Costs and Benefits

In last week’s newsletter (The Energy Conundrum) I covered some of the problems with a growing reliance on renewable energy sources. I touched on the enormous difficulties involved in a comprehensive move away from fossil fuels and hinted at the scale of the costs. Not that it’s simply a question of cost – something very expensive can bring benefits worth many times the investment – but policymakers do need to consider value for money.

Costs are always important, but even more so when a government supposedly imposing ‘austerity’ on the country sees the date for the books to be balanced continuing to recede, the main opposition party is proposing a large increase in public spending and borrowing, productivity is stagnant and real wages are outpaced by inflation. Ultimately, the money for public spending comes from private and corporate tax payers. As interest rates inevitably begin to rise at some point, chickens will come home to roost. The prospect of being saddled with an unnecessarily costly energy system would only make matters worse.

The latest Eurostat statistics show the total energy consumption for the 28 member states in 2015 to have been 1.08 billion tonnes of oil equivalent, somewhat up on the previous year but down from 1.19 BTOE a decade previously. Of this, 358 MTOE was used for transport, essentially all from oil with a smidgeon of LPG and a soupcon of electricity. For comparison, the residential and industrial sectors accounted for 274 MTOE each, or 548 in total, with the balance going to services and agriculture.

These figures are for delivered energy; that is they do not take account of the energy used to generate the electricity that makes up part of the overall consumption. Total energy consumed including the generating sector would therefore be considerably higher. Sources such as the BP World Energy Outlook suggest that over 40% of fossil fuel consumption goes to generate electricity. Given the inevitable losses involved in electricity generation and transmission, electricity’s share of total energy consumed will be significantly lower than this. Although it’s difficult to be precise, electricity accounts for only about one fifth of energy consumption worldwide.

Moving away from gas and nuclear to generate electricity will be a very difficult if not impossible task with current technology. And those difficulties would be multiplied several fold if, as is proposed, we move towards full electrification of heating and transport as well. But for now, let’s think about costs.

A unit of fuel – let’s say gas as the most versatile – can be used in a domestic boiler to heat a home and water, to fuel a car directly, or to produce electricity that can then be used for either of these purposes. Heating is rather efficient; over 90% with modern condenser boilers. Powering a vehicle is rather less so, because much of the energy is converted into waste heat, so even the most modern engines are only about 40% efficient.

To move towards a ‘decarbonisation’ of the entire energy system, rather than just electricity generation, means having to convert heating and transport to electricity. There is no point in doing so unless that electricity can be low- or zero-carbon in the first place, but a quick consideration of the implications of using gas to generate electricity rather than warm houses or power cars gives a useful point of comparison.

Let’s assume all the electricity is generated from efficient combined cycle gas turbines, whose thermal efficiency is generally quoted as 54% under base load conditions. In round terms, given the fact that plant is not always being run under optimal conditions, we can say it needs twice as much gas to generate the energy demanded as it would to burn gas directly in a domestic boiler or car engine. There are also transmission losses. Taking account of voltage transformations and losses in long-distance lines and local cables, a rough figure for these would be 10%, increasing fuel use proportionally.

There would be a large capital cost to convert both domestic heating and motoring to electricity, and a significant proportion of this would be for replacement of boilers, radiators and cars that were still serviceable. A complete new heating system would cost rather more than a new boiler, and purely electric cars are likely to remain more expensive than their conventional equivalents for a long while to come.

In addition, there would have to be an enormous investment in generating capacity and transmission lines (and a car battery charging network) to supply the 4 fold increase in electricity demanded. Those capital costs will ultimately have to be borne by consumers and taxpayers.

Ignoring those costs, supplying four times as much electricity as now means using at least nine times as much fuel to generate it, on the generous assumption that the additional electricity is supplied at 50% efficiency. Add the cost of this extra fuel to the electricity price increases necessary to recoup the capital on new plant and it is clear that converting to electricity in this way would at least triple costs of energy for the consumer.

That’s the base case. To make this a low-carbon system, the only reliable way to generate the electricity would be by building many new nuclear plants. Given the difficulty and currently undefined costs of building individual stations in the UK, Finland and France at present, the capacity for a major expansion of nuclear generating capacity seems to be sadly lacking at present.

The alternative vision is of renewable energy – wind, solar, even wave energy – supplying the grid. Even if this were remotely possible without a quantum leap in storage technology, the capital costs would be greater, given the much lower capacity factors of these means of generation, and this would be accentuated by their much shorter operational life. A further doubling of electricity costs would not be an unreasonable assumption.

And for what benefit? If we are lucky, to have the same security of supply as at present. Any cost-benefit justification would rely on putting an unrealistically high price on carbon, using essentially zero discount rates. The only real benefit would be cleaner air in cities, which could be achieved far more cheaply by using hybrid vehicles, and a small reduction in global CO2 emissions. To achieve it over, say, a fifty year period would mean putting economies almost on a war footing. Are there any policymakers who really appreciate the implications of their commitments to decarbonisation?

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