The Numbers are In and Renewables are Winning On Price Alone

Posted by Coley Girouard on Dec 5, 2018 4:00:00 PM

Historical Unsubsidized LOCOE of Utility-Scale Generation Graph

We knew this time was coming, but now it’s here: Call it the crossover point, when technologies like large-scale wind and solar come so far down the cost curve that they become cheaper than legacy sources of electric power generation. Cheaper than the old alternatives, in terms of making new investments. Cheaper, even, than keeping old power plants going, in some cases. And that time is now. You can see it in the latest estimates of lifetime costs of electricity from new power sources made by investment bank Lazard, and you can see it in the latest purchases of renewable power by utilities. Any way you look at it, advanced energy is winning.

Falling costs of advanced energy technologies and innovations in energy service solutions are changing the way we produce, manage, and use energy. Driving this trend are several factors. Many advanced energy technologies have performance characteristics that allow them to provide valuable services that improve grid performance and reliability and reduce operational risk. Add to that intensifying environmental concerns, the increasing sophistication of many energy customers (sometimes referred to as “prosumers”), and commercial and industrial customers desiring to make their own decisions about what kind of energy to buy. The result is a maturing advanced energy market featuring technologies such as wind, solar, and storage that are now competing with traditional energy resources on the basis of cost, even without subsidies.

This is borne out in the latest report from the world’s largest independent investment bank, Lazard, in their annual levelized cost of energy (LCOE) analysis.

First, let’s explain what LCOE means. LCOE measures the average cost of electricity over the life of a project, including the costs of capital, operations and maintenance, fuel, and financing. In short, LCOE is the most basic indicator of power technology competitiveness over its useful life.

Lazard’s latest LCOE numbers were released on November 8 and are shown in the graph below. They show the continuation of a multi-year trend of falling costs for renewable energy technologies. The mean LCOE of large-scale solar PV came down 13% from last year and has fallen 88% since 2009, putting the average cost between $36 to $44 per MWh, without subsidies. The mean LCOE of onshore wind declined an additional 7% from last year and is down 69% since 2009, putting the average unsubsidized cost between $29 and $56 per MWh. With the cost of coal-fired energy coming in at $60 to $143 per MWh and natural gas combined cycle coming in at $41 to $74 per MWh, the data shows that these renewable energy technologies are competitive resources in today’s marketplace.

Levelized Cost of Energy Comparison — Unsubsidized Analysis Graph

Costs have fallen so sharply that the LCOEs for new renewable resources are now at or below the marginal costs of some operating traditional generating resources such as coal and nuclear plants. This reality is only bolstered by factoring in federal incentives such as the production tax credit (PTC - used mainly by wind projects) and investment tax credit (ITC - used mainly by solar projects), which are currently in place but beginning to phase out. Taking these into consideration, the low end LCOE of new wind and solar are $14 and $32 per MWh respectively. By comparison, the average operating marginal cost of a fully depreciated coal plant is $36 per MWh.

What this means, as shown in the graph below, is that it can be cheaper to build new wind and solar plants than continuing to operate fully depreciated coal plants. A reality expressed in some recent utility filings, including Northern Indiana Public Service’s 2018 integrated resource plan, which found that the utility could save customers $4 billion by replacing its entire coal fleet by 2028 with a portfolio of solar, wind, storage, and demand management resources. This is especially significant in wholesale energy markets, where the price of electricity is set by the marginal resource as grid operators dispatch power supply in economic merit from the cheapest to the most expensive.

Levelized Cost of Energy Comparison — Alternative Energy vs Marginal Cost of Selected Existing Conventional Generation Graph

Recent data on power purchase agreements (PPAs) are consistent with Lazard’s LCOE estimates. According to Lawrence Berkeley National Laboratory’s (LBNL) 2017 Wind Technologies Report and the 2018 edition of the Utility Scale Solar Report, the national average levelized price of wind PPAs in 2017 was around $20 per MWh and the national average levelized price of PPAs in 2017 for large solar projects was $41 per MWh, with some contracts as low as $20 per MWh.

Critics of renewables often cite their variability — the wind doesn’t always blow and the sun doesn’t shine at night — as a reason why fossil fuel plants that can be turned on and off will always be needed to ensure reliability. To be sure, some baseload resources will continue to be a part of the mix – plants that run at or near full capacity most of the time but are not very flexible, like nuclear plants. But as more variable resources are added to the grid, other resources need to be more flexible – ramping up and down in response to the variability, the same way grid operators now dispatch peaking power plants in response to fluctuations in demand. These resources can include flexible natural gas-fired power plants and dispatchable hydropower plants.

However, there are a host of  other advanced energy resources and service solutions that can also provide this flexibility, such as energy efficiency, demand response, and energy storage. When coupled with renewables these resources can actually improve resource adequacy and operating reliability.

Such combinations of advanced energy resources are increasingly becoming economically viable. For example, in June NV Energy announced a deal for 101 MW of solar plus 100 MWh of storage with Cypress Creek Renewables at a levelized PPA price of $22.80 per MWh. As the grid changes, system planners and policymakers will increasingly turn to flexible resources like power-control system for utility-scale renewables, demand-side management, storage, and smart grid technologies to maintain reliability at lowest cost.

The trends now seem clear and incontrovertible. The costs of advanced energy technologies will continue to fall, leading more utilities to retire coal plants and make new investments in renewable energy. Ultimately, this will lead to a cleaner, more flexible grid, with greater reliability and resilience. We’ll be watching as new numbers come rolling in, and the transition to secure, clean, affordable energy accelerates.

This has been a year of breakthroughs, setbacks, and stalemates in energy policy, state and federal. Join us for a look back at 2018 in our annual Year in Review webinar, Tues., Dec. 18, at 2pm ET/11am PT.

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Topics: 21st Century Electricity System