Sunday, July 24, 2011

Guest Post: What is the Net Value of Renewable Energy?

Neil Fairhead returns with a post examining the issues surrounding the value of renewable energy.

This blog is triggered by a number of articles I read recently that angered me. They consistently talked down to their readers by presenting a small part of the renewable energy story - and then implying that part was the most important item - rather than presenting the whole picture and letting us make up our own minds.

To me, with one caveat, the key question is: “Does the value of renewable energy exceed the cost of renewable energy?” That is simply the net value, i.e. value minus cost. (The caveat is that we include all the costs, i.e. the whole picture.) Let's take some of the issues that articles raised and you can decide what you think.

The first issue raised is that much renewable energy (e.g. solar and wind) is intermittent and its utilization is much less than traditional centralized generation. If low utilization is a key criterion for sound investment, then we are enormously wasteful. A few minutes calculation, which I will not impose on you here but would be happy to share, resulted in the following table:

Item
Usage
Utilization
(% of 365*24 hours p.a.)
Office buildings
10 hours per day, 5 days per week, 50 weeks pa
28.5%
GO trains
373 minutes per day, 5 days per week
17.7%
My car (when I was commuting)
4.5 hours per week day plus a couple at weekends
17.3%
High Schools
7 hours per day, 5 days per week, 36 weeks per year
14.0%
Our household bathroom (2 people)
80 minutes every day
5.5%
Our lawnmower
1 hour per week
0.6%

I have never heard people say that we should not have any offices or schools, etc., just because they are only used part time. So why does it matter for renewable energy? After all, according to the US Department of Energy the estimated utilization (called “capacity factor”) of a wind turbine is 34.4%, which is better than all of the above examples.

Another issue raised was the land used by renewable energy. An article in the Toronto Star stated that, to provide the power generated by Ontario nuclear plants in 2010: “The turbines would cover 14,200 square kilometres of territory — that’s a square with sides of almost 120 kilometres.” It made no mention of the fact that you can farm happily underneath, both arable and livestock . It also made no mention that in Ontario we have 1,076,395 square kilometres of land. The dual use land represents less than 1.5% of our province. In addition we are comparing apples and oranges. In one case we are adding an extra use to our land increasing the value it produces. In the other case the land can only be used for one purpose. Have you ever tried to walk your dog in a nuclear power station? Again the land utilization represents only part of the picture.

Net value gives a more complete picture. The cost of the land for turbines is minimal because its original function remains. The cost of land for solar can be nil. I spoke recently to a farming family who have installed solar panels on the roof of an existing building. The only land impact was a small hut that held the inverters and the meters to measure the power being generated.

A third issue raised is the need for back-up generation for the occasions when there is neither sunshine nor enough wind. I am going to combine this with another issue that I saw recently, namely the environmental impact of the steel used in wind turbines, because they both highlight the costs of fossil fuels. The argument regarding backup generation often goes “since we have to invest in the back-up systems, e.g. gas burning, we should run them all the time and avoid the investment in renewable energy systems.” However this ignores the biggest cost in fossil fuelled generation is not the capital investment but the fuel being burnt every second the plant is in operation. For solar and wind the fuel cost is close to zero. The net value equation is different. As currently accounted for electricity generation,
Value = value of electricity generated
Costs = capital costs+land costs+O&M
O&M stands for operations and maintenance costs, typically divided into fixed and variable. The latter includes fuel costs.

For wind or solar, if the generator is not the owner of the land, i.e. a worst case, there is a land rental cost. For a farmer who already owns the land the incremental land costs are zero. Similarly, for fossil fuel generation the land costs are unlikely to be significant.

The difference in fixed and variable O&M is significant between fossil fuel and renewable energy, with the variable O&M predominating. The table below compares wind with the lowest overall cost gas-fired plants given in $/megawatt-hour AC delivered to grid (source: see footnote 1).


Gas
Wind
Fixed O&M
1.9
9.6
Variable O&M (includes fuel cost)
42.1
0.0
O&M Total
44.0
9.6

However, in neither case have we included all the costs. We are missing the environmental impact, which causes real costs to real people. Obviously in the energy field the most significant impact is the release of greenhouse gases particularly carbon dioxide, CO2. Wind turbines cause the release of about 13,000 pounds of CO2 per MWh while gas generation releases 465,000 lbs. So what does it cost? Or perhaps “So what. Does it cost?”

