System Costs: some renewables costs to bear in mind when analysing sovereign potential

Global - Jan 31 2019
  • #carbon
  • #carbon/climate change
  • #gdp
  • #paris agreement
  • #sovereign debt

System Costs: some renewables costs to bear in mind when analysing sovereign potential

System costs should not be underestimated when analysing sovereigns and assessing the potential and cost efficiency of renewables in their specific contexts. Indeed, system costs are often forgotten when measuring the cost of variable renewables (in particular wind and solar PV) and when comparing them with other energy sources. Indeed, variable renewables have the great advantages of being low-carbon and with low variable costs, but their output also presents characteristics that involve costs for their integration in the power system (i.e. variable, uncertain, location-constrained, non-synchronous and modular).

Of course, system costs are complex to assess as they depend on several factors such as penetration levels and progress on flexibility. Moreover, the impact of an individual renewable project is of course not the same as that of policies driving change at country level. However, as renewables are often considered at a macro level in the context of climate goals, it would be relevant to integrate system costs in the analysis of renewable prices more systematically, to have a more comprehensive picture of what is at stake. A good piece of news is that, on this very subject, the OECD has just released a quite detailed report. On this basis, the graph below provides a good illustration of what was just mentioned. System costs are considered for different scenarios, mainly based on the share of variable renewable energy (VRE). For a 75% VRE share, system costs can represent a +40 to +50% increase in the cost of electricity provision, compared to +15% to +20% for a VRE share of 50% in the main scenario. It can be noted that these costs tend to increase more as the penetration share of VRE is higher.

These system costs would mainly consist of profile costs (or utilisation costs) which represent the increase in the generation cost of the overall electricity system in response to the variability of VRE output (e.g. additional relative cost of providing the residual load in a system with VRE). But it also includes balancing costs (to ensure the system stability), grid costs (transmission & distribution costs) and connection costs (for connection to the transmission grid).

Total cost of electricity provision including all system costs for a representative OECD country (USD bn per year)

Note: These system costs must be understood as the increase of the total costs to provide the same service of electricity supply above the costs of the least-cost scenario without any VRE. System costs in the reference system are zero since the issue of variability does not arise because all the electricity is generated by dispatchable technologies.
VRE: Variable renewable energy / IC: interconnections

Guillaume Emin, Head of Client Solutions
Sources: Beyond Ratings, OECD

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