Tom Konrad CFA
Can We Afford Alternative Energy?
Most serious critiques of alternative energy boils down to, “it costs too much.”
True, detractors of wind power sometimes point to the number of birds and bats killed, and some people worry that electric vehicles (EVs) are so quiet that they pose a danger to blind pedestrians.
While such critiques are legitimate in that they are real problems, they can also be alleviated. Avian fatalities can be greatly reduced by more sensitive siting of wind turbines, and even painting turbines purple. Nissan has installed an electric noisemaker in the Leaf to warn pedestrians of its approach. More to the point, such problems do not come close to outweighing the benefits of the technologies. Bird and pedestrian deaths from collisions with wind turbines and EVs are likely to be much lower than pollution-related illness and death that both technologies reduce by replacing pollution sources.
Such arguments are more relevant to the question of how we should be pursuing alternative energy, rather than the much more important question of should we be pursuing alternative energy at all?
“Does Alternative energy Cost too Much?” is a much more relevant question. If an alternative energy technology really costs “too much,” then we should probably be spending our money on other methods of reducing pollution, such as research into more affordable alternatives, or ways to clean up the mess that “cheap” conventional energy leaves behind, such as Carbon Capture and Sequestration.
The problem with the cost question is that not only does the answer depend on a large number of assumptions (interest rates, where and when the power is delivered, and the changing costs of fuel, feedstock, and operating and maintenance costs.) We also need to decide what “too much” means.
What Do We Want Energy For?
Before we try to answer the cost question, we need to take a step back, and ask if it’s really the right question. What do we need energy for? A modern economy runs on energy, but it’s the services that energy provides that are important, not the form of energy itself.
Take a new home as an example. We can heat it with natural gas, wood pellets, fuel oil, electricity, solar thermal panels, or even passive solar design. When we decide between this multitude of options, we’re not interested in the cost per Btu, but rather how much it will cost us to keep our home comfortable for the year. We may also be interested in the potential variation from year to year: an average heating cost of $1,500 per year may be desirable, but not if the cost is low most of the time, and it occasionally costs $15,000 in a single year because of volatile fuel prices or unreliable equipment.
Which fuel can keep the home warm at a dependably low cost depends as much on the design and construction of the house as it does on the fuel needed to heat it. Generally, electric heat is the most expensive way to heat a home, but a well-designed passive solar house needs so little added heat to remain comfortable that a pellet stove may end up being a more expensive option because the heat loss through the flue even when the stove is not in use may cost much more than the little bit of electric heat that will be needed on the coldest of winter nights.
The example of a home shows that the design of a house is at least as important as the choice of heating fuel in determining the overall cost of maintaining comfortable winter temperatures.
It Costs Too Much for What?
When we assess the true cost of alternative energy, we also need to assess system design.
Consider electric vehicles. As the chart above shows, the fuel cost for an electric vehicle (Battery EV) is much lower than the other alternatives. Yet any serious look at the life cycle costs of electric cars shows them to be uneconomic under any reasonable assumptions of daily commutes and gasoline prices. Each mile of range for a battery electric vehicle durable enough to last ten years will cost between $150 in the most optimistic case, and $300 to $400 under more realistic assumptions. If the car is charged at most once per day (at night), that mile of range will be used for at most 300 miles of driving per year. If gasoline is $5 per gallon, and electricity is 10¢ per kWh, that will produce 10¢ fuel savings per mile (over a standard hybrid), or at most $30 of annual fuel savings. If we assume the batteries last for ten years under these very strenuous driving conditions, we can come up with a decent 20% Internal Rate of Return (IRR), but under more realistic assumptions we’ll get our money back (0% IRR) over ten years, or even end up losing money.
While we can conclude that electricity is too expensive a way to power a car, electricity can make sense in other transportation systems. The number of times the battery is charged per day (battery cycles) is crucial. While multiple charges per day are impractical for most commuters, multiple charges may be practical for fleet vehicles with regular routes. Electric trains and trolley buses can bypass the expense of batteries all together by drawing their power from lines along their routes. A Battery-electric bus with this capability would be able to drive on ordinary roads for part of its route, recharging while still on its route when external power from overhead lines was available.
In other words, the electric car paradigm is the problem. Electric transportation, with the right paradigm, can make a great deal of sense despite the high cost of batteries.
Wind and the Grid
The dominant paradigm for electric power holds that electric consumption, or demand cannot be influenced by the utility, so electric utilities should manage their generation assets to meet that demand. Furthermore, electric transmission is built to bring power from generation (which can be placed nearly anywhere there is water for cooling and the neighbors are unlikely to protest.)
Wind and Solar power do not fit well into this paradigm, because generation from solar and wind depend on the weather and cannot be controlled by the utility. These problems are exacerbated by the lack of robust long distance transmission, which would reduce the variability of wind and solar by diversifying away local variations in weather.
Therefore wind and solar are square pegs that do not fit in the paradigm’s round holes. For those who accept the paradigm, solar and wind are “unreliable,” and require massive investments in dispatchable generation that can replace their output at any time. Some opponents even claim that wind power does not lead to any decreas
e in pollution, because wind forces natural gas and coal plants to cycle more often in order to compensate for the increased variability of wind. Coal power plants are particularly bad for backing up wind because they operate best a constant power, and a coal-only system will have higher emissions when wind is added.
Such critiques of wind power’s variability implicitly assume that nothing can be done to make the electric system more accommodating to wind, when in fact there is much that can be done. One widely quoted study (paid for by the natural gas industry) showed an increase in pollution per MWh of generated electricity in Colorado. But Colorado is currently in the process of decommissioning or converting to natural gas most of the coal plants that caused the extra pollution. With this change to the system, the pollution reducing benefits of wind will be much more strongly felt.
Even without replacing coal plants, the grid can change to better accommodate wind power. A May 2010 report from the National Renewable Energy Laboratory, the Western Wind and Solar Integration Study (WWSIS), looked at the system improvements needed to allow 35% wind and solar integration in the Western grid. Many of these require changing the current paradigm of meeting local demand with local resources.
While the WWSIS does call for increasing the flexibility of dispatchable reserves, most of the recommendations take the form of changing the paradigm.
- The areas over which power supply is aggregated to meet demand, called balancing areas, should be expanded.
- The expansion of balancing areas should be supported by more robust transmission.
- The use of more accurate weather forecasting will not reduce the variability of wind or solar, but it can make them seem more reliable, since they will be available when expected.
- New and existing demand response programs should be used to accommodate demand to the increased variability. In other words, electricity supply cannot solely change to match demand, demand must also change to accommodate supply.
With these changes to the paradigm, the integration of wind and solar are not costless, but the cost is much lower than it would appear from the perspective of someone operating only within the old paradigm.
Implications for Investors
Why should investors care?
First, any change in the prevailing paradigms to incorporate alternative energy will reduce the future cost of alternative energy. If most investors do not yet see beyond the current paradigm, the market is probably underestimating the potential for alternative energy.
Second, stocks involved in the transformations necessary to shift paradigms are likely to be unanticipated winners. In the case of transport, alternative transportation stocks are likely to greatly outperform efficient vehicle stocks as our transportation paradigm shifts away from the car to other forms of transportation that can better leverage the advantages of electric drive. In the case of the electric grid, smart grid stocks and electricity transmission stocks may also reap unanticipated windfalls as solar and wind increase their share of electric generation.
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