Cost Of Renewable Energy Vs Fossil Fuels Graph

With rising energy costs and growing concern over climate change, comparing the costs of renewable energy sources versus traditional fossil fuels has become an important issue. Understanding current costs and future projections can inform energy policy and investment decisions as we transition to a more sustainable energy system.

Several factors make this comparison timely. First, costs for renewables like solar and wind have declined dramatically in recent years, becoming cost-competitive with fossil fuels. Second, volatility in oil and gas markets has made fossil fuel prices unpredictable. Third, climate policies are accelerating the adoption of clean energy. Comparing costs provides insights into the economics driving energy transitions and the roles different energy sources may play going forward.

This analysis aims to shed light on cost trends and the complex factors influencing the competitiveness of renewables versus fossil fuels. With both mounting climate urgency and energy security concerns, these costs comparisons have growing relevance for energy planning and policy.

Table of Contents

Current Costs

According to the International Renewable Energy Agency (IRENA), in 2022 the global weighted average Levelized Cost of Electricity (LCOE) was around $0.046 per kWh for utility-scale solar PV, $0.053 per kWh for onshore wind, and $0.037 per kWh for hydropower projects commissioned in 2022 (source). In comparison, the LCOE for new coal-fired plants was around $0.059 per kWh and $0.042 per kWh for new natural gas combined cycle plants.

An analysis by Energy Innovation shows that in 2018, the unsubsidized LCOE in the U.S. was around $0.06 per kWh for solar PV, $0.04 per kWh for onshore wind, $0.05 per kWh for hydro vs. $0.10 per kWh for advanced coal and $0.07 per kWh for advanced natural gas (source). This demonstrates that key renewable energy sources are increasingly cost-competitive with or even cheaper than fossil fuels.

Historical Trends

The costs of renewable energy technologies like solar, wind, and batteries have declined dramatically over the past decade, while fossil fuel prices have remained relatively flat or even increased in some cases.

According to data from the International Renewable Energy Agency (IRENA), between 2010 and 2021, the global weighted-average levelized cost of electricity (LCOE) for onshore wind declined by 56% and for utility-scale solar PV by 85% (IRENA, 2022). This steep decline in renewable energy costs is depicted clearly in the cost curves published annually by IRENA in their Renewable Power Generation Costs report.

In comparison, fossil fuel power generation costs have remained relatively stable over the past decade. According to Lazard’s Levelized Cost of Energy Analysis, between 2009 and 2021, the LCOE for coal-fired power only declined by 4% and the cost for natural gas combined cycle actually increased by 22% over that time period.

As a result, renewable energy is now often cheaper than new fossil fuel power plants in many parts of the world. For example, IRENA estimates that over 60% of coal generation and over 30% of natural gas generation has higher LCOE than newly commissioned renewable projects (Roser, 2023).

This cost advantage for renewables is projected to continue into the future and will be a key driver of the ongoing transition away from fossil fuels in the power sector.

Key Factors Influencing Costs

There are several key factors that influence the costs of renewable energy technologies compared to fossil fuels (EIA). Some of the main factors include:

Technological improvements – As renewable energy technologies mature, costs tend to come down through economies of scale, manufacturing experience, and research (Oluoch 2021). For example, solar PV costs have dropped dramatically in the last decade due to improvements in panel efficiency and manufacturing processes.

Government subsidies – Many governments provide subsidies for renewable energy development to help overcome cost barriers. Tax credits, feed-in tariffs, and renewable portfolio standards can incentivize renewable energy growth and bring down costs (Kilinc-Ata 2023).

Environmental regulations – Regulations that account for externality costs of fossil fuels, like pollution and greenhouse gas emissions, help level the playing field for renewables. Carbon pricing and emissions limits increase costs for fossil fuels.

Natural gas prices – Since natural gas is a major source of electricity generation, lower natural gas prices in recent years have made it more challenging for renewables to compete on cost in some markets.

Grid Integration Costs

Integrating variable renewable energy sources like wind and solar onto the electric grid comes with some challenges and costs. As the penetration of renewables increases, more investment is needed in grid infrastructure, forecasting capabilities, market design, and system flexibility to handle the intermittency and variability of wind and solar generation (Synapse Energy).

Studies have found the integration costs for renewables to be relatively low, generally less than $5/MWh. In a literature review, Synapse Energy found median integration costs of $2-5/MWh for wind and $3-5/MWh for solar at penetration levels of up to 30% (Synapse Energy). Costs were found to increase only slightly with higher penetration levels. Upgrades to transmission infrastructure accounted for the largest component of integration costs.

