Energy Transition Inflation - ORIGINAL CONTENT

Energy has been described as the master resource as it affects virtually all aspects of our lives. Therefore, energy cost inflation has the potential to drive inflation throughout the economy.

The ongoing energy transition toward “all-electric everything” and Net Zero by 2050 is creating inflation in the electricity sectors of all developed economies pursuing the transition. The effects of this inflation are propagating throughout these economies, appearing first as increases in electricity prices, which then drive increases in prices in all sectors of the economy which consume electricity.

The goal of the transition is the replacement of fossil-fueled energy processes with electric processes powered by solar and wind and potentially other renewable resources. The transition is complicated by the fact that both solar and wind are intermittent resources which are neither predictable, reliable nor dispatchable.

Perhaps it is easiest to understand how the transition is driving inflation by “freezing the frame” and analyzing it incrementally. Stipulate that the US has an electricity system which currently satisfies its customers’ demands. The transition process then adds incremental intermittent solar and/or wind capacity to the system. However, since the new generation resources are intermittent and non-dispatchable, existing conventional generation resources cannot be replaced by the new generation resources, since their output is required to meet grid demand when the intermittent resources are providing low/no output. The result is that the investment in the electricity system is increased, though electricity demand and consumption have not increased. This increased investment requires increased investment returns and adds increased operation and maintenance expenses, with no increase in electricity generation, so cost per kWh generated increases.

This inflationary effect is compounded by the transition’s approach to wholesale electricity pricing, under which each generator providing electricity output to the grid is paid the same price per kWh. The output from solar and wind generation is typically required to be used when it is available, reducing the output required from the conventional generators, but not reducing the conventional generators’ ownership, operation and maintenance costs, with the exception of fuel purchases. Reduced output results in conventional generator fixed costs being distributed across reduced generator output, thus increasing the cost per unit of generator output and the wholesale price required for that output to maintain generator profitability. These higher wholesale prices flow across the entire generation fleet output, inducing further price inflation.

These effects are further compounded by the various government incentives available for solar and wind generation. These incentives are paid with borrowed money, increasing the funds in circulation in the economy with no increase in electricity production. While these incentives reduce the apparent cost of solar and wind generation, they do not decrease the societal cost. Societal costs are actually increased by the interest payments required to support this new federal debt.

Further, solar and wind generators have installed costs similar to the installed costs of fossil-fueled generators per unit of capacity, but their expected useful service lives are a third to a half of the service lives of fossil-fueled generators, resulting in depreciation expenses which are two to three times higher.