Rating: High school and post-secondary
Summary: Energi Media interviewed energy economist Blake Shaffer of the School of Public Policy at the University of Calgary about a research memo he co-authored entitled, “Energy and Environmental Policy Trends: Cheap Renewables Have Arrived” about the Levelized cost of wind and solar (a measure which includes the full costs to construct and operate power plants over their lifetimes) reaching parity with the marginal cost (the cost of producing the next unit of something) of efficient natural gas plants. This suggests building new renewables is now cheaper than operating existing fossil power plants.
Related links:
- Wind, solar adoption will soar during 2020s – interview with Heymi Bahar, the International Energy Agency’s senior analyst for renewable energy markets and policy and lead author for “Renewables 2020 Analysis and forecast to 2025.”
- Lazard Levelized cost of energy 2020.
- Rebrand Alberta by focusing on electricity
- Alberta renewables plan powers jobs, investment
This interview has been lightly edited.
Markham Hislop:
A very interesting briefing memo was published by the School of Public Policy at the University of Calgary. It’s all about the price of renewable electricity in Canada. And in particular, in Alberta, where you’ve got a lot of coal-fired production shifting over to gas. What happens now that wind and solar are the lowest cost option? We’re going to talk to one of the authors, Professor Blake Shaffer. Why don’t you give me an overview of the briefing memo, please?
Blake Shaffer: There’s actually nothing really new here. So your readers who are following electricity markets closely will know the idea that renewables are cheap isn’t really new. It’s just that if you set your expectations on what are the costs of renewables based on where they were five years ago or 10 years ago, to most people they’ll have that recollection of these were expensive. And I guess the point of this piece was to reinforce just how much those costs have fallen over the past 10 years. So we note wind costs down 70 per cent, solar costs down 90 per cent, and I’d say the news hook for writing this piece was the International Energy Agency. The IEA produces their annual World Energy Outlook. And it’s fair to say, historically, they’ve been criticized for, for underestimating the growth of renewables.
They didn’t foresee this dramatic decline in costs and what that meant in terms of installations. Well, this year they changed their tune quite a bit, and they actually declared solar the new King of electricity. And so it’s a recognition that these costs have fallen so far and really dramatically really quickly. We wanted to highlight that to folks. We’ll probably get into it today, I do want to reinforce that costs are only one side of the ledger that nothing has changed in terms of the fact that renewables are still intermittent. And so what has changed is now that they’re so cheap, it’s worth looking into what are the options to compliment these raw, clean energy with other technologies to turn it into firm, on demand power.
Markham Hislop: One of the things I want to talk about is this idea of levelized cost of energy, which Lazard is one of the most common LCOE studies versus marginal costs, which you talk about here. And so the levelized cost of a solar is less than or equal to the marginal cost of producing another unit electricity with natural gas. Have I got that, right?
Blake Shaffer: Yeah, that’s, what’s I guess a little bit novel in this instance. So the levelized costs being a way of discounting, both the upfront capital and all the running costs over the life of a project, taking that back into a single number, a single unit cost. So think of this as the unit cost of building and then running something. And it’s been the case for a few years now that that levelized cost of building then operating, wind and solar has fallen below the same levelized cost for a natural gas plant. What we’re starting to see is them getting underneath the marginal cost of running the gas plants. So the marginal cost would be, you’ve already sunk all that capita, this is just the running costs. Think of this as the fuel and labour costs of running the power plants. What that means is building these renewables can displace generation from existing power plants, not simply displace building other power plants,
Markham Hislop: And in addition to that, now you bought up another issue and you just alluded to it a little bit in your initial remarks, which is the other side of the ledger and sort of market grid reform. And you’ve mentioned four. So I’ll just give them to our readers now; storage, whether it’s battery or pumped hydro or whatever demand response. We see a lot of that. Talk about that now because in California, because their blackouts this summer. Inter-ties between markets and of course, Albertans will be thinking about inter-ties with British Columbia. That’s been a topic of conversation. And then low emission generation, that firms up the intermittency of wind and solar, I turn it over to you, sir.
Blake Shaffer: Yeah, no, absolutely. So, you know, low cost is great, but it’s still intermittent power. And so you still need to turn that into the power that we want, which is on demand power. And so when, when renewables were expensive, having both expensive and intermittent was not a great value proposition, it meant you were willing to pay a lot for the GHG benefits of them. But now that they’re cheap, we can look at these options. So storage is clearly one of the hotter areas lots of different options there, from standard lithium ion batteries to flow batteries, compressed air the most common right now is pumped hydro. But there’s all sorts of novel things. I’m part of a venture capital incubator here in Calgary, a creative destruction lab. And I’d say half of the companies that we see are storage companies.
