Why Are Renewable Energy More Expensive?
Renewable energy resources such as wind, solar and geothermal have long been considered too expensive compared to traditional energy sources like coal, natural gas and nuclear power. However, this is beginning to change as the costs of renewable technologies fall rapidly and fossil fuel prices remain high. The thesis of this article is that while renewable energy tends to cost more than conventional sources due to higher capital costs and lack of government subsidies, costs are falling as technology improves.
According to the International Renewable Energy Agency report, the global weighted-average cost of electricity from new renewables declined 26% year-over-year in 2021. As technology matures and scale increases, renewable energy is becoming cost-competitive with conventional energy in many parts of the world.
High Upfront Costs
One of the main reasons why renewable energy is more expensive than conventional sources like fossil fuels is the high upfront costs required. Renewables like solar and wind power require large initial investments in equipment like solar panels, wind turbines, and grid connections before they can generate any electricity.
According to the UCSUSA, the upfront capital costs for renewable energy can be daunting, especially for small companies or households. While fossil fuels can utilize existing infrastructure, renewables need new equipment, land, and grid connections built from scratch. For example, building a 100 MW solar farm can cost over $140 million upfront, whereas a comparable natural gas plant may cost $40-80 million (UCSUSA).
The Washington Post reiterates that the price of renewable electricity is largely determined by these initial construction and equipment costs. This is different from fossil fuels where ongoing fuel costs dominate. Renewables have minimal fuel costs but large upfront outlays (Washington Post).
Therefore, the substantial upfront investment required for renewable energy systems is a key reason why their costs are higher than conventional energy sources.
Intermittency
Renewable energy sources like solar and wind are intermittent, meaning their power output fluctuates based on weather and time of day. This intermittency creates challenges for relying on these sources for constant, reliable energy production. When the sun isn’t shining or wind isn’t blowing, solar panels and wind turbines produce little to no electricity [1]. This requires energy storage solutions or backup power sources to ensure electricity supply consistently meets demand.
Studies estimate the cost of managing intermittency from solar and wind could add $3-11 per MWh for each increase of 10% renewable penetration on the grid [2]. At high levels of renewable energy, the costs rise further to balance supply and demand. The unreliability factor makes intermittent renewables less valuable than constant power sources [3]. Until more economical large-scale storage is available, dealing with intermittency imposes additional expenses to integrate renewables onto the grid.
Fossil fuels and nuclear plants provide consistent baseload power not subject to fluctuating weather conditions. While renewable energy costs have fallen dramatically, managing intermittency remains an obstacle to higher market shares and full decarbonization of the electricity system.
Small Scale
Most renewable energy installations like solar panels and wind turbines are smaller in scale and capacity compared to traditional fossil fuel power plants. For example, a typical coal power plant generates 500-1,000 MW, while a typical wind farm produces 100-300 MW (https://ilsr.org/report-is-bigger-best/). The largest solar farms in the world are still under 2,000 MW. Fossil fuel plants benefit from economies of scale – larger plants have lower costs per MW generated. In contrast, renewables do not benefit as much from scale and larger projects only lead to modest cost reductions.
According to one analysis, solar photovoltaic systems larger than 100 MW only lead to a 5% reduction in LCOE (levelized cost of energy) compared to a 1 MW system (https://energy5.com/maximize-your-investments-the-economics-of-scale-in-solar-energy/). The modular and distributed nature of most renewable energy systems limits the cost savings from scaling up. While fossil fuel plants can become exponentially larger and achieve greater efficiency, renewables like solar and wind have limits to how large they can scale.
Immature Technology
Many renewable energy technologies are still maturing and developing compared to traditional fossil fuel technologies like coal, natural gas, and nuclear which have benefited from decades of refinement (Source). On the Technology Readiness Level (TRL) scale, which measures the maturity of technologies from 1 (basic principles) to 9 (commercially mature), key renewable technologies like solar PV, onshore wind, and lithium-ion batteries range from TRL 7-9, whereas traditional technologies are at TRL 9 (Source). The lower TRL scores for renewables reflect their more recent emergence and indicate there are still opportunities to improve performance and reduce costs. Although renewables have progressed rapidly, more refinement is needed to fully match the maturity of incumbent technologies (Source). Their relative immaturity contributes to higher costs currently.
