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Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. I do make mistakes, but I try hard to do my analysis thoroughly, and to make sure my data are correct. Remember: the unexpected sometimes happens. The expected does too, but all too often it takes longer than you thought it would.

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Monday, June 5, 2017

AGL says renewables cheaper than fossil fuels

AGL is Australia's largest electricity "gentailer" (generator + retailer).  These graphics come from slides presented at the Macquarie companies conference in Sydney last month.  In the slides, when AGL talks about "firming" they mean making the output of renewables closer to the demand profile either by storage or gas generation.  When they talk about "time shifting" they specifically mean storage and it's much larger than "firming".

The first slide shows wholesale prices on one side and the age of the fossil fuel generating fleet on the other.  Wholesale prices have risen (a) because Hazelwood, an aging brown-coal power station in the LaTrobe valley was shuttered taking 5% of the national market out and (b) because gas prices have risen sharply because of policy mistakes by the government.  This rise in wholesale prices has made renewables appear more attractive, because their prices have been falling.  For example, a year ago (at last year's conference) the cost of utility scale solar was around A$100/MWh.  Now it's down to A$70.  Similarly, recent wind contracts have been A$65/MWh down to as low as A$55/MWh, down from A$80.  This means that renewables are now below the cost of existing coal and gas generators.




Renewables plus "firming" are now cheaper than new fossil fuel generators, even with the cost of "firming" added.  And these costs continue to fall.




Big growth in renewables depends on storage.  In the left hand chart, solar produces at its peak 100% of demand and the demand outside that peak is filled (supply is "firmed") by gas generation.  Gas is useful as part of a grid with lots of renewables because it can be scaled up or down much more easily than coal and nuclear.  However, only using gas for part of the day raises its average cost.  As the chart above shows, even now gas is more expensive than wind and solar plus storage, and peaking power gas is more expensive still.  The right hand chart shows what it will be like in the future, with solar output much higher than peak demand, and that surplus stored for the periods of twilight and darkness in the rest of the day.  Solar is now providing a big chunk of peak demand, and as more solar (household and utility-scale) is installed (driven by the increasing price differential) the need for storage will rise sharply.




So storage changes everything.



How much will it cost?  The  numbers look massive, but (a) the existing generation fleet cost much more in today's money and (b) 75% of the existing fleet is over 25 years old and 30% is over 35 years old (first chart).  They will have to be replaced anyway as they wear out.




Now I want to point out (it should be obvious, but hey, there are some really dumb denialists out there) that this isn't a bunch of loony left tree-hugging greenies.  This is a company which helped fund the so-called "Liberal" Party's "axe the tax" anti carbon tax campaign, just 4 years ago.  For them to say that the future of electricity is renewables means that it is.  Whatever the Right says.  Australia's circumstance are peculiar because our electricity is among the most expensive in the world.  But where Australia is now will be where the rest of the world is in the next few years, as wind, solar and storage costs plummet.

The future of the grid is green, and gas's role as a "bridging fuel" will likely be short (10-15 years).  Oh, and coal is finished.  AGL also has a slide (not shown) which projects its progressive switch away from fossil fuels, with zero being reached in 2048.  I'm pretty sure the zero point will be reached long before that, as the cost advantage of renewables just gets irresistible.  And again, that's likely worldwide, too.

[Read more here]

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