Why Did Renewables Become Cheap So Fast?

Renewable energy sources such as solar and wind power have seen dramatic cost reductions in recent decades. Understanding the drivers behind the rapidly falling costs of renewables is critically important, as it has enabled these technologies to become cost-competitive with fossil fuel energy sources. This cost competitiveness has allowed renewables to be deployed at large scales around the world and has transformed them into mainstream electricity sources. Analyzing why renewables became inexpensive so quickly provides insights into the key factors enabling clean energy growth, and can inform future policies and investment decisions to further accelerate decarbonization of the energy sector.

Technological Improvements

Advances in technology have significantly improved the efficiency and affordability of both solar panels and wind turbines in recent years. New solar panel designs have increased efficiency from around 15% to over 20% in the past decade alone (Source: https://www.landgate.com/news/technology-updates-for-solar-panels-and-wind-turbines). This allows solar panels to convert more sunlight into electricity with the same footprint. Meanwhile, innovations in wind turbine design have focused on increasing blade length and optimizing blade shape, allowing modern turbines to capture more wind energy (Source: https://www.nrel.gov/news/program/2023/technology-advancements-could-unlock-80-more-wind-energy-potential-during-this-decade.html). Some new designs also integrate solar panels directly onto the turbine tower to maximize energy generation per unit (Source: https://www.imnovation-hub.com/energy/new-generatiom-wind-turbines-photovoltaic-panels/).

Manufacturing Scale

Mass production of solar panels and wind turbines has brought down costs significantly through economies of scale. Global solar PV manufacturing capacity increased by over 70% in 2022, reaching around 640 GW (IEA). China accounts for around 80% of global solar panel production, enabling very low manufacturing costs through enormous scale (PV Magazine). U.S. solar panel manufacturing capacity is expected to triple to 21 GW by 2023 as new factories come online. The rapid growth in production capacity for renewable energy technologies has driven down costs and improved efficiency.

Supportive Policies

Governments at all levels have implemented policies to encourage renewable energy growth and adoption. Two major policy drivers have been government subsidies and renewable energy targets.

Many governments provide subsidies like tax credits, grants, and other incentives to support renewable energy development and deployment. For example, federal tax credits have helped make wind and solar more affordable in the U.S. by offsetting some project costs for developers (State Renewable Portfolio Standards and Goals).

Governments have also created renewable portfolio standards (RPS) that require utilities to source a minimum percentage of their electricity from renewable sources by a target date. As of 2021, 30 states and Washington, D.C. had mandatory RPS policies, while 8 states had non-binding renewable energy goals (Renewable energy explained – portfolio standards). These policies provide guaranteed demand that enables renewable energy companies to invest in scaling up technologies and reducing costs.

Competition

Increased competition between renewable energy companies has been a major driver in reducing costs. In the early 2000s, there were only a handful of major manufacturers of solar panels and wind turbines. Today, there are hundreds of companies around the world competing in the market.

According to Bloomberg, the 10 biggest solar module suppliers accounted for only 62% of the market in 2021, down from 95% in 2011. More competition means companies must innovate and lower prices to stay in business.

The increased competition has driven rapid technological improvements and manufacturing efficiencies, as companies strive to undercut each other on price. It has also spurred new business models and financing options to attract customers. Overall, the competitive marketplace for renewables is a major reason costs have fallen so dramatically.

Low Operation Costs

One of the main reasons renewables like solar and wind have become cheap so quickly is their low operation costs compared to conventional sources like coal and natural gas. As the 2021 Cost of Wind Energy Review points out, wind and solar power do not require any fuel to generate electricity. This gives them a significant advantage over fossil fuels which require continual purchases of coal, gas or oil to operate.

