Externalities

What, exactly, is the cost of electricity today? That is not an easy question to answer. In basic economic terms the cost depends on the cost of the power station - how much is cost to build1 - the cost of operating and maintaining it over its lifetime which is typically 30 years for a combustion plant, and the cost of fuel. If all these numbers are added up and divided by the number of units of electricity the plant produces over its lifetime, then this is the basic cost of electricity. (In most cases there will be an addition to this basic cost to cover either profits if the plant is owned by a private company or for future investment if the plant is publicly owned.)

Practically this means of accounting is impossible because the plant has to start selling power as soon as it is capable of operating. So some guesses will have to be made about its future performance and costs over its lifetime and some economic factors will be needed to take account of the changing value of money. While these add some uncertainty, the basic equation remains the same.

At the beginning of the twenty-first century, using this equation, the new power plant offering the cheapest source of electricity appears to be the gas-fired combined cycle power station. It is cheap and quick to build and relatively easy to maintain. The fuel is the most significant determinant of electricity price, so while gas is cheap, so is electricity.

But does the basic economic equation take account of all the factors involved in generating electricity? There is a small but growing body of opinion which says no. It says that there are other very important factors that need to be taken into account. These are generally factors such as the effect of power production on the environment and on human health, factors which society pays for but not the electricity producer or consumer directly. These factors are called externalities.

A major study carried out by the European Union (EU) and the USA over a decade in the 1990s estimated that the cost of these externalities, excluding the cost of global warming, were equivalent to 1-2% of the EU's Gross Domestic Product.

The cost of electricity in the EU in 2001, when the report of the study was published, was around €0.04/kWh. External costs for a variety of traditional and renewable energy technologies as determined by the study are shown in Table 2.2. Actual external costs vary from country to country and the table shows the best and worst figures across all countries. These figures indicate that coal combustion costs at least and additional €0.02/kWh on top of the €0.04/kWh paid by the consumer. Gas-fired

Table 2.2 External cost of power generation technologies

Table 2.2 External cost of power generation technologies

Coal and lignite

2-15

Peat

2-3

Oil

3-11

Gas

1-4

Nuclear

0.2-0.7

Biomass

0.2-3

Hydropower

0-1

Photovoltaic

0.6

Wind

0.1-0.3

Source: Figures are from the ExternE project funded by the European Union and the USA.

Source: Figures are from the ExternE project funded by the European Union and the USA.

generation costs an additional €0.01/kWh while the external costs for nuclear and most renewable technologies are a fraction of this.

If consumers were forced to pay these external costs - by the imposition by governments of some form of surcharge for example - the balance in the basic equation to determine the cost of electricity would shift in favour of all the non-combustion technologies. Of course such a move would initially penalise consumers because a high proportion of the world's electricity comes from fossil fuel and the capacity cannot be replaced overnight. It would not suit fossil fuel producers either and it would drive up manufacturing prices, initially at least, affecting global economics. Over the long term, if the analysis is correct, everyone would benefit.

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