Low Capacity Factors
One major reason renewable energy tends to be more expensive than conventional sources is due to the lower capacity factors of renewables like solar and wind power. Capacity factor is a measure of how often an energy source generates electricity compared to its maximum potential output if it operated at full capacity all the time. According to analysis, in 2022 the average capacity factor for solar PV in the US was just 27.5%, onshore wind was 42%, and offshore wind was 49.8%. In comparison, natural gas capacity factors averaged 56.8%, nuclear power averaged 92.7%, and coal averaged 53.4%.
The intermittent nature of renewables like solar and wind, which only generate power when the sun is shining or wind is blowing, means their capacity factors will be inherently lower than always-on sources like fossil fuels or nuclear. This in turn increases the levelized cost per unit of electricity generated. More renewable generators have to be built to produce the same amount of electricity as fewer always-on conventional plants. The lower the capacity factor, the more duplicate generators are needed to compensate.
Transmission Costs
Renewables often require building new transmission infrastructure to connect generation with load centers. Long-distance transmission lines are costly, with estimates ranging from $300,000 – $1 million per mile for overhead AC lines (Source: Eversource). Many prime renewable resources are located in remote areas, far from cities where energy demand is high. For example, optimal solar and wind resources are concentrated in the Midwest and Southwest, whereas peak electricity demand is on the coasts. Building transmission for renewables from remote areas to population centers can increase costs substantially.
A national lab study found that transmission costs for renewables range from $1 – $10 per MWh, which can add 3-33% to the levelized cost. These transmission investments for renewables are often above and beyond existing grid infrastructure. Fossil fuels with existing transmission connections do not face the same hurdle. Therefore, the transmission cost burden is higher for renewables as they scale up across the country.
Lack of Subsidies
Despite the growing momentum behind clean energy, fossil fuels continue to receive higher subsidies than renewables in many places. According to Human Rights Watch, global fossil fuel subsidies totaled around $423 billion in 2017, compared to only $128 billion for renewables. The IMF estimates that fossil fuel subsidies account for a staggering 85% of the total global subsidies for energy. In effect, these subsidies for fossil fuels make renewables less competitive in terms of pricing.
The disparity is also large in the United States. A 2021 report found that federal subsidies for fossil fuels in the U.S. stood at $15.9 billion in 2020, outpacing those for renewables by over 4 to 1. U.S. state-level support for fossil fuels totaled $6.6 billion, versus just $750 million for renewables.
Phasing out fossil fuel subsidies and leveling the playing field could make renewable energy more cost-competitive and spur wider adoption globally. However, the political influence of fossil fuel companies makes reducing their subsidies an uphill battle in many countries.
Rising Cost-Competitiveness
Renewable energy sources like solar and wind power have historically been more expensive than fossil fuel sources. However, the costs of renewable energy have been falling steadily in recent years, making renewables increasingly cost-competitive.
According to the International Renewable Energy Agency, between 2010 and 2019, the unit costs of solar energy decreased by 85% and the costs of onshore wind decreased by 56% (Economist, 2022). This sharp decline in costs is driven by economies of scale, technological improvements, and market competition.
One study found that prices of large-scale solar photovoltaics decreased by 89% between 2009 and 2019 (Forbes, 2022). As a result, solar and wind are increasingly cost competitive with fossil fuels in many markets. Renewables are projected to continue getting cheaper, further accelerating the global energy transition.
Conclusion
In summary, renewable energy sources like wind and solar tend to have higher costs than conventional sources like fossil fuels, largely because they are still emerging technologies. The costs for renewables have declined substantially in recent years, but key factors like high upfront capital costs, intermittent output, small scale, grid integration challenges, and lack of subsidies continue to make them more expensive in many situations.
However, as technology improves, scale increases, and experience grows, the costs of renewables are projected to decline further. Market forces like rising fossil fuel prices and climate change policies are also likely to improve the cost-competitiveness of renewables going forward. With continued innovation and deployment, renewables are poised to become the cheapest option for new electricity capacity in more and more markets in the years ahead.
