Australia’s leading scientific research group and the country’s energy market operator have released a benchmark study that shows the cost of new wind and solar – even with hours of storage – is “unequivocally” lower than the cost of new coal generation.
The joint study – GenCost 2018 – by the CSIRO and AEMO shows that the levellised cost of energy (LCOE) of solar and wind is well below that of any other generation source.
Even adding two and six hours of storage with batteries or pumped hydro still leaves the cost of “firm” solar and wind power cheaper than any fossil fuel alternative.
The study follows similar conclusions from the likes of Bloomberg New Energy Finance, and the observations of big utilities such as AGL, Origin, and the government’s own Snowy Hydro. But it has added significance because of the importance and reputation of the two institutions involved.
“I fully expected the LCOE of renewables to be cheaper,” CSIRO economist and lead author Paul Graham told RenewEconomy in an interview. “I thought that once you added storage, maybe it would be line ball. But it is unequivocally cheaper. Wind and solar are still lower cost even if you take into account those balancing costs.”
And Graham says these are conservative estimates. He points out, as previous studies from the CSIRO and chief scientist Alan Finkel have shown, that the level of storage required for wind and solar is minimal up to a point of around 50 per cent.
That is because of the existing back-up required to support the fleet of coal and gas generators. But even when storage is required, Graham says there will be cheaper alternatives such as demand response, better use of existing back-up, more transmission, more “non coincident” wind and solar (in different regions) or even hydrogen and fuel cells.
“It is probably not even the lowest cost solution to add storage (to the cost of wind and solar). In a sense we have gone to the most expensive solution just to be conservative,” Graham says.
“We say that storage is not a big problem now …. but when we go beyond 50 per cent we will need it. So we have grabbed 2 and 6 hours of storage because that gives us a starting point, and is a bit closer to apples for apples.”
The significance of this report is immense, both for its contribution to the political debate – which is usually derailed by the false claims of the fossil fuel industry and the Far Right – and for the choices to be made for grids like NSW, where much of the existing ageing coal fleet will have to be replaced over the next 15 years.
AEMO will also use it as its guide for the Integrated System Plan – its 20 year blueprint for managing the energy transition – and Graham says it will be updated every year from now on.
The top table shows the estimated LCOE’s for the various technologies in 2020. The next one immediately above shows the anticipated costs in 2030, when much of the coal fleet is due to retire.
There are a couple of important points to be made from this graph.
The first is that on simple generation costs, wind and solar winds hands down. Coal only gets close to competing with wind and solar with storage when there is no risk premium to the financing.
But as Graham points out, that is not realistic. Adding a 5 per cent risk premium, which is what financiers do, blows coal out of the ball-park. Adding in the cost of abatement for the emissions of coal makes them even less competitive.
Nuclear, the favourite technology of many within the Coalition and the peak business lobbies such as the Business Council of Australia, and many conservative commentators, is ridiculously expensive – at least five times the cost of wind and solar, and three times the cost of wind and solar plus storage – and simply not a credible alternative.
Then comes the estimates for 2040 and 2050 (above and below) which show the costs when the final coal generators will exit the fleet. In reality, the costs are likely to be even lower, and the coal exits even earlier.
AEMO Group Manager, forecasting Nicola Falcon said AEMO looked forward to using the GenCost figures.
“The reports will act as the foundation for initial discussions with stakeholders when we commence our modelling inputs and scenario consultations for the next Integrated System Plan,” Falcon said in a statement.
“It is likely we are over-estimating the amount of storage required, particularly in the early decades,” the report says.
“For example, adding non-coincident renewables as a first step would likely be lower cost than adding storage (assuming some spare transmission capacity in non-coincident zones).
“On the other hand, we could be under-estimating the amount of storage required in the context of very high variable renewable share scenarios in the later decades where storage of longer time periods may be required. Ultimately, the amount of system balancing solutions that need to be deployed with variable renewables is context dependent.”
The two organisations expect the modelling to be further refined, both as it understands more deeply the need for storage and “balance”, and as it gets more clarity about the timeline for coal retirements.
A particular focus will be the potential of demand management, and one of the interesting areas will be battery storage at household level, and how that can be exploited, and with what incentives and pricing signals.
“Battery storage is a particularly interesting form of demand management because it is highly scalable and opens up the possibility of customers responding to demand management requests without the need to modify their use of energy,” the report says.
Instead the battery responds by using stored electricity on site to maintain services.
Graham, who authored an earlier CSIRO study that resulted in AEMO dramatically scaling back its forecast uptake of battery storage, says that the technology currently has a long payback period of 10-16 years,.
This does not include the subsidies that have been announced by various state governments and the federal Labor at the end of 2018.
“Battery storage is an early adopter market (i.e. financial returns are not the prime motivator of adoption). Modelling market depth therefore requires understanding the proportion of the population who may be early adopters, and when batteries will switch from an ‘early adopter’ to ‘financially-motivated’ market segment.”
Graham notes that the common push now is for time-of-use tariffs to be deployed to encourage battery storage at appropriate times. But this may be counter-productive when there are many batteries on the grid. He suggests an alternative.
“It may be that battery owners will sign up to a more general service agreement with a fixed rebate for control of their battery which is then operated by an aggregator which participates in a market with prices that are updated on closer to a real-time basis.”
Meanwhile, amidst a host of reports released in the final week – we counted nearly 20 from the regulator, the rule maker, the ESB, and AEMO – the Australian Energy Market Commission has predicted that most Australians are already benefiting from the influx of cheap wind and solar.
The report says consumers can expect to see falling electricity prices over the next two years thanks to the “pipeline of huge renewables supply” and flat demand.
According to the AEMC, the greatest beneficiaries of falling wholesale prices will be in south-east Queensland, Victoria and Tasmania, due primarily to the 1,042MW of generation and 30MW of battery storage that entered the NEM in 2017-18 and the 3,663 MW of new generation and 75 MW battery storage that is entering in 2018-19.
Increases can be expected in NSW because of rising cost of coal, and in W.A. because of the rising cost of gas.
Over the following years, the installation of 4,822MW of large-scale intermittent generation and 100MW of battery storage is expected to push prices down further, more than offsetting rises in gas and coal fuel prices that will occur in some locations.
Note: The CSIRO/AEMO report was distributed widely under embargo to all media. Yet mainstream media ignored it, and RenewEconomy, as far as we can tell, is the only media organisation to have published it. Granted, there have been a heap of reports dropped on pre-Christmas media this past week. But, really.
Giles Parkinson is founder and editor of Renew Economy, and is also the founder of One Step Off The Grid and founder/editor of The Driven. Giles has been a journalist for 35 years and is a former business and deputy editor of the Australian Financial Review.
Originally published 21 December 2018 at Renew Economy.