Recently a report on energy costs prepared for EU commission by the consulting company Ecofys crossed the news threshold in many places. Usually it has been reported as being “the EU report”, but EU commision states “The views have not been adopted or in any way approved by the European Commission and should not be relied upon as a statement of the European Commission’s views. The European Commission does not guarantee the accuracy of the information given in the studies, nor does it accept responsibility for any use made thereof.” So the report has not been “endorsed” by EU commision (although paying Ecofys for the report is bad enough). Ecofys did the work on WWF bioenergy-heavy renewables-only energy vision and is widely linked and quoted by environmentalists in Europe.
Following quote from WWF report captures quite well, why I am not a fan. “Ecofys estimates that we would need around 250 million hectares of agriculture land, which is equivalent to about one-sixth of the total global cropland today, as well as 4.5 billion cubic metres of biomass from already disturbed forests. But what is possible on paper, even after the most rigorous analysis, is a different matter in practice. We have yet to identify where this land is, and how it is being used at the moment.“: WWF. This is then followed by WWF nevertheless endorsing such a vision. I had a look at this new report. Below few comments.
- As you can see from the Figure 1, they find that nuclear power is not heavily subsidised and is among energy sources with low external costs. According to Ecofys external costs are only little higher than with the worst renewable (biomass). This is not news, but it is interesting that even Ecofys is forced to acknowledge this. (See later for their desperate attempts to change the results…)
- It has been widely quoted (example here) that according to this report wind power is cheapest source of energy. It is perhaps helpful to note that Ecofys gets this result by discounting nuclear costs with 9-11% rate while discounting wind power with a much lower rate of 5-7%.
- As you can see from Figure 2, according to Ecofys external costs of nuclear is dominated by “depletion of energy resources” category. This was very strange result.
It turns out that they calculate a cost of depletion as 0.05 euros/(kg oil. eq.) both for fossil fuels and nuclear power! Ecofys used a tool called “Recipe” to calculate external costs and interestingly in case of nuclear power they decided to specifically deviate from what developers of Recipe said was the appropriate methodology. ” Unlike metals, we cannot use the concept of grade to express the quality of oil and gas resources. Conventional oil and gas will simply flow out of the well up to a certain point. After that point is reached it is still possible to extract more, but this will increase the production costs and the production energy requirement. Once the energy price increases, it also becomes possible to extract other unconventional resources, such as tar sands, the use of gas liquids, converting gas to oil or coal to oil etc. This means the increase of costs and energy is not caused by a gradual decrease of ore grade, but because more and more mankind will have to switch from conventional resources to unconventional resources…Uranium was formed in the same way as all other metals, the characterisation factor for Uranium is thus included in the impact category for mineral depletion and not fossil fuels.” Recipe in fact gives external cost for Uranium extraction and finds that it is similar to oil per kg. However, since energy density is different by a factor of 10000-million (roughly…who cares) depending on reactor type, Ecofys inflated otherwise irrelevant externality into one that dominates external costs of nuclear power. Not cool. Perhaps they did this in order to inflate the external cost of nuclear power to be at least higher than renewables they promote?
- Historical subsidies for nuclear are mostly based on the idea that state participation lowered interest rates for the projects and that difference between imagined market rate and state interest rate constitutes a subsidy. The logic here is not convincing and also requires the value choice that “market interest rate” is the correct one and states participation is an interference into natural order of things. Whatever your opinion happens to be on that one it is important no notice, that when Ecofys calculates external costs for depletion of resources they assume owners of resources use too high discount rate and that socially optimal one is lower. So now the market no longer knows better. On the other hand when they calculate the levelized cost of energy (LCOE) they use different interest rates for different technologies. Maybe it is true that some wind power developer can get cheaper loan from the bank, but they do so because state has guaranteed them customers as well as the price with feed in tariffs. According to Ecofys such political interference was supposed to be a subsidy and real interest rate was the one without political support structures. In case of nuclear power it is the political uncertainty that increases the perceived risks and consequently it is suffering a “negative subsidy” due to politics. Strangely here Ecofys nevertheless takes interest rates as “correct ones” rather than interpreting the resulting LCOE as the one after political interference. So note how the ground keeps shifting, but always in such a way as to inflate costs for nuclear power and fossil fuels.
- ECOFYS ignores some external costs. For example, there is an external cost for occupying agricultural land (0.1 €/m^2). This cost is due to monetizing the lower biodiversity of agricultural land as opposed to natural habitat.
However, there is no cost that I can see associated with removing biomass from forests for burning. They rationalize this by “We assumed wood pellets are made of residue wood and did not allocate agricultural land occupation to the production of this wood …” So a precondition for this resource is a forest industry creating huge externality and “waste” stream, but none of this is reflected as an externality for bioenergy.
- Existence of higher system level costs from intermittent renewables is acknowledged in the text, but these are not counted as costs, subsidies, nor as external costs. They are, as far as I can see, simply not included in any category.
- After renewables subsidies (41 billion euros/year) largest subsidy category (27 billion) was for “Energy demand support”. This is almost entirely due to lower tax rate for some uses of fossil fuels. I think this is the way also OECD defines subsidies, but in my opinion it is deeply misleading. If I am not taxed according to maximum rate, am I receiving a subsidy? If we use the Ecofys definition for energy subsidies, yes I am. Where I live (Finland) state gets more than 4 billion euros income from energy taxes that mostly tax fossil fuel use. However, this is not counted as a “negative subsidy” for fossil fuels. If we would stop burning oil, state would lose billions in tax revenue. If oil burning is then replaced with some other energy source requiring subsidies (for example) of 5 cents/kWh, state would need to find billions more. In total such transition could easily cost the state as much as we spend on education, but when computing subsidies there would have been no change. Definition is insane.