of rapid price decline as capacity expands and innovation becomes entrenched.
--Renewables must try harder and be better than traditional fossil fuel energy sources in order to overcome government complacency and bias.
--Traditional energy industries like coal see little value in innovation. They view lobbying as their core competency, not clean energy generation.

The difference in the rate of annual price reduction in sunrise renewable energy and mature fossil fuel is evident in the graph below. Note the steep downward price slopes of renewables and the flat lines of coal. After decades of cozy and protected commercial lethargy, can the coal industry's clubby culture really be transformed into a lean and mean innovation machine? The past is instructive. While renewables spent the 1980s and 1990s innovating, the coal industry spent its time denying climate change existed and fighting against carbon taxes. The OECD doesn’t believe the coal industry.Why should we?

Source: Technology Innovation, Development and Diffusion, OECD/IEA, 2003

Given the information above, it's possible to project future price paths based upon historical downward rates of price change in a carbon-adjusted marketplace. This probably results in an underestimate of cost trends in renewable energy since the pace of innovation is picking up and thus can be expected to result in faster annual price drops in the future.

Nonetheless, the picture obtained is very instructive. Using inflation-adjusted 2006 Australian dollars, and assuming flat real carbon prices of A$36 per tonne over the next 25 years (a big assumption), the per kilowatthour prices of each technology for electricity generation are projected into the future at their historical annual rate of price decline.

The top horizontal black line represents current pulverised coal-fired power, costing 8c/kilowatt hour according to ANSTO's estimates. This could be called the business as usual scenario. The bottom black line is the price of natural gas power equipped with carbon capture and storage, to the extent the costs of drawing board technology can be accurately estimated. This represents the best-case scenario for fossil fuels. In between those lines lie the various costs of carbon capture and storage, initially raising fossil fuel prices above business as usual, but gradually falling. The maroon line represents nuclear power, which starts out costing more than certain fossil fuel solutions, but eventually falls below their prices. The two steeply-sloped redlines represent concentrating solar power and solar photovoltaics, the two renewable energy technologies with the steepest learning curves. The various green lines represent other renewable energy technologies.

Renewables are falling in price much more quickly than fossil fuels or nuclear

Sources: ABARE, ANSTO, IPCC

Click Image To Enlarge

Conclusions:

1. Carbon capture and storage locks in the highest prices over the long term. It combines high costs, unproven technology and unknown mitigation ability compared to renewables, and even nuclear. In fact, carbon capture could have the perverse outcome of raising prices above the worst case scenario that already exists if Australia rushed headlong into building this kind of capacity (ie the Howard government policy setting).
2. In a properly-priced carbon market, biomass, wind and geothermal are already competitive with coal and nuclear.
3. Renewables are dropping in cost so quickly that between 2010 and 2020 when the bulk of Australia's new investment in electricity generating capacity must be made, renewables will be cheaper than coal or nuclear.
4. Given that electricity capacity planned today may not come on line until 2011, this indicates that for most forward planning of new capacity -- renewables are the way to go. In other words, fossil fuel and nuclear risk being White Elephants from the day they open. Is that smart?

Naturally, future forecasts are provided in ranges, and the above chart uses the averages of the ranges. But even recalculating the figures using the highest costs and slowest rates of price decline for renewables, and the lowest costs and fastest rates of price decline for nuclear and coal -- the picture remains the same. Crossover points shift by just a year or two. Clearly, the experts have spoken. We should listen.