Indirect cost of renewable energy: Insights from dispatching

The rapidly falling costs of renewable energy has made them the focus of efforts in making a low-carbon transition. However, when cheap large-scale energy storage is not available, the variability of renewables implies that fossil-based technologies have to ramp up-and-down frequently to provide flexibility for matching electricity demand and supply. Here we provide a study on the indirect cost of renewable energy due to thermal efficiency loss of coal plants with such ramping requirements. Using monthly panel data for China, we show that higher renewable share is associated with fewer operating hours of coal-fired units (COHOUR). We use an instrumental variable depending on natural river flows to identify the causal effect of reduced COHOURs in raising the heat rate of coal-fired units. Specifically, a 1 percentage point increase in the share of renewables leads to a 6.4 h reduction per month, and a reduction of one COHOUR results in a 0.09 gce/kWh increase of gross heat rate (+0.03%). We estimate that the thermal efficiency loss indicates 4.77 billion US dollars of indirect cost of renewables in 2019, or 9.44 billion if we include the social cost of carbon emissions. These results indicate that we should consider the indirect impacts of renewables on total coal use and the importance of increasing flexibility of the system.