Is Renewable Energy More Expensive

is renewable energy more expensive

The cost of renewable energy technologies like solar panels and wind turbines has fallen dramatically in recent years. In some cases, renewables are now cost competitive with fossil fuels on a levelized cost basis. This trend of declining costs has led many experts to predict that renewable energy will become the default choice for new electricity generation capacity within the next decade. However, accurately comparing the costs of different energy sources can be complex. This article analyzes the levelized costs and additional system integration expenses of renewable energy to assess the claim that it is becoming cheaper than conventional sources of electricity generation.

Cost Trends for Renewable Energy

The costs of renewable energy technologies like solar and wind have declined dramatically over the past decade. According to IRENA, the global weighted average levelized cost of electricity (LCOE) for new onshore wind projects fell by 15% in 2021 compared to 2020, reaching $0.04/kWh. For solar PV, costs fell by 13% in 2021 to $0.05/kWh.

Similarly, IRENA found that between 2010 and 2021, the LCOE of concentrated solar power fell by 68%, onshore wind by 56%, offshore wind by 48% and solar PV by 85% (IRENA, 2022). This steep decline in costs has made renewables increasingly competitive with fossil fuels like coal and natural gas.

What’s driving the cost reductions? For solar, it’s improvements in panel efficiency, manufacturing scale and supply chain development. For wind, it’s taller turbines, larger rotor diameters and advanced materials. Overall, increasing deployment of renewables globally has helped drive economies of scale and learning curve effects.

Forecasts suggest costs will continue falling. BloombergNEF predicts onshore wind and solar costs will drop another 30-41% by 2030. Offshore wind is also expected to see steep declines as floating turbines become mainstream.

Levelized Cost of Electricity

The levelized cost of electricity (LCOE) is a measure used to compare the overall competiveness of different generating technologies. It represents the per-kilowatt hour cost (in real dollars) of building and operating a generating plant over an assumed financial life and duty cycle. Key inputs to calculating LCOE include capital costs, fuel costs, fixed and variable operations and maintenance (O&M) costs, financing costs, and an assumed utilization rate for each plant type.

According to a 2018 report, the unsubsidized LCOE for onshore wind and utility-scale solar PV is already lower than the cheapest fossil fuel option (combined cycle gas turbine plants). The International Renewable Energy Agency’s (IRENA) 2022 report on renewable power generation costs shows that the global weighted-average LCOE of renewable technologies declined significantly between 2010 and 2022, becoming far more cost-competitive with fossil fuels.

Why Renewables are Becoming Cheaper

There are several key factors driving down the costs of renewable energy in recent years:

Technological improvements and innovations have increased the efficiency and productivity of renewable energy systems. For example, advances in solar panel design now allow them to convert sunlight into electricity more efficiently. Manufacturing techniques have also become more streamlined and automated, bringing down production costs (Forbes).

Economies of scale and manufacturing growth have led to lower costs per unit. As the market for renewables expands, manufacturers can produce at larger scales and spread fixed costs over more units. The global production of solar panels and wind turbines has risen exponentially, driving down per-unit costs (Our World Data).

There have been improvements in the performance and capacity factors of renewable systems over time. This means they can generate more electricity for the same capital investment. Capacity factors for wind turbines and solar panels have increased steadily with better technology and siting (The Economist).

In summary, the cost declines for renewables are largely driven by technology maturation, manufacturing scale, performance improvements, and market growth and competition.

Grid Integration Costs

Integrating variable renewable energy like wind and solar does come with grid integration costs. Since the output from these sources fluctuates, it requires the grid operator to balance supply and demand through either using fast-ramping power plants, storage, or demand response (Synapse Energy). However, multiple studies show that these integration costs are manageable, commonly less than $5/MWh when renewables make up less than 30% of the power supply (NREL).

