Costs and benefits of energy transition

Overall Concept

The study of whether energy transition towards 100% renewables is socially and economically feasible is yet under hot debates. Some famous debates recently in the scientific communities includes the attacks on Mark Z. Jacobson's 100% RE studies and also T.W. Brown's response to a critical review of 100 % RE systems.

In these debates, the question of how much an energy system with 100% renewables costs is often the main reason both parties disagree with each other. Therefore, it may be important to know how a solid, dynamic, and system oriented analysis on the costs and benefits of energy transition should look like.

In short, there are three scales of CBA (cost-benefit analysis) one should consider for such full scale overview. On the energy system level, the microeconomic level, and the macroeconomic level. The three levels show different perspectives of the effects of energy transition: the energy system level discusses impacts that occur from a technical or engineer point of view, the microeconomic level discusses impacts of different individuals energy transition have on; and the macroeconomic level discusses the net benefits/losses an entire industry or the society itself as a whole will gain during the transition process.

Effects on Energy Systems

There are two kinds of costs that constitute the system total cost of an energy system: the generation cost and the integration cost.

The generation costs are the costs of different types of energy sources to produce energy. One common indicator of this cost is the levelized cost of energy (LCoE). The integration costs are the additional costs to integrate different sources of energy onto the system so that supply meets demand.

Because the LCoE of renewable energy sources have been declining in a rapid speed, and are already cost-competitive with conventional sources under some scenarioes, the larger amount of deployment of renewables during the transition process will definitely lower the generation costs of an energy system.

On the other hand, most renewables that are deployed currently are variable renewable energy soures such as solar and wind. These sources require new mindset and investments for balancing of their fluctuating characteristics, with undermines the benefits of generation costs reduction.

The increase of integration costs during energy transition is nonetheless small compare to the overall benefits gained by generation costs. Even if we add all the additional integration costs to the generation costs of renewables, VRE are still cost competitive to other conventional alternatives in most modeled scenarioes.

It is also important to keep in mind that such comparison is sometimes misleading because the integration costs do not only depend on the amount of VRE but also the flexibility of the energy system the renewable sources are deployed. For example, a study conducted by Aurora Energy Research found out that the integration costs of a large amount of solar installation in UK can drop significantly when there are no nuclear on line, and can even go negative if battery storage becomes very cheap.

Microeconomic (Distributional) Effects

The microeconomic effects are also called distributional effects, because it discusses how energy transition redistribution welfare among different agents in society. There are three angles to analyze these effects: policy, merit order effect, and R&D subsidies.

Policies

Policies that subsidizes an industry directly via tax abatement and public funds, or indirectly via setting market pricing rules such as the feed-in-tariff or feed-in-premium redistribute welfare from some agents of society to others.

Cancellation of subsidies towards fossil fuel industry chains, for example, might increase oil and electricity prices and thus reduce the welfare of consumers. The effect of this cancellation is however different to various types of consumers. According to the International Monetary Fund, the richest 25% of the world's population have gained 43% of the subsidies towards fossil fuel, while the poorest 25% have gained only 7%.

Merit Order Effect

The merit order effect describes how the disruption of renewable sources affect conventional energy providers. The merit order is a way of ranking available sources of energy, especially electrical generation, based on ascending order of price (which may reflect the order of their short-run marginal costs of production) together with amount of energy that will be generated.

Since most renewables have zero or very low marginal costs, they usually have grid priority as a result of the bidding processes in the day-ahead wholesale market. This results in two major consequences: a more variable residual load curve and thus a more violatile wholesale price, undermining the profits of conventional power plants who either have marginal costs too high (gas) or operate too inflexible (nuclear and coal).

R&D Subsidies

Research and development subsidies redistributes the welfare from taxpayers to certain type of industry. These industries often rely on investment intensive technology to thrive and thus have higher upfront costs before the industries are mature enough to compete in free market. 

Historically, among all energy sources, the nuclear industry has been given the most amount of R&D subsidies in Europe . As energy transition proceeds, more R&D funds are given to renewable projects, reflecting the changes of political and economical preferences during the transition.

Macroeconomic Effects

The macroeconomic effects of energy transitions looks at the overall impact of the transition on a certain industry such as the renewable or conventional energy industries (gross effect). Another more broad analysis will count in all the indirect effects the changes in these industries will have on the rest of the society (net effect).

For gross effects of energy transition, renewable energy sectors tend to employ more workers than conventional energy sector such as coal mining. For example, in Germany even in regions where historically heavy rely on lignite, workers from the renewable energy sector outnumber those from coal industry. Also, renewable energy sectors tend to create more jobs for every kilowatt-hour of energy they produce.

However, it should be noted that jobs in the renewable energy sectors are not always better paid than those from conventional energy sector, working conditions not always good,and that union organizations are also not well developed.

For net effects of energy transition, in most studies on energy transition in Europe, there is an overall slight positive effect on the society, increasing the overall GDP and employment rate at the magnitude of 1%.

Examples

It is sometimes difficult to differentiate between the three types of economic effects, especially between the system effect and the distribution effect. Below we will provide an example to demonstrate just how to do so.

Suppose before energy transition took place, the fossil fuel power generation costed 1000 units per year in a power system, with an wholesale market share of 2000 units per year.

After the energy transition took place and some amount of renewable energy was introduced, the fossil fuel power generation cost dropped to 500 units per year, while the maintenance cost of additional renewable energy capacity, was 200 units per year in total (we assume here that there existed no other system-related costs for simplicity). This would result to a net decrease of 300 units per year in the total system cost, which would be the system effect of the transition.

On the microeconomic level, the wholesale market share was dropped to 1500 units per year after the transition, with the renewable energy operators taking 500 units per year and the fossil fuel power plant operators taking 1000 units per year. This meant that the producer surplus of fossil fuel power plant operators dropped 500 units per year. Meanwhile, renewable energy operators receive consumer-paid policy support of 200 units per year, which resulted in a total net profit of 500 units per year for renewable energy operators. For the customers, the prices they need to pay for the electricity dropped from 2000 units per year to 1700 units per year. These results from different viewpoints would be the distribution effect of the transition.

Finally, if we investigate the impact of, say, the 500 units per year of net profit for the renewable energy operators on the growth of the sector, we will be conducting a study on the macroeconomic effects of the transition; in this case, the gross effect to be specific. A study on how a broader economic metric (ex. GDP) would be affected would be study on the net effect of the transition.