The Renewable Free Energy Fallacy – we won’t have unlimited free energy

TL;DR

Despite the allure of a world with unlimited free, clean energy built on free solar and wind power, the practical costs of building more infrastructure makes this impossible. Every new project must be financially viable and since total costs can’t go to zero, revenues also can’t go to zero. Additionally, building out transmission and storage infrastructure to support these energy sources will lead to higher price floors. While renewable energy offers many benefits (including possibly lower prices in the long run), expecting it to become “free” sets unrealistic expectations that distract from the real challenges of the energy transition.

The misconceptions and where they go wrong

Free fuel means no-cost energy

Perhaps the most intuitive misconception, the premise is that solar and wind are “free” resources and that we don’t have to pay for them. Since they’re free, the energy they produce must also be free. However, this doesn’t consider the cost to harvest the energy through solar panels and wind turbines. Building the infrastructure costs money which needs to be recovered across all the energy that is produced, so while the marginal cost of energy (the cost of producing one more unit of energy once the infrastructure is built) is effectively zero for renewables, the true cost of producing that energy is not zero.

Solar and wind keep getting cheaper, eventually they’ll be zero

It’s true that the cost of renewable energy has decreased dramatically over the past decades, particularly solar energy. And while it is easy to look at charts and extrapolate this into the future, indicating that we will hit zero costs eventually, we are starting to see the cost plateaus emerging where additional cost reductions are hard to come by. There will always remain a non-zero cost to raw material extraction, processing, and manufacturing let alone land costs and labor. While innovation will continue to drive costs down, the unavoidable costs will continue to set a floor to how cheap energy can be.

Zero or negative wholesale prices will dominate

In certain markets like CAISO (California) and ERCOT (Texas) as well as some European markets, we are starting to see zero and negative wholesale energy prices during peak renewable production. This happens during periods of overproduction of renewables. Producers might be incentivized to continue producing due to subsidies or are required to by must-run clauses.

In the case that we see further penetration of renewables, we would expect these prices to go down further and the number of hours during which these events happen to increase. However, zero or negative pricing reduces returns for investors, meaning there will be fewer future projects since there is no incentive to build. What we are starting to see is energy users (loads) choosing to use more energy during these hours to take advantage of lower pricing and batteries performing arbitrage (buying low during oversupply and selling high during undersupply) to shift energy from these oversupply periods. In doing this, these loads increase demand during high renewable generation hours increasing the price during these hours until they eventually are positive again. This constant balance of supply and demand will continue, meaning while there may still be short bursts of zero or negative energy wholesale prices, on the whole we expect the average wholesale energy price to be well above zero.

Overbuilding drives prices to zero

Overbuilding (and accompanying transmission infrastructure) has been proposed as a solution to the intermittent nature of renewables instead of building out storage infrastructure. However, this argument again fails to consider the fundamental economics of investment. If the price of electricity trends to zero due to oversupply, there would be no incentive for further building. Investors need a return on capital and without earning on energy production, future development would grind to a halt.

Why incremental building limits everything

The core reason why we will never see truly “free” energy lies in the incremental nature of infrastructure building and investment. Every single plant is a discrete project that requires positive financials at that time to move forward. This means the expected revenues and returns must outweigh the costs and risks of building and operating the facility. If the prevailing energy prices are zero, there is no return available and the project won’t be built. This fundamental economic reality along with the cost floor for building infrastructure prevents prices from ever consistently reaching zero.

Transmission, land and storage costs matter

The focus on the energy generation cost of renewable energy often overlooks the land, transmission, and storage costs that need to accompany renewable build out in favor of other technologies. Wind and solar farms often require vast amounts of land (much more than traditional fossil fuel plants) that are far from energy hungry urban centers requiring extensive transmission build out. Transmission and land acquisition for these large-scale projects already represent multi-billion-dollar expenditures, and these costs are expected to increase with increased renewable penetration as prime locations have already been developed.

Given the intermittent nature of these renewables, as oversupply during certain hours is reached, storage is needed to move the excess energy to undersupplied time periods. Storage acts as a “delay tax”, the added cost of storing energy for later use, for renewables and will increase as the higher frequency cycling opportunities are saturated.

Even in the case of continuing decline of solar and wind generation costs at a plant level, the additional infrastructure needed to support these plants will increase and keep costs and therefore prices well above zero.

How subsidies are currently supporting zero and negative energy prices

Subsidies are a powerful tool for governments to accelerate the adoption of renewable energy technology. In the US this includes the Production Tax Credit (PTC) which awards renewable generators a guaranteed amount for each unit of electricity generated even if the unit is not used. This leads to situations during peak production hours where a solar farm can bid a zero-energy price and still earn a return on the energy generated. Given that subsidies cannot be a long-term solution, once subsidies are removed, this artificial support for zero and negative prices will disappear along with the economic viability of these plants. This will eventually lead to decreased future investments which would again increase prices over time as capacity becomes limited.

Moving forward

Instead of focusing on a pipe dream of unlimited and free energy, our efforts should be directed towards continuing to make renewable energy as affordable and reliable as possible. Just because prices don’t become zero, doesn’t mean that renewables can’t have a positive impact on the environment and possibly energy prices. Additionally, this misconception of free energy can distract from the real challenges in the energy transition and undermine efforts to address these issues. Put another way, paying for energy gives us a much better chance at having energy.