There are also many potential solutions to keep integration costs low even with high renewable penetrations. Better forecasting techniques allow grid operators to anticipate changes in renewable output. Expanding regional grids and interconnections smooths variability over larger areas. Increasing system flexibility with fast-ramping power plants, energy storage, and responsive demand reduces the need for excess reserves. Market reforms that improve price signals and access to balancing resources also reduce integration costs (Heptonstall et al.).

Capacity Factors

The capacity factor of a power plant is defined as the ratio of its actual annual output over a period of time divided by its potential output if it were possible for it to operate at full nameplate capacity all the time (Wikipedia, 2022). Renewable energy sources like wind and solar often have lower capacity factors than traditional fossil fuel plants.

For example, the average capacity factor for wind farms is around 35% and for solar PV it’s around 25%. In comparison, coal and natural gas plants often operate at capacity factors of 50-60% (PNAS, 2022). The intermittency of wind and sunlight availability means that renewable plants generate less electricity over a year than their rated maximum capacity.

This has implications for the levelized cost. Since renewable assets produce less electricity overall due to their lower capacity factors, the capital cost per unit of electricity generated is higher. The lower the capacity factor, the fewer MWh’s are produced from a power plant over its lifetime, driving up the LCOE.

Intermittency Costs

Due to the variable nature of wind and solar generation, there are additional costs associated with integrating large amounts of these intermittent resources onto the grid. According to the International Renewable Energy Agency (IRENA), the integration costs for wind power ranged from $3 to $10 per MWh in Europe in 2020, while for utility-scale solar PV they ranged from $2 to $7 per MWh 1. However, there are strategies to mitigate these costs such as improving forecasting, expanding regional transmission networks, and using storage and flexible generation sources.

For example, pairing wind and solar with storage can smooth out the variability and provide firm capacity. Battery storage costs have declined 89% in the last decade according to BloombergNEF 2. Pumped hydro storage and emerging long-duration storage technologies like flow batteries can also help integrate renewables. With effective policies and grid planning, the integration challenges and costs of renewables can be managed.

Externality Costs

Fossil fuels impose major health and environmental costs that are not reflected in their direct price. These are known as externality costs. A 2021 report from the Environmental and Energy Study Institute found that the annual health impacts of fossil fuel-generated electricity in the U.S. could total up to $886.5 billion. Fossil fuel combustion contributes to climate change, air pollution, and other environmental damage. According to a UC San Diego study, the externality costs for coal are estimated at 3.6 to 5.7 cents per kilowatt-hour, while natural gas ranges from 0.9 to 2.2 cents per kWh. In comparison, solar PV and wind have externality costs of just 0.05 to 0.25 cents per kWh.

These hidden health and environmental costs are passed on to society rather than reflected in the market price of fossil fuels. Factoring in externality costs is important for accurately comparing the true price of different energy sources.

Subsidies

Fossil fuels have historically received substantial government subsidies, which have helped make them cheaper and more competitive against renewable energy sources. According to the International Monetary Fund, global fossil fuel subsidies were around $5.2 trillion in 2020 [1]. In comparison, renewable energy subsidies were estimated at $630 billion in 2020 globally [2]. This imbalance skews the economics against renewable energy.

Developed countries like the United States still provide large subsidies to fossil fuel companies. The fossil fuel industry benefits from decades of government support, while renewable energy subsidies are more recent. Phasing out fossil fuel subsidies and redirecting government support to renewable energy is seen as an important step to accelerate the transition to clean energy [3].

Conclusion

As renewable energy technology continues to advance and deployment expands, costs are coming down dramatically. In many parts of the world, renewables have already reached cost parity with fossil fuels. This trend of decreasing costs for renewables compared to more stagnant pricing for conventional sources is expected to continue.

However, a true cost comparison requires factoring in externalities. The environmental and health damages caused by fossil fuels are borne by society. Accounting for these external costs would make renewables even more cost-competitive. While more investment is still needed to fully integrate high shares of renewables onto grids, renewable energy is becoming increasingly cost-effective.

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