Renewable Energy Costs and Benefits for Society RECABS www.iea-retd.org. Prepared for the IEA’s Implementing Agreement on Renewable Energy Technology Deployment by Ea Energy Analyses Prepared by: Ea Energy Analyses Frederiksholms Kanal 1, 1st 1220 Copenhagen K Denmark Phone: +45 88 70 70 83 Fax: +45 33 32 16 61 Email: [email protected] Web: www.eaea.dk 2 Preface The Renewable Energy Technology Deployment (RETD) Implementing Agreement (www.iea-retd.org) is one of a number of Implementing Agreements on renewable energy under the framework of the International Energy Agency (IEA). The purpose of RETD is to carry through selected activities, which aim at accelerating the deployment of renewable energy. The target groups are policy makers and private compa- nies dealing with energy. At the moment, nine countries participate in RETD, and the Implementing Agreement is open for more countries to join. Under the Work Programme 2006-2007, RETD has established seven priority areas, one of them focusing on levelling the playing field for renewable energy.This report on Renewable Energy – Costs and Benefits to Society (RECaBS) summarizes the results of several activi- ties undertaken under this priority area. The objectives of RECaBS were to estimate the costs and benefits of electricity from renew- able energy sources compared to conventional technologies, to identify cost reduction pos- sibilities for renewables and to communicate the results through an interactive website. RECABS provides the basis for developing recommendations for international policies that could level the playing field for renewables for example by internalising externalities into energy prices. 3 Contents 1 Executive Summary .....................................................................................................5 2 Introduction ..................................................................................................................7 3 Methodology and key assumptions .............................................................................9 3.1 Cost data......................................................................................................................9 3.2 Cost-benefit analysis (economic/financial) ............................................................... 12 3.3 Price level.................................................................................................................. 14 3.4 Technology costs ...................................................................................................... 16 3.5 Fuel prices................................................................................................................. 17 3.6 Income from heat sales............................................................................................. 20 4 Technologies............................................................................................................. 21 5 Externalities............................................................................................................... 22 5.1 Environment.............................................................................................................. 22 5.2 Security of fuel supply............................................................................................... 33 5.3 System integration .................................................................................................... 35 5.4 Local benefits of renewable energy .......................................................................... 41 6 The web-tool REcalculator........................................................................................ 47 7 Results from economic calculations ......................................................................... 50 7.1 Basic generation costs (ignoring externalities) ......................................................... 50 7.2 Generation costs including externalities ................................................................... 52 7.3 Sensitivity analyses for five key technologies........................................................... 56 8 Subsidies for conventional energy............................................................................ 63 9 Summary and conclusions........................................................................................ 71 9.1 Technology data ....................................................................................................... 71 9.2 Externality costs........................................................................................................ 73 9.3 Subsidies for energy production ............................................................................... 76 9.4 Results ...................................................................................................................... 76 9.5 Conclusions............................................................................................................... 79 9.6 Recommendations for further development.............................................................. 79 9.7 Recommendations for outreach................................................................................ 80 10 Literature................................................................................................................... 82 Annex A: Technology descriptions......................................................................................... 86 Annex B: The REcalculator User’s Guide............................................................................ 131 Annex C: IEA consultation ................................................................................................... 134 Annex D: Cost estimation methodology............................................................................... 135 4 1 Executive Summary The electricity sector has a history of public interest and political interference based on secu- rity of supply, national economy, environment and employment issues. Since the 1990’s, liberalisation has strongly changed the electricity sector framework in most OECD countries. Market forces and indirect regulation are now replacing the previous direct government con- trol. Furthermore, when designing the market framework for the electricity sector, it is important to recognise the costs and benefits of different energy sources, considering external costs as well, in order to stimulate sustainable investments in energy technologies. The main challenge is that socio-economic benefits of renewable energy are not monetized, in the market place. Therefore these externalities are ignored by investors when making decisions on new electricity plants. In most markets environmental and climate footprints, impacts on employment and security of supply are externalities. On the other hand grid own- ers and system operators can experience particular costs of integrating some renewable energy technologies into energy systems due to their fluctuating nature of energy supply. It was the objective of the RECaBS project to address these issues for a limited number of electricity producing technologies based on data from available sources and recent research. Another objective was to present the results from the study in a simple and accessible form. A main contribution of the project is the introduction of an interactive energy calculator. This REcalculator enables anyone to make quick socio-economic comparisons of renewable and traditional electricity generating technologies. The tool is available at www.iea-retd.org. All the economic and technological assumptions are also available for download at the site. Comparisons are based on the long-run marginal cost of electricity generation, including investment costs, operation and maintenance costs and fuel costs. Compared to traditional fossil fuel technologies, renewables are often at an early stage of development. In a longer perspective, through technological progress and economies of scale, renewables may hold large potentials compared to mature energy technologies. For the identification of cost re- duction possibilities, technology and cost data are therefore based on Best Available Tech- nologies today as well as in the mid-term future (2025). It was a goal in the study to avoid conclusions based on short-term business cycles on cer- tain technologies or short-term price spikes on certain fuels. For this reason the costs of for instance wind power turbines, photovoltaics and gas turbines are somewhat lower than prices observed in the market at present. The same applies to oil and coal prices as these are based on the price projections in the International Energy Agency’s World Energy Out- look.1 When examining the basic costs without considering external costs, small hydro, onshore wind, large scale biomass, nuclear and coal are presently economically more competitive than the other technologies analysed under this project. Too low From society’s point of view, technologies with relatively high capital costs and low fuel costs 1 Although oil and coal prices based on the price projection in the International Energy Agency’s World Energy Outlook can be considered too low, these prices are merely referential and it is possible for the user to change these values in the Interactive Renewable Energy Calculator (RECaBS) 5 are more competitive than in the market place, as the socio-economic discount rate is usu- ally lower than the financial interest rate including investors’ risk premium. The lower dis- count