Renewable energy is experiencing a rare trend. Costs have increased in 2022 for the first time since the 2007-08 commodity price boom, finds Energy Intelligence’s latest report on the cost of electricity generation. Commodity prices have now stabilized but rising interest rates may add another layer of cost increases and further penalize renewables in the future. The big question is: will these challenges erode renewable energy’s cost advantage versus fossil fuel alternatives? The answer is no. The data, known as the levelized cost of energy (LCOE), shows that fossil fuel costs have increased even more than those of renewables, causing gas- and coal-based electricity to lose competitiveness against wind and solar, with very little hope to regain much ground in the future. A more detailed version of this analysis is available as a supplement in this week’s EI New Energy.
However, looking forward in the US where gas prices are expected to decrease faster than renewable costs in the next few years, combined-cycle gas turbines (CCGT) could again be neck to neck with solar photovoltaic (PV) and onshore wind until around 2030. Beyond that, the falling cost of renewables will make them permanently unbeatable. This is already the case in Europe, where gas and coal are expected to stay expensive for several years, and carbon prices to remain permanently high.
Given their cost and emission advantage, renewables account for 90% of new power capacity globally, according to the International Energy Agency (IEA). Existing power stations are a slightly different story. Utilities owning fossil fuel-fired plants need to compare the cost of operating them with that of building new renewable capacity. In Europe, the choice is unambiguous. Current fuel costs alone, at $95 per megawatt hour for a coal plant and $203/MWh for a CCGT, are substantially higher than the full LCOE of onshore wind and PV, at respectively $58/MWh and $73/MWh. Current carbon prices add another $29/MWh to gas and $71/MWh to coal costs. The situation is tighter in the US but PV and onshore wind, at respectively $39/MWh and $44/MWh, are also cheaper to build and operate than CCGTs cost just to operate, at $45/MWh including $39/MWh for fuel and $6/MWh for operation and maintenance.
Investment costs for new projects have increased by 5%-10% from last year for most technologies including renewables but also fossil fuels and nuclear. But investment costs typically account for 80% of wind and solar LCOEs versus 10%-30% for fossil fuels. This means that a 10% increase in capital expenditure will cause an 8% raise in wind or solar LCOE versus only 1%-3% for fossil fuels. The problem for fossil fuels is that the remaining 70%-90% of total LCOE is attributable to fuel costs, which have increased considerably more than 5%-10% in the past two years.
Falling in the Future
Further down the road, renewable LCOEs are expected to stabilize and start to decrease again. “Every year there is an efficiency increase of solar modules and wind blades become bigger, so every year you have a better equipment,” Saudi developer Acwa Power’s Andrea Lovato told the recent Energy Intelligence Forum. “So far, this has compensated any cost increase and allowed us to deliver projects at the agreed cost. We don’t expect contracted power prices to immediately go further down, but we should at least maintain them at the current level.”
Inflation also applies to the cost of capital, notably interest rates. In the report, Energy Intelligence uses a 6%-7% post-tax weighted average cost of capital (WACC). This could be considered conservative until recently and is now more in line with actual market rates. Calculations suggest that a 1% increase in WACC would approximately translate in a 10% increase in investment costs for most technologies, and up to 15% for long-lived ones such as nuclear and hydropower. That in turns means that LCOEs would increase by around 12% for nuclear and hydro, 8% for solar and wind, and 3%-5% for fossil fuels.
While the cost of PV crumbled by over 90% between 2008-22 at $51/MWh down from $540/MWh in average European and US sunlight conditions, Energy Intelligence foresees PV at $24/MWh by mid-century, 53% below today’s level. This makes $20/MWh or below a realistic target even in sub-average conditions. The data similarly suggest that $35/MWh is a reasonable target for onshore wind, and $50/MWh for offshore wind and PV plus battery storage.
The falling costs for wind and solar would make the Paris Agreement’s targets not only achievable but also much cheaper than business as usual, assuming the required investments are made. Based on Energy Intelligence’s cost data and the IEA’s base-case scenario global mix, the average cost of electricity would reach some $73/MWh in 2050, including $36/MWh in capital costs, a considerable $17/MWh in CO2, $11/MWh in fuels, and $9/MWh in operating costs.
|The Future of Power|
|Global Mix||2020||2050 (Base)||2050 (Net-Zero)|
|Coal w/ CCS||0||0||1|
|Gas w/ CCS||0||0||1|
|Generation Costs ($/MWh)||2020||2050 (Base)||2050 (Net-Zero)|
|Operation & Maintenance||11.6||9.5||9.4|
|Emissions (kg CO2/MWh)||506||158||3|
|Current and future global power generation mix under the IEA’s base case and net-zero scenarios to 2050 (in % of total terawatt hours), with associated costs (in $ per megawatt hour) and emissions (in kilogram CO2 per MWh) derived from our model. Source: Energy Intelligence, IEA|
In the IEA’s net-zero scenario — where solar and wind account for 70% of global generation in 2050 and fossil fuels for just 5%, versus 40% and 32% in the base case — the average LCOE would be more than 30% cheaper at $50/MWh, thanks to much lower fuel cost at $4/MWh and almost no CO2 cost. Without carbon pricing, the average net-zero LCOE would still be some 10% cheaper than the base case calculation.