According to the Department of Energy, fuel costs make up a significant portion of the total operating costs for fossil fuel plants, around 30-60%. In comparison, wind and solar plants have virtually zero fuel costs since their “fuel” – sunlight and wind – is free. This gives renewables a structural cost advantage and protection against fuel price volatility. As fuel and operating costs for natural gas and coal plants continue to rise, the operating cost gap between renewables and fossil fuels widens even further.

The lack of fuel costs for wind and solar also provides long-term price stability. Once built, the operating costs of renewable assets are fixed, predictable and immune to market shocks. This contrasts with gas and coal where prices can swing wildly based on market conditions. Renewables’ inherent price stability is extremely valuable for consumers and the overall power system.

Falling Costs of Raw Materials

The costs of key raw materials needed for renewable energy technologies like solar panels and wind turbines have fallen substantially over the past decade. This includes materials like silicon, steel, aluminum, and others.

For solar panels, the cost of polysilicon, the key raw material for most solar cells, has declined by around 90% since 2008 (Comparative Cost Analysis). This drop in silicon prices has been driven by more efficient manufacturing processes and economies of scale as the solar industry has rapidly expanded.

Similarly, steel and fiberglass are major components for wind turbine blades and towers. Prices for steel have fallen due to oversupply and weakness in global demand in recent years. The price decline for materials like steel and fiberglass has helped reduce wind turbine costs by 20-40% over the last decade (IEA).

With renewable energy expected to continue growing rapidly, increasing economies of scale in the production of raw materials should lead to further modest declines in prices. This will help drive down overall system costs for solar and wind power.

Economies of Scale in Installation

As the renewable energy industry has scaled up, companies have gotten much faster and cheaper at installing solar panels, wind turbines, and other equipment. Installers have developed better techniques and standardized processes to reduce costs and construction times. According to the International Renewable Energy Agency (IRENA), the average time to install a wind farm fell by 29% between 2010 and 2019. Similarly for solar PV, installation times have dropped by 69% in that period¹.

With streamlined installation, renewables can be deployed very rapidly. For example in 2020, China installed 72 GW of new solar capacity, more than doubling the amount installed in 2019². As companies get better at installing renewable equipment at scale, the fixed costs of construction continue to fall.

Financial Innovations

One key factor in lowering costs for renewable energy has been the development of new financing models that reduce the cost of capital. Traditionally, renewable energy projects required large upfront investments that deterred adoption. But innovations like solar leasing and third-party Power Purchase Agreements (PPAs) have opened up renewable energy to more customers by eliminating the need for high upfront costs.

With solar leasing, a third-party owner installs a solar energy system on a customer’s property at little to no upfront cost. The customer then makes monthly lease payments to the owner in exchange for the power produced by the system. This shifts the upfront capital expenditure from the customer to the third-party owner, who can raise capital more cost effectively [1]. Major players in solar leasing include SunRun, SunPower, and Vivint Solar.

Similarly, a PPA allows a third party to install a solar system on a customer’s property with no upfront cost, and sell the power generated to the customer at a fixed rate. The third party handles system maintenance and financing. By securing low-cost financing and government incentives, the third-party provider can offer PPAs at very competitive rates compared to utility retail electricity [2]. This has stimulated rapid growth in renewable energy adoption.

The emergence of new financing models has been critical to reducing the cost of capital for renewable energy projects, enabling more widespread adoption.

Conclusion

In summary, the rapid cost declines for renewables such as solar and wind over the past decade have been driven by a combination of technological improvements, economies of scale in manufacturing and installation, supportive government policies, intense competition, and financial innovations. The speed at which costs have fallen has exceeded expert predictions and demonstrates the power of market forces and focused policies to quickly drive down costs for new energy technologies. Key factors that enabled renewables to become cost-competitive with fossil fuels in many locations globally within just 10-15 years include advances in turbine and panel efficiency, larger-scale manufacturing, lower operation and maintenance costs, and new financing models like power purchase agreements. Moving forward, renewables are poised for continued cost reductions and wider adoption worldwide as they offer an economical path to a clean energy system.