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Right now, energy policy is all about choices. The need for new production capacity is urgent, but so is the need to control costs. Then there’s the sheer number of technological options available to us. A hundred years ago the choice was basically coal or coal, today we can choose between coal, gas, nuclear and a bewildering variety of renewables – and that’s before we get into such matters as energy efficiency and cogeneration.

So, with the cost issue in mind – how do we come to a conclusion as to the best option or options? Well, in the words of a certain fictional opera singer, we must go compare. Except that, unlike the market for insurance or cars or most commodities, energy comparisons are hard to make. Policy-makers generally have to rely on expert guesses from such bodies as the International Energy Agency.

The IEA is to energy policy what the OECD (the IEA’s parent organisation) is to economic policy – and widely seen as an authoritative source of information on various energy sources and their respective costs. It therefore matters if the IEA have got their figures wrong – which as Terje Osmundsen argues in Energy Post, is apparently the case:

“In various parts of the world – US, Chile, South Africa, India among others – utilities are these days signing Power Purchase Agreements with solar power producers at tariffs competitive to the cost of electricity from new-built gas and coal power plants. But according to the IEA this can hardly be true, because their analysis claims that the cost of large-scale solar PV is more than the double that of the alternatives.”

The IEA is not a trade body for fossil fuel producers – indeed it was set-up as a counterweight to OPEC:

“The International Energy Agency (IEA), probably the most influential energy think tank in the world, is not an overt enemy of renewable energy. The IEA often has nice words to say about the importance of renewables. Yet its flagship publication, the World Energy Outlook (WEO), foresees only rather moderate progress of renewables – and of solar power in particular…

“With cost assumptions 100% above current market prices, it’s perhaps not surprising IEA’s model projects such a modest market development of PV [solar photovoltaics] compared to benchmark studies…”

What, then, is the real cost of solar? According to Osmundsen, the IEA puts it at “close to 0.25$/kWh in Europe and the US” – yet when one looks at what’s happening on the ground, a different picture emerges:

“In the US, the average negotiated tariff (inflation-adjusted) of large-scale solar PV fell to below 0.06$/kWh in 2013… adding the value of the 30% tax credit available in the US, this still gives a competitive tariff of less than 0.10$ per kWh…

“…the German Fraunhofer Institute calculates that the levelised cost of PV from ground-mounted utility-scale PV in Southern Germany fell to 0.08-0.11 €/kWh (0.11-0.14$/kWh) in 2013… In Southern Europe the cost is somewhat lower despite higher finance costs, 0.06-0.08 €/kWh (0.08-0.10$/kWh), close to a third of the cost reported by the IEA.”

Furthermore, the IEA is hardly alone in getting it wrong. Indeed, most other expert sources, especially those with an ideological or commercial axe to grind, are much less reliable.

Even with the best will in the world, it’s very hard for anyone to accurately forecast cost and price movements in a rapidly developing, highly competitive, international industry like the renewables sector. Unlike certain other forms of energy – such as oil or nuclear – there are no cartels and no state-owned monopolies to control supply and fix prices.

In a properly functioning, innovative market, the only institution capable of discovering the true price of different products is the market itself – if it’s allowed to do its thing. Unfortunately, when it comes to energy, there’s so much government interference (even in a supposedly ‘liberalised’ energy system such as our own) that price discovery is hopelessly confused by overt and covert subsidies, political deal-making and the rent-seeking practices of dominant utilities.

Thus in place of intense competition between technologies and companies to drive down prices, what we get is a contest to game the system at the consumer’s expense.

8 comments for: We should stop basing energy policy on false cost estimates

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