Why Is The Cost Of Renewable Energy Going Down?

Renewable energy sources like solar, wind, hydroelectric, geothermal and biomass are becoming increasingly popular around the world. Countries are setting ambitious goals to increase the share of renewables in their energy mix in order to reduce carbon emissions and mitigate climate change. The costs of renewable energy have fallen dramatically in the last decade, making them more affordable and competitive with conventional fossil fuels like coal and natural gas.

According to Deloitte’s Global renewable energy trends report, renewables are reaching parity with fossil fuels both on and off the grid. The International Renewable Energy Agency found that the global weighted-average cost of electricity from new solar PV and onshore wind power projects commissioned in 2020 was 83% lower than a decade ago. This massive cost reduction is driving increased adoption of renewables around the world.

Improving Technologies

Advances in renewable energy technologies like solar, wind, and geothermal have significantly reduced costs over the last decade. The solar photovoltaic industry has benefited from improvements in panel efficiency, manufacturing techniques, and economies of scale, dropping PV module costs by over 80% since 2009.

Onshore wind turbines have increased in size and height to capture more wind energy, while blade aerodynamics and drivetrain technology have become more advanced. This has boosted capacity factors for wind farms and lowered the levelized cost. Offshore wind has also made strides as floating foundations allow access to deeper water locations.

For geothermal, enhanced geothermal systems (EGS) and co-production from oil and gas wells have expanded potential resources and development capabilities. Drilling techniques have improved and project developers have gained experience siting high-quality reservoirs.

Overall, increased commercial deployment has driven learning-by-doing, while R&D investments have targeted performance improvements across renewable technologies.

Economies of Scale

As the deployment of renewable energy like solar and wind expands, costs decline through economies of scale. Larger solar and wind farms achieve lower costs per unit of electricity than smaller projects, as fixed costs are spread out over more units of electricity generation. According to IRENA, utility-scale solar PV costs declined by 6% for every doubling in capacity between 2010 and 2019 (IRENA, 2021). As the scale of renewable energy projects has grown larger, manufacturers have been able to produce components at higher volumes, bringing down costs through economies of scale and more efficient production.

For example, as the average size of wind turbines has increased from 1.5-2.5 MW in 2000 to 4-5 MW today, the cost per MW of wind power capacity has fallen by nearly 30% (Institute for Local Self-Reliance, 2016). Larger wind turbines capture more wind energy and produce more electricity from a given site. Similar trends are seen in the solar industry, where larger production volumes of solar panels and inverters have driven down hardware costs dramatically.

Competition

A major reason why renewable energy costs have fallen is due to increasing competition in the renewable energy marketplace. As more companies enter the renewable energy industry, they are innovating to improve technologies and reduce costs in order to remain competitive. With more players and products available, consumers have more options to choose from. This spurs companies to enhance performance and lower prices, as they aim to attract more customers in an expanding but contested market. Intensifying competition has been an important driver of the dramatic cost declines seen in renewable energy over the past decade.

Manufacturing Improvements

One key driver in reducing renewable energy costs is streamlining production and reducing hardware costs. According to the International Renewable Energy Agency (IRENA), improvements in manufacturing techniques and production efficiency have led to significant declines in solar panel costs (source). For example, automation and optimized supply chains have enabled economies of scale. Manufacturers have also been able to cut costs by using cheaper materials, reducing silicon usage, and minimizing waste in production.

In addition, manufacturers are employing new techniques like diamond wire sawing to cut silicon wafers thinner, enabling each solar panel to produce more energy. R&D investments have also led to increases in panel efficiency and lower balance-of-system costs. Overall, streamlining and cost reductions in manufacturing have been instrumental in driving down the levelized cost of electricity from solar PV.

Government Incentives

Governments have implemented various incentives to drive down the cost of renewable energy and encourage adoption by homeowners and businesses. Major incentives include federal tax credits, grant programs, rebates, and renewable energy targets. For example:

The federal solar Investment Tax Credit (ITC) provides a tax credit for 30% of the cost of installing a solar photovoltaic system until 2032. Homeowners can receive the credit directly on their taxes or work with solar companies to monetize the credit upfront (Homeowner’s Guide to the Federal Tax Credit).