So lots of exciting things there to take all of this abundant, renewable energy and shift in time. Demand response is a really interesting area, potentially the lowest cost area to deal with this. So this is the notion of the the old world was forecasting demand and dispatching supply. And the new world is forecasting supply from renewables and dispatching demand. It won’t be for everybody. And that probably sounds unsavoury to some listeners. But electric vehicles really make it a possibility because you’ve got a really big load and one that’s really flexible. I get home at 5:00 PM. I don’t get home anymore. I’m always home. But when I used to drive off somewhere you get home at 5:00 PM. You can charge it right then and there. That’s the worst thing you can do for the grid. But right now I’ve got zero incentive to delay my charge, giving us those incentives perhaps to something more technologically novel, like direct load control.
Those are exciting areas I think we’re going to see. And then other topics you talked about, so transmission there, you’re taking advantage of complementarity between systems. BC, Alberta’s a great example. It’s a two way flow. We’ve got the much cheaper renewables here in Alberta. You’ve got the much better flexible dispatch-able system in BC. So complimenting those to bringing them together as value for consumers. The staple would be firming resources that are low emissions. So be it biomass, nuclear reactors. I didn’t list here, but you could have natural gas with carbon capture. And ultimately hydrogen, I think this is one that you’re probably going to be talking about it in podcasts to come. Hydrogen has this potential is already turbines out there that can run on blends of natural gas and hydrogen and even shift all the way to a hundred per cent hydrogen. And I think that’s a really exciting area. I’m working on a paper on that at the moment or the prospects of that. I think that’s an interesting area to watch.
Markham Hislop: It’s interesting that you mentioned the IEA renewables paper because I interviewed the lead author on that, Heymi Bahran, just earlier this week. He made the point that while the cost of renewables has fallen, particularly solar, it’s not done yet, and it’s not done by a long shot. We may see another 50 per cent or more reduction in costs between now and 2030, plus you’ve got all this plethora of new technologies, grid, technologies, demand, response and battery storage. If you could give us just a quick, your view of where electricity is a fuel, where the electric revolution is going and how much change we might see between 2020 and 2030.
Blake Shaffer: Well, I think these low costs are really exciting in that, you know, this is an area that’s essential for de-carbonization. If you think about the stages of decarbonization heading towards a net zero future, the linchpin, to use Jessie Jenkins word, is a decarbonized power system. So first and foremost, we have to get our power systems as, as green as possible. You’re already way ahead of the curve over there in BC. This is something that Alberta can aggressively work at and what’s exciting is that it doesn’t have to cost too much now. It’s cheap. And then the next phase is taking that like clean electricity system and growing it, making it bigger and electrifying other sectors. And so you’re absolutely right, we’re not done yet going down the cost curve on renewables. But I think now the attention is turning away from how do we make renewables cheap? How do we subsidize renewables? All of that we don’t need to anymore. Now, the question is, how do we integrate them? How do we take advantage of this amazingly cheap clean resource? That isn’t exactly what we want raw energy. How do we either find uses for raw intermittent energy or turn it into firm, on-demand energy we want. And that’s where all the focus I’m seeing, all the research, all the venture capital, that’s where it’s all going. Now,
Markham Hislop: I forgot to ask you one question that I meant to Blake, and that is on the Lazards levelized cost of energy. It always gives a variance like a range of costs because of course costs vary between regions. And we know that two years ago, Alberta did an auction and got 3.70 cents a kilowatt hour as the winning bid. But a lot has happened in two years. So where are we now in terms of Alberta being in that that range that Lazard has set. And I think it’s around the range is down to two and a half or two and three quarter cents up to three and a half or so. I mean, it’s really cheap.
Blake Shaffer: Yeah. So I think, you know, last year when they have $26 to $54 a megawatt hour, so 2.6 to 5.40 cents US we’re near the low end on, on wind here in Alberta, mainly because we just got this great wind resource here in Southern Alberta coming off the Eastern side of the Rockies. So we’re at some of the cheapest wind in Canada, certainly some of the cheapest wind that’s transmission accessible right now. So we’re in the low end on wind. We’re being more on the upper end of their band on solar simply because our annual installation. So how much sunlight you get in Canada just isn’t as good as California, Arizona, those types of places. But, within Canada you had, again, this is an area where Alberta and Southern Saskatchewan are the two places that have the best installation numbers. If I were to take BC’s, you’d be well on the upper end of that. I grew up in Vancouver, so I’m well aware of it from my Gore-Tex days. But solar probably won’t play as big of a role in Canada, but again, cost declines could change that, that calculus. But wind certainly has a really strong feature.
Markham Hislop: Well, thank you very much. Always appreciate this. And this is going to be a big story going forward, and this ought to be a really big story in Alberta because it’s very exciting. And I think my opinion is, that this is going to spur policymakers and industry to rethink what they want to electrify and how they want to move towards that low carbon future we keep talking about.
Blake Shaffer: I agree. And I would say I felt a shift in tone towards renewables. I think it was something that was easily beaten down. People pointed towards Ontario here as changes were made, but they’re starting to recognize that actually this is cheap and this is an opportunity for Albertans, an opportunity for jobs, municipal, property taxes, a lot of good things. And so I think they’re starting to seize the opportunity and the most important thing at this point is simply getting out of the way of their growth.
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