A Flawed Logic, a Misunderstanding of System Costs
UK Conservative Party leader Kemi Badenoch recently argued that slowing the rollout of renewables would save costs, claiming that building two separate power generation systems would be more expensive. However, this argument is fundamentally flawed and stems from a common misunderstanding of system costs. In this article, we will delve into the “double cost fallacy” and explore its implications on the UK’s renewable energy landscape.
The Double Cost Fallacy: A Misconception of Upfront Capital Expenditure vs. Total System Costs
The double cost fallacy occurs when we conflate upfront capital expenditure with total system costs, focusing narrowly on installation expenses while ignoring the costs of purchasing fuel to run fossil power plants. This is a critical misunderstanding in the energy transition debate today. By ignoring the operational costs of fossil fuels, proponents of the double cost fallacy overlook the substantial savings that can be achieved by adopting renewable energy sources.
Example: A Stylized Analysis of a 1 GW Solar and Gas Power Plant Combination
To illustrate where this line of thinking goes wrong, let’s examine a simple, stylized example. Imagine we get granted a large plot of land and a 1 GW grid connection that we need to supply with power all 8,760 hours per year, for 25 years. Our task is to find a cheap, reliable way to do this. We’ll set our scene in the south of the UK, exclude local carbon taxes to focus purely on economics, and use some standard cost assumptions for power generation technology, largely from the UK’s DESNZ (detailed assumptions below).
Scenario 1: 1 GW Gas Plant Only
As we’ll see, building a 1 GW gas plant to deliver our 1 GW baseload results in a total cost of approximately £76/MWh. This solution has a very straightforward cost breakdown, with only £8/MWh going towards paying off the capital expenditure, and the remaining £68/MWh being the cost of running the plant, primarily in the form of gas.
Scenario 2: Adding 1 GW of Solar Capacity
Now, let’s add some solar energy to the mix. Suppose we install an additional 1 GW of solar capacity alongside the 1 GW gas plant. You’ll get the result below, highlighting how the total system cost actually falls when we add solar on top of gas.
| Gas Plant Cost | Solar Cost | Total System Cost |
|---|---|---|
| £76/MWh | £70/MWh | £70/MWh |
Scenario 3: Doubling Solar Capacity
Continuing this logic, let’s double our solar capacity to 2 GW. Despite some solar energy being wasted during peak generation times, overall costs decline even further, saving another £3/MWh. Solar energy now accounts for over a quarter of total generation, while the total system costs £9/MWh less than just using gas.
Scenario 4: Adding Battery Storage
Taking it further, suppose we expand dramatically and install 10 GWh of battery storage alongside our 1 GW gas plant. We then get the result below, highlighting how adding batteries reduces total cost again, down to £74/MWh.
| Gas Plant Cost | Battery Cost | Total System Cost |
|---|---|---|
| £76/MWh | £8/MWh | £74/MWh |
Scenario 5: Adding More Solar and Battery Capacity
As we continue to add more solar and battery capacity, we see that the total system cost decreases even further. Installing 6.5 GW of solar and 12 GWh of battery storage alongside our 1 GW gas plant results in a system cost of £76/MWh, identical to the 100% gas case.
Conclusion
These calculations clearly show that the double cost argument is a fallacy. By ignoring the operational costs of fossil fuels and focusing solely on upfront capital expenditure, proponents of the double cost fallacy overlook the substantial savings that can be achieved by adopting renewable energy sources.
Real-World Implications
In the real world, this analysis has significant implications for the UK’s renewable energy landscape. With the current high gas prices in the UK, the cost of adopting solar and battery technologies is already competitive with traditional fossil fuel-based power generation.
Future Benefits and Opportunities
As solar and battery costs continue to fall, the benefits and opportunities for the UK’s energy transition will become even more pronounced. According to DESNZ projections, solar capital costs are expected to drop another 30-40% over the next decade or two, approaching £300/kW.
Practical Approaches to the Energy Transition
To accelerate the energy transition, it’s essential to adopt a step-by-step approach. This involves starting with a few gigawatts of solar, gradually adding batteries as their costs fall, and then continuing to expand both technologies as they become more affordable.
Assumptions and Limitations
This analysis primarily relies on cost estimates provided by the UK government (DESNZ). DESNZ estimates UK solar capital expenditure at approximately £450/kW, and gas plant capital expenditure at roughly £600–700/kW. However, these gas plant estimates are adjusted slightly upward to reflect recent examples from the US, where current gas capacity costs can reach as high as $1,500/kW (approximately £1,150/kW).
The double cost fallacy is a misconception that overlooks the operational costs of fossil fuels and focuses solely on upfront capital expenditure. By ignoring these costs, proponents of the double cost fallacy overlook the substantial savings that can be achieved by adopting renewable energy sources.
It’s essential to recognize that the double cost fallacy is not only a misconception but also a hindrance to the UK’s energy transition. By adopting a more nuanced understanding of system costs, we can unlock the full potential of renewable energy and create a more sustainable energy future.
This article highlights the importance of considering the full range of costs involved in energy generation, including both capital and operational expenses.
References
For example, this analysis used a simple battery dispatch approach—charging and discharging whenever possible—but a smarter strategy could further reduce costs. For additional information, please refer to the online model and the references provided.
• DESNZ (2023). Electricity Generation Costs 2023
• Renewables.ninja (2023). Solar Inverter Clipping Ratio
• US Energy Information Administration (2022). Natural Gas Prices
• UK solar capital expenditure: £450/kW
• Gas plant capital expenditure: £600–700/kW
• Battery storage cost: £200/kWh
• Weighted Average Cost of Capital: 7.5% for gas plants and 5% for solar and battery installations
[i] See https://www.conservatives.com/news/watch-live-kemi-launches-the-policy-renewal-programme
[ii] See https://www.gov.uk/government/publications/electricity-generation-costs-2023
[iii] For example, this analysis used a simple battery dispatch approach—charging and discharging whenever possible—but a smarter strategy could further reduce costs. Additional information can be found in the online model and references provided.
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