22 04 2015

Is this the turning point for fossil energy (2)?

As oil prices have plummeted, the question has naturally come up: does this mean the end for renewable energies? Can they compete with this cheap fossil energy? The short answer is: yes, it will of course now be less profitable to invest in renewable energies. However, paradoxically, the longer story is more complex. Wind energy is already competitive with fossil energy, and solar has also passed the break-even point in more sunny places. And unlike non-renewable energy sources, the long run trend is towards falling costs. So we may be at a turning point for the fossil energy.

It is common to hear the statement: yes, it would be nice with more renewable energy, but the simple fact is that this is a very long term solution – in the short to medium term, it will necessarily be coal, oil and natural gas. This is also more or less the message from the (very conservative) International Energy Agency (IEA). They see some progress for renewable energy from here to 2040, but their main hope for non-fossil energy is nuclear energy. Anyway, a new ice-age may be coming soon, so perhaps we don't have to worry too much about global warming.

But there are actually some very positive news regarding wind and – particularly – solar energy lately.

What is perhaps best known is that wind energy now in many places is the cheapest way to produce energy, even taking into account the costs related to its intermittent character (the wind does not always blow).The bad news is that this is presently only the case for land-based windmills, and the resistance from the neighbours to the construction of more windmills on land is increasing. The alternative explored now in Northern Europe is off-shore windmills, but they are more costly to construct - an extra cost that is only partly offset by the more forceful winds out there. However, even the ocean-based mills are now coming down in price, making them more profitable (the latest tender in Denmark, the leading country in wind energy, implies a cost of 0.103 Euro per kilwatt-hour (kWh), and the price is expected to continue falling).

The other less noticed news is that the cost of photovoltaic (PV) panels is plummeting. The price per watt has been falling consistently (except for a temporary rise 2000-2008 due to a shortage of the raw-material polysilicon):

 The price is now down to 0.5-0.7 USD per watt, and still falling. When I installed my own 4.2 kW PV system in 2012, the cost was 1.40 USD per watt – now it can be imported directly from China at close to 0.5 USD per watt. Presently, the inverters and other auxiliary materials and the installation cost constitute the most important part of the price for small decentralised systems. My own system cost me around 3.30 USD per watt, all included, but according to some estimates the total price was around 2.1 USD per watt in Germany in 2013 (but for some reason more than 4 USD in the US). For larger systems, the cost is much lower.

So we may speculate what this dramatic drop in price will mean, particularly in the more sunny places of the world (Southern Europe, Southern China, Southern USA, Latin America, Australia, India, etc.). One of the contentious issues is the feed-in tariff – the price paid by the utility company, when there is excess production. In many developing countries this feed-in tariff does not exist, and in many developed countries it is controversial – who shall pay for the distribution network and the back-up capacity necessary due to the intermittent character of PV power? Will the rich go off the grid and let the poor pay for the network?

Regarding the back-up power, an obvious possibility is to increase the capacity of the electricity network to combine the many difference sources (wind, sun, hydro, thermal) so the variations can at least partly offset each other, which is what is successfully done in Northern Europe, e.g. Scandinavia, where the variations in wind and solar are compensated with hydro-power. But the spare capacity needed will of course always carry an extra cost.

Another possibility is to increase the capacity to store energy. This has until now been uneconomical, but new possibilities are being explored and there are interesting developments. The traditional candidates are: batteries, hydro-pumping, compressed air and now, experimentally, flywheels and molten salt. All have drawbacks and most are relatively expensive.

The batteries have traditionally been lead-acid, but they are relatively expensive and have a limited life (for the best – and most expensive - ones, up to 5,000 discharge cycles). The lithium-ion batteries, which we use in mobile phones and other gadgets are even more expensive, and have an even more limited life (typically 700-1000 cycles).

