A new report published by the UK Energy Research Centre’s Technology and Policy Assessment (TPA) function asks why the cost of generating electricity in the UK has continued to rise, and why we keep getting it wrong when it comes to predicting future costs.
The report “Presenting the Future: an assessment of future costs estimation methodologies in the electricity generation sector”, has been produced by a team based at Imperial College London, led by Dr Robert Gross and Philip Heptonstall.
It uses six case studies – onshore wind, offshore wind, nuclear power, carbon capture and storage, combined cycle gas turbine and solar PV – to examine the factors that affect cost trends over time, and determine whether the methodologies that have been used to predict future costs are fit for purpose.
Ongoing scrutiny of rising consumer energy bills, coupled with the Electricity Market Reform proposals, which will shift aspects of power sector investment choices away from the private sector and back to government, mean it is vitally important to predict generation costs accurately, and for policy makers to be able to understand the strengths and weaknesses of cost estimates and forecasts.
The authors found that past studies tended to err on the side of optimism, leading to a broad consensus that costs would fall over time when in reality, since the mid-2000s, fossil fuel prices, raw materials and building costs have continued to rise. This led to wide disparities between projections and outcomes, overwhelming the downwards trends previously seen in several technologies, and anticipated in others.
The team noted an encouraging trend in some recent studies, many of which explicitly took account of the variety of factors able to drive costs in the wrong direction. But they observed that some contemporary forecasts still anticipate future cost reductions even where costs and estimates have risen. In part this reflects an expectation that factors such as supply chain constraints will ease and learning effects will lower capital costs and improve efficiency and performance.
Lead author Dr. Robert Gross, Director of the TPA theme, says: “There are different types of uncertainty, and projections need to make that clear. Some of the uncertainties revealed by the case studies are inherently unpredictable and volatile, and can overwhelm cost projections even in the best of analytical worlds. Others, such as learning effects, ongoing innovations, scale effects and standardisation, lend themselves more readily for future projection. It’s also possible to anticipate and manage factors such as short-term bottlenecks and supply chain constraints. This has important implications for policy design such as time horizons and sequencing.”
“We need to acknowledge, and communicate the assumptions and uncertainty inherent to cost projections; they are difficult and challenging, so analysts and policymakers should not be surprised if forecasts turn out to be wrong, and should understand that it is not always possible to seek certainty in an uncertain world.”
Read the full report