Energy in Africa


The true cost of renewables
Melany Bendix
Published: 20-APR-06

The spotlight is increasingly being placed on renewable energy technologies, which can provide energy security during turbulent global crises such as the war in Iraq, as well as assist countries in lowering greenhouse gas emmissions. But despite the numerous benefits, one aspect of green energy still remains a major concern for potential investors, cost.

The renewable energy sector has made speedy inroads into the global energy framework over the past few years, with the various renewable technologies growing by an average of between 2 percent and 60 percent a year from 2000 to 2004. Fourty-five countries now have a set target for renewable energy implementation and many global companies, large corporate banks, investment banks and venture capital investors have sniffed the potential in the air and upped their stakes in the renewable sector, with more than US$34bn invested in 2004 alone.

With more investment and funding flooding in, renewable energy has become big business and a mass of green energy-focussed companies have sprung up, adding a bit of spicy competition to a market where prices were virtually stagnant before.

But even though the cost of renewable energy rapidly decreases as the uptake market increases, prices still remain high when compared to fossil fuels, or do they really?

With the oil crisis becoming more dire by the day and impending energy shortages looming darkly overhead, a number of renewable experts and energy financial strategists who contend the �old misconception� that fossil fuels are cheaper, are finally being given the attention their progressive theories deserve.

These experts argue that green energy has been unfairly labelled as �too expensive� � a slanted perception the progressive researchers claim is based on outdated methods used in cost comparisons which do not quantify the full range of benefits offerred by renewables in the long-term, including the most important financial indicator - risk.

Dr Shimon Awerbuch, a financial economist specialising in utility regulation, energy and the economics of innovation and new technology at SPRU � a research institute at the University of Sussex, UK, is perhaps one of the most vociferous campaigners for the re-evaluation of renewable energy�s competitiveness.

Awerbuch argues that in the energy sector it is fatal not to take into account the risk attached to energy sources. He uses the example of fruit salad to illustrate his point: �If you go into a supermarket and notice that strawberries are expensive today, you may decide not to put strawberries in your fruit salad because it will cost more. Similarly, if you�re planning a country�s energy strategy, you would look at the various generating technologies and fuel types, and you may then decide that electricity from wind is more expensive than electricity from natural gas. Therefore adding wind power to the mix will increase the cost of electricity, right? Well, it isn�t that simple!�

The difference, says Awerbuch, is that at the supermarket you know immediately what the cost of the other ingredients that make up a fruit salad are. But unlike apples and oranges, the future cost of fossil fuels is not certain.

No-one can predict how much natural gas or oil will be in 10 years time, he stresses, therefore the unpredictability of fossil fuels adds risk to the equation, and risk equals costs.

With energy being the cornerstone of the global market, banking on a set rate for fossil fuels is taking an enormous risk, says Awerbuch, especially when there are so many market factors that have an impact on energy resources.

To minimise the risk of the momentus impact fossil fuel price spikes can have on an economy, the trick, according to Awerbuch�s portfolio theory, is not to put all your eggs into one basket. The foolishness of this was clearly demonstrated by the 1973 oil crisis which is estimated to have cost the US economy $350bn.

Instead, spreading the risk by including alternative energy sources in the energy planning mix is the best way to avoid such a potentially disasterous gamble. Much like financial investors trading on the stock exchange protect themselves from the volatility of the market by having a mix of low and high-risk investments in their portfolio, so too is the risk of escalating fossil fuel prices �evened out� by adding low risk investments like wind, solar, biomass, biofuel, geothermal power and hydropower to a country�s energy planning portfolio.

�Even if renewable energy costs a little more than fossil power - and even this is debatable - the costs of renewables are far more certain, and therefore represents a more secure investment,� emphasises Awerbuch. �Or to put it another way, fossil power becomes much more expensive if we include the cost of the risk in the calculation.�

In a 2003 study of energy use in developing countries commissioned by REEEP (the Renewable Energy and Energy Efficiency Partnership), the United Nations Environment Programme and the British Foreign Office, Awerbuch successfully proved that upping the percentage of green energy generation in a country�s energy supply significantly decreased overall generating costs by as much as a third.

Glynn Morris, Director of Cape Town-based energy consultancy AGAMA Energy and REEEP�s South African facilitator, is also an energetic supporter of a more mixed energy portfolio.

�Coal and oil will inevitably go up, but the cost of renewables is predictable because the technologies are basically immune to external factors,� explains Morris. �The initial costs may be higher now, but we know what these costs are and therefore we can plan ahead. The big question is, can we deal with the untold cost of fossil fuels in the future?�

He adds: �People tend to dismiss renewables as an alternative to fossil fuels because they typically compare individual renewable technologies in isolation, whereas the trend nowadays is to install a range of complementary technologies, that when viewed as one compatible system, are more likely to compete on an equal footing with traditional sources.�

Awerbuch agrees and insists that using only dollars per kWh evaluations as a method of comparing the price of solar photovoltaic energy against that of gas turbines is as useful as using dollars per mile to compare the value of cars and horse-drawn carriages!

Aside from not taking the high risk factor of fossil fuels into account, Morris says the traditional financial models also do not quantify the value of the additional benefits offered by renewables.

Nor do these models take into account the revenue that can be earned from �selling� the carbon credits generated by clean energy solutions via the Kyoto Protocol�s Clean Development Mechanism � a system aimed at helping developing countries to fund the installation of renewable technologies. �It�s a question of considering the quality of the overall energy service,� adds Morris.

But how does one measure the financial value of a cleaner environment or the benefits of a sustainable energy system that does not marginalise those in the lower economic stratas? And what can the merits of having secure, stable and replenishable energy sources be weighted against?

For that matter, what model can be used to quantify the masses of new jobs created from renewable energy installation and the subsequent contributions these newly employed workers make to the overall economy?

It may be clean energy, but the complex calculations needed to quantify the broad-based benefits are certainly not clean cut. And perhaps this is why many energy planners have chosen to only use the traditional accounting-based cost techniques which exclude the added value provided by green energy.

Awerbuch warns that taking this seemingly easy route may retard a country�s future development and economic competitiveness. �After all, these techniques have a dismal record for picking winners,� he quips, referring to the grossly miscalculated prediction in the 1960s that �armies of clerks are cheaper (than computers)�, and again in the 1980s when the emerging robotics industry was discounted because �human workers are cheaper�.

Using these same techniques, many economists still insist that renewables are �not yet cost effective�, yet all indicators are pointing to their calculations proving as inaccurate in this decade as they were in the 1960s and 1980s.

This report was first published in Energy in Africa Magazine, February 2006 - April 2006. To subscribe click here

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