The Future of Fossil Fuels: Dark or Bright?

BP’s recent Energy Outlook 2017 has given the impression to some journalists, Jeremy Warner in the Telegraph for example, that the oil giant sees fossil fuels in a hopeless long term struggle with a renewable energy steamroller squeezing the life out of all others through sheer competitive advantage. However, careful reading of a key chart in the Outlook tells a different story. Coal and gas will remain fundamentally cheap for decades, while renewables will remain dependent on fragile market distorting policies.Confronted by increasingly cost-conscious and nervous finance ministries – even China is said to be cutting its subsidies – the renewables industry has responded over the last few years with vigorous assertions that the public support so far paid (upwards of £20 billion since 2002 in the UK for example) is now yielding results and that some technologies, solar and wind in particular, are almost ready to compete without income support. It goes without saying that the industry quickly adds that it is not quite ready and that subsidies must continue for just a little longer: Da mihi castitatem et continentiam, sed noli modo.On closer examination the details of many of these claims seem less robust. The much-vaunted bid price of the Danish offshore wind farm at Krieger’s Flak, EUR49/MWh, turns out to be only equivocal evidence of cost reductions, since the site is in fact very close to the shore, and because the developers were spared the cost of their grid connection and offshore substations (some £500m). Even at this low bid price (a winner’s curse?) the site is expected to reap some £400m in subsidies in its first fifteen years, about half of its total income in that period. In other words, this project is a near-shore site, easy to build, has large avoided costs because of the grid subsidies, but still needs major income support to make it viable. Hardly a revolution.Even accounts from sources that can be regarded as sober, such as this chart from the Energy Outlook 2017 of British Petroleum (BP), published last month, seem on detailed scrutiny to tell stories incompatible with their headlines:As a visual graphic the chart unambiguously drives the reader towards the conclusion that fossil fuel fired electricity is becoming more expensive, with the red and black bars representing coal and gas climbing steadily across the figure; while renewables are getting much cheaper. Thus growth in the renewables sector is implicitly spontaneous and results, as the slide puts it, from “increasing competitiveness”. From a glance  you would think that new builds of coal and gas will be very unlikely on purely economic grounds by the mid 2020s.However, the notes to the chart need to be taken into account. First, the subscript observes that these are Levelised Costs over the lifetime of the plant, a fact which should remind the wary reader that while the economic lifetimes of conventional generators are well understood, those for renewables are not, and are indeed controversial. BP doesn’t reveal its assumption here but it is likely to be the questionable industry standard of twenty years and upwards. (Kriegers Flak's subsidies are for fifteen years, however, which may be a better indication of the truth.)Secondly, and rather unusually, these Levelised Cost figures include “estimates of system integration costs” for wind and solar. That is an important point, and genuinely to be welcomed, but on the subsequent page BP’s authors remark that the system costs are “likely to be relatively low for the levels of penetration projected out to 2035”. Anyone familiar with the cost of grid expansion, and of running at low load factor an almost unchanged conventional fleet to guarantee security of supply, will find that somewhat implausible. The costs are not insignificant even now, but by 2035 they are likely to be quite high.So, with only a little scratching, the varnish seems to be coming off the renewables price falls projected in this chart, certainly enough to make you wonder whether the full cost to consumers of solar electricity in North American will really fall from about $85/MWh in 2015 to $55/MWh in 2035, and onshore wind from about $55/MWh in 2015 to about $40/MWh in 2035. Given that the cheapest sites have already been developed, and system costs rise sharply with increasing penetration, that seems to be rather unlikely.The figures for the fossil fuels turn out to be still more remarkable. Above the chart BP’s authors note that they have assumed a “lifetime average” carbon price of $20/tCO2e in 2015, $40 in 2025, and $60 in 2035. Bearing in mind the emissions per megawatt hour generated by gas turbines and coal stations, we can therefore calculate what proportion of the charted price in BP’s projections results from carbon taxation and what from technological fundamentals and fuel price.Reading from the graphic we can see that BP estimates that the price of electricity from new build gas turbines in North America ranges from from $32 to $56 dollars per MWh in 2015. Assuming that BP used an emissions factor of 0.35 tonnes of carbon dioxide per MWh (tCO2e/MWh) modern CCGT this suggests a carbon tax of approximately $7/MWh, meaning that the fundamental price range is about $25–$49/MWh. At its cheapest this is much less than any other fuel technology, and even at its most expensive it is cheaper than the mid range of wind, and cheaper any solar whatsoever.In 2035 the BP prices for North American gas turbines rise to a range of $43–$68/MWh, including carbon tax at $60/tCO2e. The emissions per MWh of a new build Combined Cycle Gas Turbine in that year are uncertain, but some improvement is to be expected, and BP must have made allowance for this. To be on the conservative side, let us say there is only a modest improvement in thermal efficiency and emissions fall to about 0.3 tCO2e/MWh. This would suggest a carbon tax burden of about $18/MWh. Subtract that from the projected price, and the range in 2035 falls to $25/MWh to $49/MWh, identical to the fundamental cost in 2015, and at its cheapest well below both solar and wind electricity.Performing the same rough calculation on the coal price estimates, assuming that BP used emissions of about 0.74 tCO2e/MWh for current super-critical coal and 0.67 tCO2e/MWh for future advanced supercritical coal, reveals the surprising finding that the carbon price assumed in BP’s chart is masking a significant fall in fundamental coal generation prices. 2015 prices range from $48/MWh to $73/MWh without carbon tax ($15/MWh), while the 2035 prices range from $45/MWh to $59/MWh without carbon tax ($40/MWh). Such prices make coal competitive with both wind and solar even in 2035.In other words, practically all the coal and gas generation cost increase presented in BP’s graph is the result of carbon taxation, not from technological and fuel fundamentals. A chart that we began by interpreting as the steady triumph of renewables over even the cheapest of the fossil fuels now shows that electricity from gas and even from coal power stations is likely to remain fundamentally cheap for decades, with renewables only becoming competitive on optimistic assumptions about cost reductions and with an arbitrary and politically vulnerable coercive penalty being applied to fossil fuels in the form of a carbon tax.I have no wish to single BP out for particular criticism. Charts of this ilk are being shown by the hundreds in corporate and governmental presentations all over the world. This is Group Think on a grand scale. Not everyone, of course, believes it. Mr Trump has ambitious plans for major remilitarization of the United States, alongside a low tax agenda and reductions in public spending. Cheap fossil fuel costs such as those implicit in BP’s study will not only square that circle but will also permit the President to keep his word to the miners and manufacturing workers who voted him into office. The Outlook may be rather confusing, but the outlook is plain for all to see.