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Analyses of the economics of wind energy have shown that it is increasingly competitive with conventional electricity generation technologies. However, in present market conditions the gap towards full competitiveness has to be covered by economic support instruments such as feed-in tariffs, and tradable green certificates.
While wind energy and other renewable energy sources have environmental benefits compared with conventional electricity generation, these benefits may not be fully reflected in electricity market prices, despite a fledgling CO2 emission trading scheme. The question therefore is: "Do present electricity market prices give an appropriate representation of the full costs to society of producing electricity?". In other words, are externalities included in the price mechanisms?
The externalities of electricity generation deal with such questions in order to estimate the hidden benefit or damage of electricity generation not otherwise accounted for in the existing pricing system. The costs are real and "external" because they are paid for by third parties and by future generations, and not directly by the generators or consumers. In order to establish a consistent and fair comparison of the different electricity generation technologies, all costs to society, both internal and external, need to be taken into account.
The following sections of Chapter 4 explain the basic economic concept of external cost, the policy options to internalise external cost and the present knowledge of the external costs of different electricity generation technologies. Finally, empirical results on the specific and total emissions, and on the external cost of fossil-fuel based electricity generation in the EU27 are presented on Member State level for the year 2005. Chapter 5 continues with quantitative results on the environmental benefits of wind energy in terms of avoided emissions and external costs for different wind deployment scenarios in the EU27 Member States up to the years 2020 and 2030.
The different definitions and interpretations of external costs relate to the principles of welfare economics, which state that economic activities by any party or individual making use of scarce resources cannot be beneficial if they adversely affect the well-being of a third party or individual.
From this, a generic definition of externalities is "benefits and costs which arise when the social or economic activities of one group of people have an impact on another, and when the first group fails to fully account for their impacts" (European Commission (1994).
By definition, externalities are not included in the market pricing calculations and, therefore, it can be concluded that private calculations of benefits or costs may differ substantially from society's valuation if substantial external costs occur. Externalities can be classified according to their benefits or costs in two main categories:
If an external cost is recognised and charged to a producer, then it is said to have been 'internalised'.
By definition, markets do not include external effects or their costs. It is therefore important to identify the external effects of different energy systems and then to monetise the related external costs. It is then possible to compare the external costs with the internal costs of energy, and to compare competing energy systems, such as conventional electricity generation technologies and wind energy.
As markets do not intrinsically internalise external costs, internalisation has to be achieved by adequate policy measures, such as taxes or adjusted electricity rates. Before such measures can be taken, policy-makers need to be informed about the existence and the extent of external costs of different energy systems. Analysing external costs is not an easy task. Science (to understand the nature of the impacts) and economics (to value the impacts) must work together to create analytical approaches and methodologies, producing results upon which policy-makers can base their decisions for appropriate measures and policies.
Valuation procedures are needed, for example: putting a value on a person becoming ill due to pollution, or on visual intrusion caused by a wind turbine, or on future climate change damage caused by a tonne of CO2. Such evaluations of externalities have uncertainties due to assumptions, risks and moral dilemmas. This sometimes makes it difficult to fully implement the internalisation of externalities by policy measures and instruments (e.g. emission standards, tradable permits, subsidies, taxes, liability rules, voluntary schemes, etc.). Nevertheless, they offer a base for politicians to improve the allocation processes of the energy markets.
Subsequently, the question arises whether the internalisation of externalities in the pricing mechanism could impact on the competitive situation of different electricity generation technologies, fuels or energy sources. As Figure 4.1 illustrates, a substantial difference in the external costs of two competing electricity generating technologies may result in a situation where the least-cost technology (where only internal costs are considered) may turn out to be the highest-cost solution to society, if all costs (internal and external) are taken into account.
Figure 4.1 Social cost of electricity generation, source Auer
Serious study of external costs began in the late 1980s, when the first studies were published attempting to quantify and compare the external costs of electricity generation. The most important early studies are listed in the Appendix. These studies seeded public interest in externalities, since they indicated that external costs could be of the same order of magnitude as the direct internal costs of generating electricity. Since that time more research and different approaches, better scientific information, and constant improvement of the analytical methodologies used, have advanced the study of externalities, especially in Europe and the U.S.
This development has resulted in a convergence of methodologies, at least for calculating the external costs of fossil-fuel based electricity generation and wind energy. Despite the uncertainties and debates about externalities, it can be stated that with the exception of nuclear power and long-term impacts of GHGs on climate change, the results of the different research groups converge and can be used as a basis for developing policy measures aimed at a further internalisation of the different external costs of electricity generation.
The most noted project on determining the external cost of energy is the ExternE project (ExternE - Externalities of Energy), which attempted to develop a consistent methodology to assess the externalities of electricity generation technologies. Work and methodologies on the ExternE project are continuously updated. For comprehensive details on ExternE, refer to www.externe.info.
Prior to the ExternE project, studies were conducted in the late 1980s and beginning of the 1990s, that gave an early insight into the importance of externalities for energy policy as a decision-making tool. An overview of the key aspects of these early studies is presented in the Endnote of Chapter 5.
The ExternE methodology is a bottom-up approach, which first characterises the stages of the fuel cycle of the electricity generation technology in question. Subsequently, the fuel chain burdens are identified. Burdens refer to anything that is, or could be, capable of causing an impact of whatever type. After having identified the burdens, an identification of the potential impacts is achieved independent of their number, type or size. Every impact is then reported. This process just described for the fuel cycle is known as the 'accounting framework'. For the final analysis, the most significant impacts are selected and only their effects are calculated.
Afterwards, the 'impact pathway' approach developed by ExternE proceeds to establish the effects and spatial distribution of the burdens to see their final impact on health and the environment. Then, the 'economic valuation' assigns the respective costs of the damages induced by each given activity.
The methodology summarised above was implemented in the computer model EcoSense (also within the ExternE project). EcoSense is based on the impact pathway approach and, therefore, widely used to assess environmental impacts and the resulting external costs of electricity generation technologies. Moreover, EcoSense provides the relevant data and models required for an integrated impact assessment related to airborne pollutants.
Figure 4.2 Impacts pathway approach. Source: European Commission (1994).
The modelling approach of EcoSense is briefly summarised in section
Because air pollutants can damage a number of different receptors (humans, animals, plants, etc.), the task of analysing the impacts of any given emission is complex. Moreover, the final values of external effects and external costs vary between different countries and regions, since specific peculiarities from every country have an influence on the results due to a different range of technologies, fuels and pollution abatement options as well as locations.
In general, the fossil-fuel cycle of electricity generation demonstrates the highest values on external effects and external cost (coal, lignite, peat, oil and gas), of which gas is the least damaging. In the ExternE studies, nuclear and renewable energy show the lowest externalities or damages.
In almost all studies to date, the fossil-fuel cycles of electricity generation are associated with higher external costs than nuclear and renewable energies. An exception are the studies undertaken by Hohmeyer (1988) and Ottinger (1990) which also show significant external costs of nuclear energy:
The most important emissions concerning electricity generation are CO2, SO2, NOx and also PM10 (particulate matter up to 10 micrometers in size). Emissions generally depend on the type of fuel used:
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