Renewable energy production is now affordable. So why are electricity prices still so high?

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For decades, the transition to a decarbonized energy future was focused on achieving “grid parity” – the point at which renewable power generation costs per kilowatt hour (kWh), are the same as the costs for a kWh generated from conventional sources.

This approach has been remarkably successful, and in many markets, including here in Asia, grid parity has already been achieved – years ahead of projections.

But now that we are at this historic moment, grid operators and governments are realizing that building a sustainable energy system requires more than cheap renewable power generation. There needs to be enough affordable, dispatchable generating capacity to meet demand when renewables aren’t available. Otherwise, the energy transition which the industry is embracing might be to the detriment of power consumers.

Balancing supply and demand

One challenge is caused by the imbalance of supply and demand on the grid. Adding too much renewable capacity can cause grid instability, and even blackouts, when wind and solar become unavailable. During a major summer 2020 heatwave, California experienced a series of blackouts caused – not by too much demand – but by too little supply.

Peak demand for electricity occurs after sunset, long after solar generation has peaked. This typically requires dependable generation sources to ramp up to compensate. The result is a timing imbalance that creates a generation profile known as the duck curve.

What’s more, in California this summer, wind generation also was significantly down – not uncommon in extreme weather events. The transmission operator therefore had to curtail demand for several hours, leading to blackouts.

Relevant Sustainable Development Goals

Providing adequate returns to dependable power 

Another challenge is caused by the economics of power generation. Renewable energy is usually given priority of dispatch. As a result, during peak renewable energy generation, conventional power producers can face low or even negative prices. Earlier this year in Australia, for example, prices regularly fell below zero, causing some conventional plants to shut down. That left a supply gap when there was no wind or sunshine. Meanwhile, in situations where conventional power is available, operators must charge higher rates to compensate for the negative price periods.

These higher charges, along with guaranteed feed-in tariffs offered to renewables, and the necessary investments in the grid drive higher prices for consumers. Germany, for instance, takes pride in having the world’s highest share of renewables in the mix, but it also has the world’s highest electricity prices.

So, what’s the answer? 

Grid parity is undoubtedly a good benchmark to assess technological maturity and power plant profitability. But, for a government or utility managing and operating an entire power system, it doesn’t encompass the other costs and considerations required to ensure reliable, dependable and affordable electricity supply.

A whole-system approach that considers the broader “dispatchable cost of electricity” is needed to enable a smooth and sustainable energy transition which is not to the detriment of power consumers. This approach incorporates standalone power generation costs, transmission costs, and the need to balance power supply and demand with sufficient generation flexibility and capacity. It requires a revised look at the role of dependable, 24/7 conventional sources such as natural gas, coal and nuclear.

Flexible baseload 

These conventional sources will continue to play a role in the energy mix, but that role is changing. They will need to balance the load as renewables fluctuate; operating in low load when there’s lots of wind or sunshine, ramping up when wind and solar power drop, and providing base load at times when renewable power is not available.

With the latest technology, gas and coal provide the required low load capabilities, and even nuclear power plants in several countries, including France and Germany, operate in load-following mode and adjust their generation to the demand. Out of the three, natural gas offers the highest capability to ramp up and down quickly. In the future, we may also expect maturity of small modular reactor (SMR) technology that could enable faster ramping for nuclear power.

The right mix of energy sources will vary from country to country, depending on a number of factors. One of them is local fuel availability, which will impact affordability of the generated power. In countries with significant coal reserves, such as Vietnam and Indonesia, coal-fired plants are expected to provide grid stability, power affordability, job creation, lower fuel import bills and greater energy security. These coal plants will require solid maintenance and service to sustain reliability and efficiency.

Emission concerns can be addressed with the latest air quality control technology, which is capable of enabling coal plants to reach the SOx and NOx emission levels of modern gas-fired plants. On the other hand, the Philippines is considering nuclear power, given the technology’s positive implications on economy, energy security and climate.

No ‘silver bullet’ 

Renewable energy prices have fallen dramatically, yet we cannot put all our money into the renewable energy basket, especially since cost-effective, utility-scale energy storage is still a long way off. Governments, policy makers and investors need to make decisions based on total power system optimization: the dispatchable cost of electricity.

In short, there is no “silver bullet” to help us make this energy transition. We need a wide range of technologies, each of which can play an important role in delivering a secure, reliable, sustainable, cost-effective energy system that meets the unique needs of each power market.

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Camille Levy

Camille Levy

CEO, Asia Pacific and China, GE Steam Power

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