Wind and Solar Costs Are Plummeting: Now What Do We Do?

By Mike O'Boyle

For years, debates about how to reduce carbon emissions from electricity generation were framed as trade-offs: What is the cost premium we must pay for generating zero-carbon electricity compared to fossil fuels, and how can we minimize those costs?

Fortunately, the holidays came early this year for renewable energy: In investment company Lazard’s annual report on the levelized cost of energy (LCOE) for different electricity-generating technologies, renewables are now the cheapest available sources of electricity. This flips the question of clean-versus-cost on its head. And in 2017, we’ll be asking: How much can we save by accelerating the renewable energy transition?

The story from Lazard’s 10th annual report is clear. Rapid technology cost reductions mean wind and solar are now the cheapest form of generation in many places around the country, without federal subsidies like tax credits.

What does levelized cost of energy mean?

Lazard uses LCOE analysis to identify how much each unit of electricity (measured in megawatt-hours or MWh) costs to generate over the lifetime of any power plant. LCOE represents every cost component – capital expenditure to build, operations and maintenance, and fuel costs to run – spread out over the total megawatt-hours generated during the power plant’s lifetime.

Because different plants have different operating characteristics and cost components, LCOE allows us to fairly compare different technologies. Think of it as finally being able to evenly compare apples to oranges.

How wind and solar are winning the day

According to Lazard, wind costs have fallen 66 percent since 2009, from $140/MWh to $47/MWh.

Large-scale solar’s cost declines are even more dramatic, falling 85 percent since 2009 from more than $350/MWh to $55/MWh.

The case is even clearer when federal subsidies are considered: Tax credits drive renewable energy costs down to $31/MWh for wind and $43/MWh for solar. These low prices are not only cheaper than building new natural gas plants, but they are also cheaper than many fossil fuel power plants on their marginal cost (i.e. costs for operating, maintaining, fueling, etc.) alone.

In other words, it’s now cheaper in many places to build new wind or solar energy plant than it is to simply continue running an existing coal or nuclear plant:

 

What does it all mean?

Even with these new numbers, more natural gas plants are being built every week, expensive coal is not retiring as fast as economics would dictate, and the rapid transition to renewable energy isn’t happening fast enough to prevent the worst effects of climate change.

At least three stodgy institutional barriers limit renewable energy deployment today:

1. Difficulty accessing high-quality wind and solar resources


2. Misguided alarmism about the reliability of renewables


3. Misconceptions of the cost of running the grid with more renewables

While just wind and solar alone could potentially power the entire U.S. many times over, the windiest and sunniest (and thus cheapest) places to generate wind and solar power are often in remote locations, far from large cities with lots of power demand. Costly, drawn-out processes for siting transmission and power plants make these projects unnecessarily expensive and stifle investment. Policymakers can turn to America’s Power Plan for recommendations on streamlining the siting process and limit local impacts to create policy that reduces siting costs for renewables in the U.S.

Managing America’s grid with variable renewables also requires rethinking how we operate and plan our electricity systems, and many utilities have been slow to adapt. Grid operators sometimes claim we need to back up solar and wind an equal ratio of fossil fuel power plants like coal or gas for “when the sun doesn’t shine and the wind doesn’t blow," but that’s just not true. Adding wind and solar can reduce the risk of a large outage – what are the odds the wind unexpectedly stops blowing everywhere or the sun is suddenly blotted out by clouds everywhere? In fact, government analysis shows we could quadruple the amount of wind and solar on the grid today without running into reliability issues.

Besides reliability, defenders of the old paradigm of large, fuel-fired power plants argue wind and solar come with integration costs, i.e. backup generation and transmission lines to connect remote locations to the grid. But attributing these costs to any one technology makes little sense across a big grid, where a diverse mix of power generation naturally smooths variability like an index fund versus a single volatile stock, for example.

Gas, coal and nuclear power also require new transmission, fuel supply and storage, and large backup reserves. Like renewable sources, they also have “integration costs,” even without accounting for the health and climate costs of carbon dioxide and other pollution.

A new paradigm

Transitioning our electricity sector away from fossil fuels is no longer just an environmental imperative; it’s an economic one. Free markets now favor solar and wind — look no further than gas-rich Texas for evidence: Texas has over three times more wind capacity than any other state, and solar is expected to grow 400 percent by 2022.

Outdated policies leave us unprepared to take full advantage of the rapid cost declines we’re seeing in the wind and solar industry. The time is now to radically adjust for a paradigm where wind and solar form the backbone of our electricity grid.

Images courtesy of America's Power Plan

Mike O’Boyle is the Power Sector Transformation Expert at Energy Innovation, where he works on policy and technology solutions for a clean, reliable, and affordable U.S. electricity system. Mike is also a leading expert for America’s Power Plan, a platform for innovative thinkers to reform utility regulatory models and identify opportunities for grid transformation and optimization. He has worked with stakeholders states including California, New York, Hawaii, and Minnesota to improve links between public policy goals and electric utility motivations. Mike has authored reports on topics including distributed energy resource ownership and operation, mechanisms for adopting performance-based regulation, and proper valuation metrics for utility compensation. He graduated cum laude from Arizona State University’s Sandra Day O’Connor College of Law, and has a B.A from Vanderbilt University in Philosophy and Asian Studies, with a minor in Economics.