However, some new promising technologies are now being deployed, among these the so-called flow-batteries. They are relatively simple, consisting of two tanks with electrolytes and a membrane, and would in principle have an infinite lifespan. They are relatively heavy and bulky, but for use as stationary storage that is not important. The drawback is that the raw-material for the most common electrolyte is relatively expensive (vanadium). The good thing is that the batteries are now being deployed as pilot projects, and they are either already commercially available or will be available during 2015. Elon Musk, the man behind the Tesla electric car, has announced that he will offer competitive storage solutions this year in a venture with Solar City, apparently based on lithium-ion batteries, but that does not sound very probable. Anyway, the good thing is that a lot is going on.

The combination of cheap PV panels and affordable storage is potentially very powerful – at least in the sunny parts of the world. It is very difficult to get reliable data on the cost of storage, apart from traditional lead-acid batteries. The cost of the lithium-ion packs, which go into the existing electric vehicles, is not public, but it has recently been reported that Nissan will sell a 21 kWh replacement pack for their Leaf car for around 5,000 Euro, which means that the price should now be below 250 Euro per kWh. Some new flow battery producers claim that their batteries will cost less than 250 USD per kWh, with at least 20 years of lifespan and sustaining a discharge to around 20% without any damage (for a comparison, a deep-cycle lead-acid battery costs around 250 USD per kWh, but to get a 10 years lifespan, only 30% of this capacity can be drawn – otherwise it will not last more than 3-4 years – so the real price per usable kWh is three times this, or around 750 USD per kWh).

The sweet spot for battery technology for electric vehicles is often said to be 100 USD per kWh. But for solar energy it depends more on the number of cycles. For a battery to last 20 years it should be able to deliver more than 7,000 cycles. The flow batteries promise to do that. Lithium ion batteries are with 700-1,000 cycles still far from that, unless you never discharge them to more than 30% of their capacity – in this case they should be able to deliver 4,000 cycles – but the price per usable watt would also be higher. If in 2015 or 2016 a stationary battery at a cost of 250 USD per kWh and with a lifespan of 20 years becomes commercially available, the cost of storage would come down to around 0.05 USD per kWh. Add to this, that the cost per kWh produced by a PV system in sunny places presently is around 0.07 USD per kWh (and falling). This implies that a small PV system with battery storage may produce electricity at around 0.12 USD within a couple of years, using existing technology. This has sparked speculations about a possible “grid flight”, where wealthier suburban households in sunny places as California or Australia will prefer to go completely off-grid. It is however more profitable for the households to only take part of the load off the grid, while staying connected. All this depends on how the utility companies and the authorities will react to this threat to the sustainability of the grid and the profitability of the utility companies (higher fixed charges, taxes on solar systems etc.).

UDATE may 2nd, 2015: Tesla announced its new storage battery 2 days ago. It was much better than expected. They will sell a 10 kWh battery for 3,500 USD (weekly discharge) and a 7kWh battery for 3,000 USD (daily discharge) - both with a 10 year guarantee. This is indeed a good start, and the price is really good. But for storage the price is still not low enough to make it worth while, unless electricity prices are high. The relevant battery for storage is the 7kWh battery for daily discharge, which I guess it is basically the same as the 10 kWh battery, but limited to a discharge to 30%. With a price of 3,000 USD the cost per usable kWh storage is then 429 USD, and with the 10 years guarantee, it should be able to do 3,650 cycles. With a 5% interest rate and a 10 year payback period, the annual cost of the battery is 389 USD, and if cycled daily it should store-produce 2,555 kWh per year. So the cost would be 15.2 cents per kWh. That is not bad at all, but more than the cost of electricity in many places. I am in Nicaragua paying 22 cents per kWh, and I can produce electricity from my PV system at around 7 cents. Adding the two, it would just break even. So in places where electricity is expensive it may work. If the lifespan is longer than 10 years (i.e. longer than the guarantee period) the cost is lower. With a lifespan of 15 years the cost will go down to 11.3 cents and the investment would actually pay off. 

The good thing is that real competition is introduced in the energy storage industry. The Tesla offer is better than any of the alternatives I have looked at, including flow batteries.If we can get the price down to 250 USD per usable kWh storage, or the lifetime up from 10 to 15 or 20 years, then this will take off.

First article in this series.

To read the next article, click here: Is this the turning point for fossil energy (3)?

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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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