RENEWABLES' COST LEAD OVERWHELMS
Philippe Roos - May 21,2021
Renewables are the cheapest option for new power generation across most of the globe and have overtaken gas more permanently on cost-effectiveness grounds, according to Energy Intelligence's latest regional data on the cost of electricity generation, known as levelized cost of energy (LCOE) (NE May13'21). The race for the lowest cost is now between solar photovoltaic (PV) and onshore wind, except in Japan, where the scarcity of real estate handicaps land-intensive renewables. What's more, renewable energy’s cost lead over conventional electricity looks likely to be permanent and to strengthen. Solar PV and wind are set for dramatic growth which, in combination with constantly improving efficiency, is fueling economies of scale and dragging costs down. This will continue regardless of carbon pricing and is likely to boost related technologies such as green hydrogen based on water electrolysis.
Solar PV is the current winner in the Mideast, developing Asia and the US, with LCOEs as low as $35-$36 per megawatt hour. That's a 20%-25% drop from last year and down an astonishing 85% from a decade ago. It gives renewables a much firmer lead over gas, which has often been neck-and-neck with PV and onshore wind in recent years. In Europe, where sunlight conditions are modest in many countries, wind -- at $57/MWh -- displaces both gas and PV.
Looking ahead, recent PV transactions in optimal sunlight locations give a good preview of future costs. Saudi Arabia holds the current record-low bid for PV, at just over $10/MWh for the 600 megawatt Shuaibah project, which was announced last month (NE May6'21). Once unthinkable, multiple PV deals have been signed at $25/MWh or below in the past year or two in countries as diverse as Abu Dhabi, Brazil, Chile, Dubai, Mexico, Portugal and the US.
These projects not only enjoy bright sunlight but also cheap financing, which is critical for capital-intensive assets. In the report, Energy Intelligence uses a conservative 6%-7% post-tax weighted average cost of capital (WACC). A 2.5% WACC, which is common in advanced markets such as Germany, would bring PV's LCOE in Europe down to $45/MWh, from $69/MWh. The same cheap WACC combined with the Mideast-level sunlight -- twice that of Europe -- puts it down to $22/MWh. Assuming that capital and operating costs drop by the same 10% this year as last year, the $20/MWh mark will be reached for top-quality projects commissioned next year, in line with recent bids in the Mideast and Latin America.
Cheap New Norm
Longer term, learning-rate analysis suggests that $25/MWh could become the norm by 2030 even in subpar locations, and $10/MWh is a not unrealistic midcentury target. PV's learning rate -- that being the rate at which capital costs decline every time capacity doubles -- has grown from an already impressive 20% or so since 1976 to over 40% in the past decade. This was caused by a recent acceleration in the standardization of materials and manufacturing tools in China, which has reinforced economies of scale. Based on the International Energy Agency's PV capacity projections and the same 40% learning rate as in recent years, that would translate to LCOEs of $17-$24/MWh by 2030 and $11-$16/MWh by 2040.
How Cheap Will Solar Become?
Wind trends are equally impressive (NE Sep.10'20). In a recent survey by the US' Lawrence Berkeley National Laboratory, industry experts gave an average projection for the decline in LCOEs of 27% over 2019-30 and 37% over 2019-50 for onshore wind, and 35% and 49% for fixed-bed offshore wind over the same periods, respectively. That would translate into LCOEs at $26/MWh for onshore wind and $46/MWh for offshore in the US by 2050, down from today's $41/MWh and $91/MWh.
Little Need for Carbon Price
PV currently displaces fossil fuels on cost grounds in the Mideast, developing Asia and the US without any carbon pricing. Europe is slightly different. Without carbon pricing, combined-cycle gas turbines (CCGT) would still be the cheapest technology there and beat onshore wind by a thin margin, at $52/MWh against $57/MWh.
But this is no longer true with carbon emission prices at $50 per ton and over, as they currently are (NE May20'21). At $50/ton, a European CCGT must pay $17/MWh for emission credits, or about a quarter of its total LCOE, at $69/MWh. By comparison, the same CCGT's fuel cost amounts to $29/MWh with gas at the current 12-month average price of $4.70 per million Btu, and its capital cost to the same $17/MWh as its carbon cost.
Looking ahead, however, carbon pricing's impact on future renewable penetration globally will be limited under most projections, given how quickly solar and wind costs are expected to fall. Rather than boosting renewables, carbon pricing could help to permanently trigger coal-to-gas switching at existing power plants, the data suggest.
It would also help carbon capture and storage (CCS), which would need a carbon price of around $75/ton in developing Asia and $90/ton in Europe and the US to displace unabated coal with today's technology and fuel prices. With a 30% cost reduction, which CCS would probably achieve quickly if it took off, that could be brought down to $45-$50/ton.
The problem is that, at $45/ton for carbon emissions and the current $2-$3/MMBtu for coal, the cost of generating power even at an existing, fully depreciated coal plant retrofitted with advanced CCS would be $65-$75/MWh. This is not competitive with current solar and wind costs, much less with future ones. The story is similar for gas-fired plants: A CCGT with CCS and gas priced at $2.50/MMBtu has LCOEs at around $75/MWh for a new plant and at least $50/MWh for a retrofit, current data suggest. Arguably, these competitive dynamics make it unlikely that CCS will ever gain significant market share in the power sector.
Philippe Roos is a senior reporter at Energy Intelligence based in Strasbourg, France. The full report and methodology originally appeared in EI New Energy (NE May13'21).