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New Cost Analysis Shows Unsubsidized Renewables Increasingly Rival Fossil Fuels

Alternative Energy

Renewables in the electricity sector are undoubtedly getting cheaper. But exactly how cheap compared to conventional fuels?

If using the common levelized cost of energy (LCOE) metric, renewables are actually starting to rival fossil fuels and nuclear on an unsubsidized basis, according to the latest calculations from the financial advisory firm Lazard.

In the newest version of its comprehensive LCOE analysis of energy technologies, Lazard finds that a wide variety of renewables are, in some cases, directly competitive with coal, gas and nuclear without federal tax support.

LCOE is the megawatt-hour cost of a particular technology in real dollars. The calculation, which factors in capital expenditures, dispatchability, fuel costs, operations and maintenance costs, and financing costs, is a widely used metric for comparing different energy resources.

Lazard’s research shows that the average cost of biomass, geothermal, onshore wind and utility-scale solar all compete with – or even beat – natural gas peaking plants, natural gas combined cycle plants, coal plants and nuclear plants. Energy efficiency, by far the lowest cost resource, beats everything handily.

“Over the last five years, wind and solar PV have become increasingly cost-competitive with conventional generation technologies, on an unsubsidized basis,” concludes Lazard.

Click the chart to expand.

There are inherent limitations to using LCOE to compare different technologies, as it doesn’t account for many real-world usage considerations. Lazard’s analysis does not include capacity values, stranded costs, integration costs, environmental costs or waste disposal costs. These factors potentially change the value of renewables, fossil fuels and nuclear.

For example, as the chart below shows, Lazard finds that utility-scale solar can be far more cost effective than natural gas peaking plants. In the U.S., some contracts for utility-scale plants are coming in well below the low-end averages outlined in the study.

However, without integrating storage, “solar lacks the dispatch characteristics of conventional peaking technologies,” writes Lazard.

Click the chart to expand.

The solar-storage combination is not analyzed in the study; although the unsubsidized cost of battery storage is one of the second-most expensive technologies behind diesel generators, according to the analysis. One could make a similar argument about the long-term environmental and societal costs of fossil fuels, but Lazard calls these “difficult to measure” due to widely varying estimates.

The cost profiles of renewables and fossil fuels are very different. Coal and natural gas plants have lower upfront capital costs, but are sensitive to fuel prices; technologies like wind, solar and geothermal have no fuel costs, but are far more capital intensive to build up front, making them sensitive to financing costs. The chart below shows how fuel prices can impact the economics of certain technologies.

Click the chart to expand.

The upfront equipment, financing and labor costs for renewables continue to improve. The Lazard analysis shows how this has influenced solar PV, which has seen a 78 percent decrease in LCOE over the last five years, averaged across the utility-scale, commercial/industrial and distributed rooftop sectors.

“Rooftop solar has benefited from the rapid decline in price of both panels and key balance-of-system components (e.g., inverters, racking, etc.); while the small-scale nature and added complexity of rooftop installation limit cost reduction levels (vs. levels observed in utility-scale applications), more efficient installation techniques, lower costs of capital and improved supply chains will contribute to a lower rooftop solar LCOE over time,” writes Lazard.

The Lazard study shows a clear improvement in the competitiveness of renewables, even on an unsubsidized basis. However, LCOE is only one way to look at the actual cost of various technologies.

The Energy Information Administration (EIA) identified the limitations of LCOE in a recent update to its cost analysis of energy technologies.

“It is important to note that, while LCOE is a convenient summary measure of the overall competiveness of different generating technologies, actual plant investment decisions are affected by the specific technological and regional characteristics of a project, which involve numerous other factors,” explains EIA.

A more helpful metric for making specific project-level decisions is the levelized avoided cost of electricity (LACE), which compares the marginal cost and average annual output of a new power plant with the cost of existing generation assets. By comparing LACE to LCOE, one can get a more accurate picture of the value of a particular resource to the grid.

“When the LACE of a particular technology exceeds its LCOE at a given time and place, that technology would generally be economically attractive to build,” writes EIA. In other words, if the difference between LACE and LCOE is negative, the power plant has less value to the grid; if it’s positive, it has more value.

Using this comparison, EIA shows that, on average, nuclear and dispatchable natural gas plants offer more value to the grid than nondispatchable renewables, except geothermal and hydro through 2019. However, through 2040, onshore wind, solar PV, geothermal and hydro all show a net benefit to the grid potentially greater than combined cycle gas plants in regions with high resource availability – reflecting increases in natural gas prices that offset capital cost improvements.

Click the chart to expand.

There are many variables for determining the local value of renewables versus fossil fuels or nuclear. LCOE or LACE analyses do not necessarily offer a full accounting of project performance. But they do provide a helpful guide on where the cost of renewables is headed – and that’s continually downward.

Green Tech Media

4 Comments on "New Cost Analysis Shows Unsubsidized Renewables Increasingly Rival Fossil Fuels"

  1. Davy on Thu, 25th Sep 2014 9:07 pm 

    All these numbers will be irrelevant and subject to new interpretation if we see a financial collapse or liquid fuel shortages. These numbers look good now but they are BAU derived numbers. The numbers represent an unstainable complexity. This complexity allows for efficiency and economies of scale and global distribution. I will say this any small scale renewables that can be built out is a lifeboat plus. Large scale anything including renewables are in danger of being large shut in investments when the grid destabilizes. Imagine trying to keep a huge wind farm or solar thermal plant in the desert going with liquid fuel shortages or financial collapse. What about trying to integrate the variability of large scale renewables with an already variable grid in a collapse situation. Really at this point any energy investment is better than the huge investments in non-essentials and the discretionary we see globally. We don’t need any more nascar tracks or soccer stadiums. It is my hope that a serious crisis will hit and put an end to the nonessentials and discretionary. This will free up much low hanging fruit of vital resources for a forced change. I will admit this will end the global economy and initiate the dark period. Any financial disruption of any kind will derail the current arrangement. It is my hope that this crisis will happen lite enough in duration and degree to allow a reboot at an economic level closer to the local while avoiding a drop to a Stone Age level. Maybe wishful thinking but I am all ears for other scenarios. If you are a corny and want to sell me happy days I will listen and tell you back that is what I have now. My point is I realize happy days are over in 3-5 yrs.

  2. rockman on Fri, 26th Sep 2014 6:27 am 

    Such analysis often fails to acknowledge the obvious: while some alt production system might be competitive on the operations side with a fossil fuel fired system there’s a tiny problem: the fossil fuel system exists and the alt system doesn’t. I’ll use Texas wind as an example again. The state leads the country big time in wind power. But those turbines didn’t have to compete with the economics of existing coal fired plants but new construction. Wind isn’t replacing existing fossil fuel sources but supplementing our rapid expansion of electrical generation.

    The math is simple: new alt systems costing hundreds of $billions in capex have a difficult time competing with ff plants that require no new capex expenditures. Any economic analysis that ignores this reality is deeply flawed IMHO.

  3. Kenz300 on Fri, 26th Sep 2014 7:30 pm 

    The world is in transition to safer, cleaner and cheaper alternative energy sources.

    Those with vested interests in fossil fuels are doing all they can to stop or delay the transition.

    How Fossil Fuel Interests Attack Renewable Energy

  4. Kenz300 on Sat, 27th Sep 2014 5:49 pm 

    Fossil fuel plants require more and more fossil fuels each month to produce electricity. The cost of that fuel varies but generally increases over time.

    Wind, solar, wave energy and geothermal have no on going monthly fuel costs. Once installed they produce energy month after month with no worry about fuel price increases.

    Easy choice………..

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