True costs of fossil fuels - 11-10-2011

"It's not fair" - why should wind get a subsidy?

One of the criticisms repeatedly levelled at at renewable energy by the anti-renewable/pro-fossil fuel press (do I really need to mention the Mail again?) is that “it can't survive without subsidy”.

A closer look at the story shows these claims are not true. Wind is more than competitive with other supplies – including fossil and nuclear but it suffers from inherent disadvantages in the market place, which is far from free and fair.

Fossil fuel electricity costs flow largely from the cost of fuel. Gas in particular is a “price maker” - production can be cut or restarted within minutes to take advantage of the best spot prices on the market - and can even force up prices by reducing supply.

Wind power is a “price taker” it produces power when the wind blows. Virtually all its costs are upfront, stemming from the capital cost of construction and connections to the grid. Wind producers have to take whatever price the market offers – but they still have to pay off the fixed costs of financing the project. This means if market prices remain low for any length of time they risk bankruptcy. Taking over a bankrupt windfarm would still be good business, it produces electricity at virtually zero marginal cost, but exposure to the vagaries of a market make it a poor investment risk without some form of long term price guarantee.

The reasoning behind the proposed “Contract for Difference” (CfD) announced in the White Paper on Electricity Market Reform earlier this year – is to encourage investors in low carbon power. Rather than offer an outright subsidy the proposals offer a guaranteed price – but will claw back revenue if the wholesale market price exceeds the guaranteed prices. CfD offers reassurance to low carbon producers – the only way of ensuring investment in low carbon technology in an unregulated market.

Privatised profit – Socialised cost 

Whilst the notion of any interference with the market is anathema to neo-liberal economics there's a strong whiff of hypocrisy when it come to the subsidy on coal. The sharp minded will ask “what subsidy?”. Strictly speaking, it's a good point – coal competes in the market place on its own terms and is king in the world of electricity generation.

But the problem with coal (and road transport and almost any other fossil fuel intensive activity) is that its true costs don't ever go on to the books of the companies that profit from it. Pollution, health effects, the impacts of climate change create huge costs that are born entirely by the public purse. A US study “Full life cycle costs of coal” (Paul R Epstein et al) published earlier this year by the “Annals of the New York Academy of Sciences” quantifies the cost of coal to the public purse, covering the costs of each stage of the life cycle of coal, extraction, transport, processing, and combustion.

These costs – estimated at between a third to over half a trillion US dollars a year are passed directly to the public and represent a massive covert subsidy to coal. The study concludes:

"Our comprehensive review finds that the best estimate for the total economically quantifiable costs, based on a conservative weighting of many of the study findings, amount to some $345.3 billion, adding close to 17.8¢/kWh of electricity generated from coal. The low estimate is $175 billion, or over 9¢/kWh, while the true costs could be as much as the upper bounds of $523.3 billion, adding close to 26.89¢/kWh. These and the more difficult to quantify externalities are borne by the general public.” The average retail cost of electricity in the USA is 12c/kWh – representing a taxpayer subsidy of between 75 and 150% of the true unit cost of fossil electricity".

The hidden costs of coal are spectacular and blow the neo-liberal whinging about "subsidies for wind" out of the water - but Epstein is talking specifically about coal - and it's a US study.

Does the same story apply here in the  UK?

In 2008 the Mayor of London's office estimated there were almost 5000 deaths associated with long term air pollution - one city - one year. The fossil energy industry enjoys a unique exemption from the costs of it's activities - with all the costs associated with it's use and production passed on directly to the state - creating hidden taxpayer subsidies that far outstrip direct support for wind.