Externalities â€" the reality of hidden costs of electricity

Popular notions of the zero-emission status of cars running on hydrogen or batteries have come about through ignoring parts of the energy life cycle.

Externalities represent only one factor in assessing power generation technologies. But with one externality already having a decisive influence on future power sources, the more we know about them the better off society will be.

ATSE has recently completed a study – The Hidden Costs of Electricity: Externalities of Power Generation in Australia. The term ‘externalities’ refers to costs (or sometimes benefits) of an economic transaction not covered by the price. For power generation the externalities comprise environmental and social costs arising anywhere in the complete production chain for getting electricity to end-users.

The reason for the surge in interest in externalities is obvious: one particular externality – the environmental cost of greenhouse gas emissions – is changing the whole way we think about energy.

For evidence, look no further than ATSE Focus, with this and other recent issues devoted to energy efficiency and new energy technologies. Externalities demand our attention now that we are facing the introduction of a new portfolio of energy technologies for reducing emissions.

Monetary costing of energy externalities

Understanding externalities involves identifying all impacts of a technology on human health and the environment – on climate, crops, structures and biodiversity, for example – and then trying to place a cost on each impact.

Costing methodologies applied to externalities of power generation and transportation have been the main focus of recent research on energy externalities.

Since 1991 the European Union has poured tens of millions of Euros into such multidisciplinary research, notably the ExternE project.

Australia’s electricity comes mainly from coal. Most of the external costs are directly connected with the four power-station emissions: carbon dioxide (CO2) (climate costs) and sulphur dioxide, nitrogen oxides and fine particles (health costs due to various respiratory and cardiovascular ailments). These and other emissions also occur – in smaller quantities – with renewable technologies if assessed over the full life cycle.

The aim of a costing model is to determine the damage cost per unit of each emission (the ‘unit cost’) and the quantity of that emission per unit of electrical energy generated. From those two figures a damage cost can be derived in terms like dollars per megawatt-hour ($/MWh), which then provides a common basis for comparing different technologies.

The costing process needs to account for externalities at all stages of a production chain. For electricity generation, these might include exploration, mining and transport of the fuel; construction, manufacture and operation of the plant; and delivery and storage of the electricity produced.

Without this life-cycle approach there will inevitably be misconceptions or wrong assessments concerning the environmental credentials of an energy technology. For example, popular notions of the zero-emission status of cars running on hydrogen or batteries have come about through ignoring parts of the energy life cycle.

Why the effort on monetary costs? Why not just identify damaging impacts and then do whatever possible to control and rectify them?

There are several reasons. Knowing the damage costs provides a basis for internalising them. It allows insight into priorities for control and abatement measures and into the value of their eventual benefits.

External costs are needed to help make energy technology choices for the future. Quantified knowledge of external costs can assist in setting fiscal policy, such as environmental taxes. Importantly, the very process of exploring and costing externalities raises awareness of the externalities associated with all technologies.

Results of the ATSE study

The ATSE study presents a review of power generation externalities and costing methodologies, especially the relevance and application to Australia of research originating in Europe. It also goes a step further, trying to foreshadow which external impacts of various emerging technologies might turn out to be important.

Figure 1 shows the ATSE study’s estimates of Australian external costs for various generating technologies now in use or under consideration and development. The wholesale price of electricity, about $40/MWh, provides a context for these external costs.

Most of the ATSE data are derived from the European Union’s ExternE project and related work. Each bar represents a combination of contributions from direct emissions at the actual generating plant and emissions attributable to other stages of the life cycle. Also, different proportions due to climate, health and other social costs contribute to each total.
One striking thing about externality costings, to a scientist at least, is their lack of precision. Attaching a cost to climate change or to human sickness and death is fraught with subjectivity, uncertainties and unknowns. The bar chart, while illustrating relativities and orders of magnitude, gives no indication of the range of uncertainty for each value and must be interpreted with appropriate caution.

In choosing the unit cost needed to calculate the climate change contribution, one is faced with a wide range of estimates covering two orders of magnitude. Also, there is a genuine conceptual difficulty in the idea that a single number could possibly convey the damage cost for the whole globe of each extra tonne of CO2. Despite these problems, ExternE adopts a cost figure of €19 (or A$31) per tonne CO2 and this is what the ATSE report uses for its calculations. The number will need tuning as exchange rates fluctuate.

For each of the other three emissions, ExternE arrives at unit health damage costs pertaining to European conditions. ATSE’s estimate is that the corresponding health damage costs in Australia, with its lower population density, are some 7 to 20 per cent of European costs.

Each result in the chart represents the sum of a cost for climate change based on life-cycle CO2 emissions data, a cost for health effects based on actual emissions and scaled down for population density, and certain other costs, usually minor, from various life-cycle estimates in the literature.

On the whole, the relativities reflect European results. External costs of fossil-fuel based electricity are highest, largely because of their greater CO2 emissions. With carbon capture and storage (CCS) technologies, these costs are significantly reduced. Renewable energy, as expected, has the lowest external costs. Nuclear energy also has quite low externalities, at least to the extent that external impacts have been costed.

Looking ahead

Australian energy policy for the future sets great store by CCS and renewable technologies, especially geothermal energy. These emerging technologies all show low or modest externalities. However, there are several potential impacts that merit further consideration.

CCS will have externalities associated with CO2 pipelines and with increased scale of fuel extraction, transport and generation. Solar installations will need to be very large to contribute materially to power needs and there may be impacts from the greatly increased requirements for inputs such as concrete and steel. Geothermal plants will probably be in remote locations, so that cooling water and long transmission lines present potentially significant sources of externalities.

Externalities of nuclear energy fall into a special category. Costing via the usual models arrives at low externality values. Yet it seems clear that waste disposal, accidents and nuclear proliferation represent additional external impacts that weigh heavily in public concerns about nuclear energy in Australia.

Accidents and proliferation are ‘Damocles risks’ of low frequency but high impact, which may not be amenable to quantitative costing.

The many knowledge gaps mentioned above provide good reasons for further work aimed at improving our understanding of externalities. The ultimate aim is to ensure that Australia’s energy policies lead to maximum social benefit.

Dr Tom Biegler FTSE is author of the ATSE report The Hidden Costs of Electricity. An electrochemist with a PhD in Agricultural Science, he spent most of his research career in CSIRO working on fuel cell electrocatalysis, electrochemistry of sulphide minerals, and electrowinning and refining of metals. He became Chief of the CSIRO Division of Mineral Chemistry (later Mineral Products) in 1985. After retiring from CSIRO in 1996, he consulted on fuel cell commercialisation. He is a Fellow of the Royal Australian Chemical Institute and the Australasian Institute of Mining and Metallurgy.  

Editor's Note: An opinion provided by ATSE Focus. Original page available here.