Low-carbon systems of the future must take system costs into account
A new study just released by the OECD Nuclear Energy Agency (NEA) recommends that decision-makers should take full electricity system costs into account in energy choices and that such costs should be internalised according to a "generator pays" principle.
The study, entitled Nuclear Energy and Renewables: System Effects in Low-carbon Electricity Systems, addresses the increasingly important interactions of variable renewables and dispatchable energy technologies, such as nuclear power, in terms of their effects on electricity systems.
System effects refer to the costs above plant-level costs to supply electricity at a given load and level of security of supply. This report focuses on "grid-level system costs", the subset of system costs mediated by the electricity grid, which include a) the costs of extending and reinforcing transport and distribution grids as well as connecting new capacity, and b) the costs of increased short-term balancing and maintaining the long-term adequacy of electricity supply.
Some of the study's key findings based on an analysis of six technologies – nuclear, coal, gas, onshore wind, offshore wind and solar – are the following:
While all technologies generate system costs, those of dispatchable generators are at least an order of magnitude lower than those of variable renewables. The study finds that including the system costs of variable renewables at the level of the electricity grid increases the total costs of electricity supply by up to one-third, depending on country, technology and penetration levels. While grid-level system costs for dispatchable technologies are lower than USD 3 per MWh, they can reach up to USD 40 per MWh for onshore wind, up to USD 45 per MWh for offshore wind and up to USD 80 per MWh for solar. In addition, the greater the penetration of renewables, the higher the system costs.
Currently, such grid-level costs are absorbed – unacknowledged – by electricity consumers through higher network charges and by the producers of dispatchable electricity in the form of reduced margins and lower load factors. Not accounting for system costs means adding implicit subsidies to already sizeable explicit subsidies for variable renewables. As long as this situation continues, dispatchable technologies will increasingly not be replaced as they reach the end of their operating lifetimes, thereby weakening security of supply.
Maintaining high levels of security of electricity supply in decarbonising electricity systems with significant shares of variable renewables will require incentives to internalise system costs, as well as market designs that adequately remunerate all dispatchable power production, including low-carbon nuclear energy.
Nuclear power will fare relatively better than coal or gas in the short run due to its low variable costs. In the long run, however, when new investment decisions need to be made, reduced load factors will disproportionately penalise technologies with high fixed costs such as nuclear. In systems that currently use nuclear energy, the introduction of variable renewables is therefore likely to lead to an increase in overall carbon emissions due to the use of higher carbon-emitting technologies as back-up.
The existence of sizeable system costs implies that significant changes will be needed to generate the flexibility required for an economically viable coexistence of nuclear energy and renewables in increasingly decarbonised electricity systems. Such changes may include more widespread use of carbon pricing, long-term contracts and capacity mechanisms in order to provide adequate incentives for investment.