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Why We Should be “Flip-Floppers” … with regard to the Cost of Electricity

Today, prices for electricity are based almost entirely, over 90%, on the capital and fuel costs of power plants and transmission lines. The other small percentage of the price of grid-based electricity is based upon the ancillary services that coordinate the activities on the grid. Through the grid operator, consumers pay these ancillary services such as enabling new generation to come online or go offline on short notice (minutes) and demand response mechanisms where consumers can decide to get paid to turn off large loads, such as factories and commercial buildings.

The push for renewable energy essentially needs to flip the current price relationship to 90% for ancillary services and only 10% for fuel and capital. Well, getting the cost of electricity to be < 50% based upon fuel and capital costs may never happen, but because the fuel for renewable is free (sun, wind, geothermal heat, waves, etc.), certainly the fuel cost can be minimized and brought near zero. Many people believe this is why a grid based upon renewable electricity generation will ultimately be cheaper than the current grid based upon fossil fuels. It is not obvious that intermittent electricity with free fuel will be cheaper, but a good goal is to keep the price of electricity the same while taking the fuel costs to zero. Furthermore, electricity that is twice as expensive will not be a new burden if we design our buildings and use patterns to consume half of the electricity.

The reason that a renewable electric grid will not necessarily be cheaper than a fossil fuel grid is that the intermittent nature of renewable generation forces two basic actions to happen - both of which increase costs:

1) People adapt themselves to the grid – people can adapt their habits and usage of electricity to the output profile of renewable generation, and

2) People adapt the grid to themselves – we can adapt the electricity output profile of renewable generation to our electricity usage habits.

Both actions, or strategies, will happen simultaneously in an undetermined proportion to be discovered in the future. The first item in the list above means that people alter their schedule, which we could assume is now optimized for their leisure and income, and any changes to that schedule mean someone will have less leisure time or income, or both. No new gadgets necessarily need to be added to the electric grid except the actual generation systems themselves. The second item above implies that we install gadgets such as storage systems along with smart appliances and meters such that we can essentially program these new infrastructure items to shift and store electricity from when we don’t want it to when we do want it. Obviously, manufacturing, installing, and operating these new gadgets will cost money that is not currently being spent - although many regions of the US are in the early stages of moving to the “smart grid” and “smart home” systems that will define how much the grid will adapt to people. Ideas go so far as to even include plug-in electric vehicles in the smart grid concept, marrying devices that can be used for transportation and home electricity usage.

The future cost of electricity from a high renewable scenario is unknown, but don’t expect it to be cheaper. It may or may not even be more stable as stability costs money. Although, there are reasons that future electricity prices may be more variable on short time scales (minutes to hours), they will likely be with less long term impacts (years) for the magnitude of the variability as compared to natural gas-based generation, for example.

So we need to “flip flop” the composition of electricity prices from being primarily based upon fuel to being primary based upon the capital costs of renewable and storage systems with free fuel. We need to get these renewable systems on the grid so we can learn sooner or later how to best integrate them into our grid … and our daily lives.

Posted by Carey King on May 27, 2009 8:00 AM | Permalink