Real costs beginning to emerge?

There was great excitement coming from South Australia recently as the Tesla 100 MW generation capacity, 129 MWh storage battery commenced operation within the electricity grid. This is part of a much-needed upgrade to the grid such that it can better support the high level of renewable energy now available across the state. South Australia has been hit by a number of high profile blackouts over the past two years. While these were the result of various sets of unusual events unrelated to renewable energy deployment, the presence of a very high level of renewable energy had left the grid less robust, leading in turn to the blackouts.

 The State Government has been under pressure to rectify the situation and the installation of a battery facility is one of the measures implemented, along with additional natural gas capacity. The addition of the battery also offers the opportunity to better understand the underlying cost of the renewable energy transition.

 Tesla Battery SAFrom the outset, the cost to consumers of renewable electricity generation has been hard to pin down. In all cases, solar PV and wind have been added incrementally to an existing grid, typically powered by some combination of coal, hydroelectricity, nuclear and natural gas. More recently, that incremental cost has fallen to very low levels, in some cases to just a few cents per kilowatt hour. These very low costs have been highly visible in the media, but do not represent the true cost for the system as a whole.

While very low marginal installation costs are great news for renewable energy deployment, the rapid increase in available capacity in some grids has played havoc with the existing power generation business model. When the renewable energy is available it reduces the dispatch of existing generation, thus cutting into the profitability, and possibly viability in extreme cases, of these operations. However, intermittent renewable energy cannot exist alone on the grid, so it is effectively undermining its own existence by driving existing generators away. This is a well-known issue and is being tackled in some jurisdictions with new business models; for example, the use of capacity payments to existing generators to ensure the viability of their facilities. This increases the overall cost of renewable electricity but doesn’t change the low marginal generation cost offered by additional renewable energy added to the grid.

In additional to capacity payments, the grid operator can provide further backup generation and energy storage, such as in South Australia. In the case of the latter, Tesla have built the 129 MWh storage facility, located adjacent to an existing 99 turbine, 315 MW wind farm. The Tesla battery is reported to have cost A$50 million. If it operated as a back-up to the windfarm itself, it would provide less than 30 minutes of storage, so this isn’t true backup for extended windless periods. Rather, the battery is there to address shorter term grid fluctuations and natural gas is added as a reliable back up for periods of low renewable generation. The need to keep the battery charged also reduces the output of the wind system for periods of time, however, that energy isn’t lost, just time shifted (apart from storage and transfer losses).

Exactly how the total cost of supply changes depends entirely on the situation for each individual grid, but that cost is greater than the marginal cost of renewable energy supply, even when expressed as a levelized cost of electricity (LCOE). This higher system cost for renewable electricity is how we should view this resource within a grid.