How Serious Are Soaring Prices for Renewable Energy Sources?

A unique trend is occurring with renewable energy. According to the most recent report on the price of electricity generation from Energy Intelligence, costs will rise in 2022 for the first time since the spike in commodity prices in 2007–2008. Although commodity prices have now steadied, rising interest rates could result in additional cost rises in the future, severely penalizing renewable energy sources. Will these difficulties reduce the pricing advantage that renewable energy has over fossil fuel alternatives? No, is the response. The levelized cost of energy (LCOE) data demonstrates that the costs of fossil fuels have risen even faster than those of renewable energy sources, making gas- and coal-based power less competitive against wind and solar, with very little possibility of making up much ground in the future. This week’s issue of EI New Energy includes a supplement with a more in-depth version of this analysis.

However, combined-cycle gas turbines (CCGT) may once more compete with solar photovoltaic (PV) and onshore wind until about 2030 in the US, where gas prices are anticipated to fall more quickly than renewable energy costs in the coming years. Beyond that, renewable energy sources will become incomparably cheap. This is already the situation in Europe, where it is anticipated that costs for gas, coal, and carbon would remain high for a number of years. According to the International Energy Agency, renewable energy sources account for 90% of new power capacity globally due to their cost and emission advantages (IEA). The situation with existing power plants is slightly different. The operating costs of utilities’ fossil fuel-fired plants must be compared to the price of developing new renewable capacity. The option is clear in Europe. The whole LCOE of onshore wind and PV, at respectively $58/MWh and $73/MWh, is significantly higher than the current fuel costs alone, at $95 per megawatt hour for a coal plant and $203 for a CCGT. The cost of carbon at the moment is an additional $29/MWh for gas and $71/MWh for coal. Although the situation is more precarious in the US, PV and onshore wind are still less expensive to develop and operate than CCGTs, which cost $45/MWh to operate, including $39/MWh for fuel and $6/MWh for maintenance and operation.

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For the majority of technologies, including renewables but also nuclear and fossil fuels, investment costs for new projects have risen by 5% to 10% over the previous year. However, compared to 10%–30% for fossil fuels, investment expenses often account for 80% of LCOEs for wind and solar energy. In contrast to fossil fuels, which will only see a 1%–3% increase in LCOE for every 10% increase in capital spending, wind or solar energy will see an 8% increase. Fossil fuels have an issue since fuel costs, which have climbed significantly more than 5%–10% in the last two years, account for the remaining 70%–90% of the overall LCOE. Renewable LCOEs are anticipated to stabilize and begin to drop again in the future. Andrea Lovato, a Saudi energy developer for Acwa Power, stated at the recent Energy Intelligence Forum that “every year there is an efficiency gain of solar modules and wind blades become bigger, so every year you have a better equipment.” “So far, this has offset any cost growth and enabled us to complete projects at the agreed-upon price. Although we don’t anticipate significant reductions in contractual electricity rates right away, we should at least keep them steady.

Interest rates and other aspects of the cost of capital are also affected by inflation. Energy Intelligence used a 6%–7% post-tax weighted average cost of capital for the study (WACC). Up until recently, this may be viewed as conservative, but it is now closer to market rates. According to calculations, a 1% increase in WACC would result in an approximately 10% increase in investment costs for the majority of technologies and up to 15% for those with lengthy lifespans, including nuclear and hydropower. This in turn implies that LCOEs for fossil fuels would rise by 3% to 5%, 8% for solar and wind, and about 12% for nuclear and hydro. While PV costs decreased by over 90% between 2008 and 22 to $51 per MWh from $540 per MWh under typical European and US sunlight conditions, Energy Intelligence projects that PV costs will be 53% lower by the middle of the century at $24 per MWh. This makes a target price of $20/MWh or less attainable, even in below-average circumstances. The numbers also indicate that $35/MWh for onshore wind and $50/MWh for offshore wind, PV, and battery storage is a plausible aim.

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If the necessary investments are made, the aims of the Paris Agreement would become not only attainable but also far less expensive than business as usual. Based on cost statistics from Energy Intelligence and the IEA’s base-case scenario worldwide mix, the average cost of electricity in 2050 would be around $73/MWh, with capital costs of $36/MWh, significant CO2 emissions of $17/MWh, fuel costs of $11/MWh, and operating expenses of $9/MWh. The average LCOE would be more than 30% cheaper at $50/MWh in the IEA’s net-zero scenario, where solar and wind power account for 70% of global generation in 2050 and fossil fuels for just 5%, as opposed to 40% and 32% in the base case. This is because fuel costs would be much lower at $4/MWh and there would be almost no CO2 cost. The average net-zero LCOE would still be about 10% less expensive than the base case estimates even in the absence of carbon pricing.

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