Strategies like geographic diversity, interconnection, storage, demand response, and advanced forecasting can help manage integration challenges and costs. Despite some increases in short-term integration costs, studies indicate long-term system costs may actually decline since renewables have zero fuel costs (NREL). With proactive policies and planning, high levels of renewable generation can be integrated onto the grid cost-effectively.

Cost Projections

The U.S. Energy Information Administration (EIA) provides detailed cost projections for renewable energy and fossil fuels in their Annual Energy Outlook. According to the EIA’s Annual Energy Outlook 2022, the levelized cost of land-based wind power is projected to decline from $37 per megawatt hour in 2020 to $28 in 2050. The levelized cost of solar photovoltaics is expected to fall from $40 per MWh in 2020 to $24 in 2050. Meanwhile, advanced natural gas combined cycle plants are forecast to have levelized costs declining slightly from $44 per MWh in 2020 to $42 in 2050.

The EIA projects that by 2035, the levelized cost of land-based wind power and solar PV will be lower than the cost of advanced natural gas. By 2050, wind and solar are expected to maintain a cost advantage over gas. This cost trajectory suggests renewable energy sources like wind and solar will continue to expand their cost competitiveness against fossil fuels in the coming decades.

Externality Costs

Fossil fuels like coal, oil, and natural gas have major externality costs that are not reflected in their direct price. These externalities include the social cost of carbon, which measures the estimated economic impact of climate change damages from emitting an additional ton of carbon dioxide. According to a Stanford University article, the U.S. government’s central estimate for the social cost of carbon in 2020 was around $51 per ton. Other models estimate even higher costs, with one model from the National Bureau of Economic Research putting it at $185 per ton.

Fossil fuel emissions also have significant public health costs from increased air pollution. A report from the think tank Resources for the Future estimates that curbing U.S. greenhouse gas emissions to meet climate goals through 2050 could save over 200,000 lives and deliver public health benefits worth over $2 trillion from reduced air pollution alone. Meanwhile, renewable energy has minimal externality costs after installation.

Accounting for these externalities dramatically increases the real costs of fossil fuels to society. Policies like carbon pricing seek to integrate those externalities into market prices, which would better reflect the true costs and benefits of different energy sources.

Policy Impacts

Government policies aimed at reducing carbon emissions and encouraging renewable energy adoption have a significant impact on costs. Carbon pricing policies like carbon taxes or cap-and-trade systems make fossil fuel energy more expensive by attaching a cost to emissions. These policies help account for the external costs of emissions and make renewables more cost-competitive.

According to research from Energy Innovation, “a rising carbon price narrows the gap between renewables and fossil power.” They estimate that carbon prices of around $40-50 per ton would allow renewables to outcompete gas plants across most of the U.S. https://www.forbes.com/sites/energyinnovation/2023/10/29/renewable-costs-have-risen-policymakers-can-help-reverse-the-inflationary-blip/

Clean energy incentives like tax credits and rebates can also lower costs by spurring greater deployment and economies of scale. Policies that simplify permitting and approval of renewable projects help accelerate cost declines as well. Stable, long-term policy support provides market certainty for continued renewable energy investment and innovation.

Key Takeaways

The key takeaways on the cost competitiveness of renewables versus fossil fuels are:

Renewable energy sources like solar and wind are now cheaper than fossil fuels in most parts of the world, according to recent reports.
The costs of renewable energy have fallen dramatically in the last decade, while fossil fuel costs have remained relatively flat.

Factors driving down renewables costs include technology improvements, manufacturing scale, competitive procurement, and low operating costs.
Fossil fuels do not reflect their full costs to society when it comes to pollution and climate change.
Most projections expect renewables costs to continue falling in the years ahead, making them increasingly cost competitive.

Government policies like carbon pricing and clean energy incentives are accelerating the renewable energy transition.

In summary, renewables have become the cheapest form of new electricity generation in most major markets, reinforcing their cost competitiveness against fossil fuels.

Conclusion

The data shows that renewable energy continues to rapidly decrease in cost and gain cost competitiveness against fossil fuels. If current technology cost reduction trends continue, renewables are projected to widen their cost advantage over fossils. Key factors driving down renewables costs include technology improvements, manufacturing scale and experience, and fierce market competition. With supportive policies and carbon pricing further improving the economics of renewables, the outlook is for accelerated growth in zero-carbon renewable generation displacing fossil fuel sources. Continued cost declines will be crucial for renewables to supply the majority of global electricity in the coming decades and play a key role in decarbonizing the energy system.