Many states and utilities offer additional rebates and incentives for solar installations. Programs like California’s Self Generation Incentive Program (SGIP) provide thousands in additional incentives for home solar and storage (Homeowner’s Guide).

The Inflation Reduction Act of 2022 also includes new clean energy tax credits and grants to continue driving down costs (White House Brief).

Falling Fossil Fuel Prices

The declining cost of renewable energy sources can be partially attributed to falling prices for fossil fuels like oil, coal, and natural gas. Fossil fuels have historically dominated energy production due to their relatively low cost and abundance. However, prices for fossil fuels can fluctuate dramatically based on supply and demand. In the early 2000s, prices for oil and natural gas began to rise steadily. This made the cost gap between fossil fuels and renewables smaller, making renewables more economically competitive.

However, starting around 2014, fossil fuel prices dropped significantly due to oversupply and lackluster demand. Abundant shale oil and gas production in countries like the U.S. led to global oversupply. Meanwhile, slowing economic growth in major markets like China reduced energy demand. Lower fossil fuel prices have made it more challenging for renewable energy sources to compete on upfront costs.

Despite lower fossil fuel prices, renewables continue to fall in cost due to technology improvements, manufacturing scale, and incentives. The US Energy Information Administration predicts renewables will continue gaining market share from fossil fuels in the long run. But short term drops in oil, gas, and coal prices do create headwinds for renewables competing on initial cost. The price ratio between fossil fuels and renewables remains a key factor in adoption.

Energy Storage

The development and deployment of low cost energy storage solutions like batteries is helping drive down renewable energy costs. As more renewable energy comes online, energy storage is needed to smooth out supply and store excess capacity. Advances in lithium-ion batteries have significantly brought down costs. According to IRENA, the cost of utility-scale lithium-ion batteries has fallen nearly 90% since 2010. Further improvements in battery technology like solid state batteries could provide greater efficiency and storage capacity. The declining price of batteries and energy storage solutions enables more renewable capacity and further cost reductions across the grid.

Investor Interest

There has been growing investment and financing for renewables around the world. According to the International Renewable Energy Agency, global investment in renewable energy has been increasing steadily for years, reaching over $300 billion in 2021 (source). This growth in investment has been driven by several factors:

First, renewable energy technologies like solar and wind have become cost-competitive with fossil fuels, providing investors with a higher rate of return (source). As costs continue to decrease, investment opportunities in renewables become more attractive.

Second, there is growing policy support and public pressure for renewables and decarbonization around the world. Many governments are enacting incentives and targets to increase renewable energy deployment, sending positive signals to investors.

Finally, financial institutions and large corporations are making major commitments to renewable energy and carbon neutrality goals. Major pension funds, insurance companies, banks and businesses want to capitalize on the renewable energy boom and are directing more capital into wind, solar, and other technologies.

With strong projected growth in renewable energy over the next decades, investment opportunities abound. This influx of financing has been crucial in allowing the renewable energy industry to expand and drive down costs through economies of scale.

Conclusion

In summary, the cost of renewable energy has been declining due to a combination of technological improvements, economies of scale, increased competition, more efficient manufacturing processes, government incentives, falling prices of fossil fuels, advancements in energy storage, and growing investor interest. The outlook for the future is that costs will likely continue to decrease as these trends persist, making renewable energy increasingly cost-competitive with conventional energy sources.

With more investment and R&D, we can expect to see continued innovation that drives down costs through better designs, materials, and manufacturing techniques. As renewable technology diffuses into the mainstream, scale effects will also reduce costs. Market dynamics and policies that advantage renewables over fossil fuels will further accelerate cost reductions.

If these trends continue as expected, renewable energy will become the obvious economic choice for new electricity capacity in most markets within the next decade. This transition will play a major role in reducing greenhouse gas emissions and mitigating climate change. The future is bright for renewable energy to transform into the dominant energy paradigm globally.