Economic analysis can be relied upon to produce a set of numbers to support almost any argument. That must be remembered when considering recent modelling of the costs and benefits of gas-fired power stations.
Analysis by AF Consult found that replacing Britain’s ageing fleet of coal-fired power stations with gas-fired (and nuclear) plants met emissions reduction targets more cheaply than switching to renewables. It is true that modern combined cycle gas turbine (CCGT) power stations are cheaper than renewables and nuclear and produce about half the CO2 emissions of old, coal-fired power stations — but this misses the point.
The Government’s low-carbon strategy is not simply about reducing CO2 emissions as cheaply as possible. Equally important is diversity of energy sources and security of supply.
Britain is already the largest consumer of gas in Europe and further increases of consumption will expose it to greater supply and price risks. Over the next 20 years, international gas prices will continue to rise, driven by steady demand from developed nations and strong growth from developing countries. The Ministry for Energy in Saudi Arabia expects that, by 2030, 60 per cent of its oil and gas production will be required for domestic electricity generation. In addition, instability in the Middle East brings the risk of price shocks. If these risks are properly priced, renewable energy unquestionably could provide a competitive alternative.
Yet even if that risk is not priced, investing in renewables still makes long-term economic sense. The AF Consult report focuses on the period to 2020, a short time in the context of energy investments. In a longer-term view, say to 2050, the life cycle costs of renewables are not that much different to gas.
About 80 per cent of the cost of renewable generation is fixed and occurs at the start of the project, but renewable sources such as wind have no ongoing fuel costs.
So the price of generation on day one is about the same as the price 20 years later. This is very different for conventional fuels, where the dominant fuel costs are impossible to predict over the lifetime of the asset.
We need to compare the cost of renewable energy with fossil fuels. One way to do this is through a levelised cost approach, in which all costs of power generation, per fuel type, are equated over the project’s life. An analysis by PB Power for the Department of Energy and Climate Change found the levelised cost was about £0.015/kwh lower for gas-fired generation, compared with wind. Offshore wind is more expensive but innovation will drive down costs.
The Government’s carbon reduction plan will deliver economic benefits, reduce CO2 emissions and enhance security of supply — and the recent figures are simply a distraction from these clear advantages.
The priority for ministers should be to provide clarity and certainty and to ensure that the focus shifts to the implementation of the plan.
Scott Flavell ia an energy experts with PA Consulting Group
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