Earlier this year, three Canadian scientists together with a Scottish colleague published a paper showing “that human-induced increases in greenhouse gases have contributed to the observed intensification of heavy precipitation events found over approximately two-thirds of data-covered parts of Northern Hemisphere land areas.” Since it was published there have been floods across North America. In Canada, we are suffering a reduction in planted crops and reduced activity in oil and gas exploration, plus property damage and flood protection costs.
  • “Unrelenting rain across large areas of Western Canada will severely impact grain production.....In total, between six and eight million acres of farmland will go unseeded across the Prairies, according to the Canadian Wheat Board”
  • “When you have these one-in-500-year weather events that we are experiencing in our province in terms of flooding,....Rig Locator records show only eight drilling rigs are active this week in southeastern Saskatchewan compared to 37 drilling and four moving in for the same week last year. In Manitoba only one rig is at work this week compared to five drilling and four moving in a year earlier.”
The fact that we have not yet succeeded in getting agreement - on how big the costs are, on how to measure them and on how to allocate them to the processes that caused them - does not stop the costs being real, hurting real people and damaging real businesses.

Our decisions on renewable energy are better made when we consider the net value it adds, having included all the costs to the best of our ability. Presenting partial pictures does us all a disservice. 

Postscript: I recognize that there is another level of detail needed to reflect the net value better. Simply, the value we put on electricity depends on how badly we need it and this varies over time, both time of day and season. In Southern Canada, as in much of the US, peak demand coincides with the sunny conditions (air conditioning), or windy ones (heating). A balance of renewables can match this pattern .

After studying Chemical Engineering, Neil enjoyed a variety of experiences, working in 4 countries on 3 continents including computing, marketing and environmental activities for both private and public organizations. A lover of history, Neil remains convinced of the truth of Winston Churchill's comment "the further back you look the further forward you can see". To learn more about Neil, you can visit his LinkedIn profile:  http://ca.linkedin.com/pub/neil-fairhead/1/a36/9b2

Wednesday, July 13, 2011

Guest Post: McMillan LLP Clarifies Ontario PC Party's Plans for FIT Program

The following is cross-posted from McMillan LLP's website. You can view the original post here. It is posted with the kind permission of McMillan partner and entry author Mike Richmond. Mike is a lawyer in the Energy Law Group with a focus on electricity, renewables and utilities.


Further to the Energy Law bulletin we circulated in May regarding the Ontario PC Party's pledge to cancel Ontario's Feed-In Tariff Program if elected on October 6, 2011, the Party released its formal policy platform, entitled Changebook, earlier this month.

The document states the following with respect to energy policy:
We will stop the expensive energy experiments that are driving up hydro bills.
A Tim Hudak government will end the Liberal government's schemes that have families subsidize hydro prices. We will end the feed-in tariff program that, in some cases, pays up to 15 times the usual cost of the hydro. Hardworking farmers and other Ontarians who signed contracts to host energy production on their property will have their contracts honoured. But there will be no more of these deals.
We will end the king of all secret, sweetheart deals – the $7 billion Samsung deal – that happened without a competitive process or a guarantee of job creation targets. Building our green energy sector cannot be achieved by writing a cheque to one single foreign-owned multinational corporation that was handed every advantage.
We will give families a voice in how hydro rates are set.
Families understand that their hydro bill goes up if they leave the lights on. But why does it skyrocket for no apparent reason? The Ontario Energy Board sets rates, but this body has lost its independence. We will restore that independence by ending the day-to-day political interference of the last eight years. And we will establish a powerful Consumer Advocate at the OEB. The Consumer Advocate will represent only consumers. Not the bureaucrats. Not the energy sector. Not the special interests.
We asked Party officials and the authors of the document to clarify the ambiguity regarding the phrase, "Hardworking farmers and other Ontarians who signed contracts to host energy production on their property will have their contracts honoured."

It seemed clear that FIT Program participants who have accepted a FIT Contract and received Notice to Proceed will be permitted to complete construction and operate under the contract for the 20 year term, in accordance with the terms of the Contract. However, with respect to those who have accepted a FIT Contract but have not yet received Notice to Proceed, would they be able to obtain NTP and complete their projects under a PC Government? Or would a PC Government honour their contracts by refusing NTP and paying the cancellation fees contemplated in the FIT Contract?

The clear answer we received was the latter. For any FIT Contract holders who do not yet have NTP at the time of a change in government, a PC Government would exercise its rights under Sections 2.4(a), (e) and (f) of the FIT Contract to terminate the FIT Contract, return the Completion and Performance Security, and pay the Supplier its reasonable Pre-Construction Development Costs (upon delivery of written documentation thereof). Pre-Construction Development Costs exclude the cost of Generating Equipment, the $500 Application Fee, non-arm's length payments above fair market value, and profits, and are capped at the following limits:
  • Biogas, Biomass and Landfill Gas  $400,000 + $2.00/kW
  • Solar PV                                          $250,000 + $10.00/kW
  • Waterpower                                     $500,000 + $20.00/kW
  • On-shore Wind                                $400,000 + $2.00/kW
  • Off-shore Wind                               $500,000 + $2.00/kW
There may, however, be ways to protect your project in advance of an election. You should contact a legal professional to discuss your options.

Disclaimer
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.  
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