Large wind farms and solar plants are now cost-competitive with gas-fired power in many parts of the US even without subsidy, according to Lazard, raising the prospect of a fundamental shift in the country’s energy market.
Costs have fallen and efficiency has risen for solar panels and wind turbines, the investment bank found, to the point that in areas of strong wind or sunshine they can provide electricity more cheaply than fossil fuel plants.
The falling cost of renewable power will encourage greater investment by generators and utilities, and could help ease public concerns about the cost of federal and state regulations intended to support alternative energy and cut carbon dioxide emissions.
George Bilicic, global head of power, energy & infrastructure, Lazard, said: “We used to say some day solar and wind power would be competitive with conventional generation. Well, now it is some day.”
However, not all renewable energy sources are yet able to compete with fossil fuels, the bank argues, with technologies such as rooftop solar panels and offshore wind still having significantly higher costs, and relying on tax credits and state incentives to be commercially viable.
In recent years natural gas has been by far the most popular technology for new power generation capacity in the US, thanks to the weak natural gas prices resulting from the shale boom, but renewables have been closing the gap. In the first half of this year, almost half the utility-scale generation capacity added in the US has been in solar and wind power, according to the government’s Energy Information Administration.
Those industries have been supported by federal tax credits and requirements in 29 states for suppliers to use a set proportion of renewable power, but those supports have been under attack in many places because of concerns about the impact on budgets and energy costs.
Warren Buffett’s Berkshire Hathaway group has invested $15bn in renewable power, but Mr Buffett said earlier this year that the only reason to build wind farms was because of the production tax credit that expired at the end of last year. “They don’t make sense without the tax credit,” he added.
However, the economics of wind power have been improving sharply, with its lowest possible unsubsidised cost dropping from a minimum of $101 per megawatt hour in 2009 to a minimum of $37 per MWh today, according to Lazard calculations published on Thursday.
The decline in solar costs has been even more dramatic: since 2009 the lowest possible cost of generation from a large photovoltaic solar plant has plunged almost 80 per cent, from $323 per MWh to $72 per MWh. Technical progress and huge investment in solar module manufacturing capacity in China, which created a glut in the global market, sent the price of panels tumbling.
At those prices, in areas of strong sunshine or wind, the costs of unsubsidised renewables are comparable to new gas-fired plants, which are expected to deliver power at a cost of $61-$87 per MWh.
Because solar power is available during the day, and can generate most at times of high demand for power for air-conditioning, it can compete with gas “peaking” plants, which have a cost per MWh of $179-$230, making the comparison even more favourable.
The Lazard figures suggest that rooftop solar is still relatively costly, with a minimum cost of $180 per MWh for homes and $126 per MWh for businesses, because of relatively higher costs of installation and support.
However, Tom Beach of Crossborder Energy, a consultancy, argues that estimates of the higher cost of rooftop solar fail to take into account the savings it provides because of the reduced need for investment in transmission capacity to move power around.