This Appendix presents the methodology used to assess the costs of energy transitions through electrification presented in Chapter 14. It was originally developed to address the costs in the electricity sector only. For this report, the calculations were adapted to the Canadian context and modified to fit the data produced for each energy transition scenario.
Two outputs are used to estimate annualized costs for each scenario: electricity production by mode of production; and energy consumption by fuel type for transport, agricultural, industrial and residential sectors in 2016, 2030, 2050 and 2060. Each scenario is divided into four time periods (2016–2030; 2030–2050; 2050–2060; 2060+). The change in production and consumption projections during each period is obtained by subtracting the figures of the lower bound year from the figures of its upper bound year.
We calculate the net annual cost incurred for each of the four time periods. Capacity, transmission and storage costs are annualized and changes in fuel expenditures are based on annual consumption figures. The net annual cost (TC) for a given year is the sum of the annualized capacity cost (CC), the annualized transmission cost (CT) and the annualized storage cost (CS) plus the change in fossil fuels expenditures in relation to 2016 figures (FS). TC is calculated for each time period using the following equation:
Equation 1 is used separately for each of the four time periods. In the first period from 2016 to 2030, cost estimates do not take into account changes in annual fuel expenditures. This is because these changes in fuel expenditures are calculated using values from 2016 as base measurements. Consequently, we conservatively assume that the changes in fuel expenditures can only be considered from 2030 onwards. The second and third periods take into account all types of costs and changes in annual fuel expenditures. The last period can be understood as “2060 and beyond”, where capacity, transmission and storage costs are considered to be null, since each transition scenario is implied to end at or before 2060. We also assume that fossil fuel consumption does not change after 2060, thus keeping the total annualized fuel expenditures constant from that point on. We assume that a reduction in fossil fuel consumption, if negative, is a source of savings. Thus, if avoided fossil fuel costs are higher than capacity, transmission and storage costs, TC will be negative, representing net savings.
Capacity costs refer to the value of the investment needed to construct the new power capacity. They are calculated using the differences between time periods in electricity production for each mode. We consider that that fossil fuel-related assets would have to be replaced. These assets are annualized; thus, their cost is divided by the number of years of the period. It is important to note that in scenarios that feature a reduction in the production capacity of non-renewable sources of electricity, the negative cost values are still taken into account as assets that will not have to be replaced in the future, thus offsetting the additional cost incurred by new renewable electricity sources. The annualized capacity cost (CC) is calculated by:
Where δm is the change in power generation capacity (kW) by power generation mode (m) for a specific energy transition scenario during a time period, Pm is the cost of power generation capacity ($/kW) by power generation mode (m) divided by the mode’s capacity factor (Table D.1), n is the number of electricity production methods (hydro, biomass, wind, solar, hydrogen, nuclear, coal, natural gas, oil), and t is the number of years of the period of the projection.
Table D.1 – Cost of power generation capacity divided by capacity factor #
Increasing shares of variable renewables in the energy mix increase the volatility of electricity wholesale prices and therefore improve the profitability of flexibility and balancing options. At the same time, sinking costs for battery units are already making short-term battery storage an economically attractive option (IEA, 2020a). Adding storage capacity to the electricity network represents an important investment cost. The annualized storage cost (CS) for a given year is calculated by:
Where SW is the additional storage capacity for new wind capacity (kWh) needed during a period, SS is the additional storage capacity for new solar capacity (kWh) needed during a period, and B is the cost of energy storage ($/kWh). We assume that two days of electricity storage would be required for the additional solar and wind production capacity added to Canada’s grid in each of the scenarios (Heal, 2020). We also consider a cost of storage of USD 100/kWh, which is fairly conservative given average energy storage price predictions from now until 2060. Estimates for 2023 are already in the USD 100/kWh range, with strong downward trends (BloombergNEF, 2020).
To calculate the transmission investment costs incurred by each transition scenario in our study, we determined how many kilometers of additional power lines would have to be built in Canada according to the total change in electricity production in each scenario. The annualized transmission cost (CT) for a given year is calculated with:
Where L is the length of high voltage lines to be built (km) during a period and E the cost of high voltage power lines ($/km). We assume that an increase in electricity production required a proportionate increase in power lines. As base measurements, we used Heal’s methodology proposal of building 50 000 miles of high voltage power lines for an additional 2.44 billion MWh of annual power generation. We calculate a proportion using these two values with the change in MWh in renewable electricity produced for each time period and each scenario in Canada to find the total length of power lines to build. We use a value for E of $2.4M/kilometer in our calculations (Dolter and Rivers, 2018).
Fossil fuel expenditures
Replacing fossil fuel consumption with electricity reduces the cost of acquiring these combustibles. We calculate the fuel cost differences generated by the change in fossil fuel consumption for each period by using the data provided for the upper bound year of a period minus that of 2016. For the “2060+” period, we use the data from 2060 minus that of 2016. The additional (or lesser) annual costs associated with the consumption of fossil fuels (FS) for a given year are calculated using:
Where CUX is the change in annual fossil fuel consumption between the lower bound of the time period and 2016 (PJ) by type of fossil fuel (X), FCX are the fossil fuel costs ($/PJ) by type of fossil fuel (X), and f is the number of fossil fuels considered (coal, gas, oil). Since “oil” incorporates many different types of petroleum-based combustibles, we use an average price per liter based on average Canadian wholesale prices in Canada in 2020. We chose to use fixed prices that does not change over time. For each type of fuel saved, we convert the energy figures into physical amounts and used the average price of these fuels in 2021 to find a dollar figure (Table D.2). Negative cost differences correspond to savings.