Levelized cost of energy update – what barriers remain for wind and solar as costs continue to drop below fossil fuels?

A version of this article was published on Utility Dive on March 21, 2018

By Silvio Marcacci & Mike O’Boyle

We launched America’s Power Plan five years ago under the premise that renewables growth would soon accelerate, and therefore we needed to proactively examine and reform institutions that impede a high-renewables, low-cost, reliable grid.  Siting and permitting, transmission construction and planning, utility business models, wholesale markets, finance, and distributed energy resource planning and compensation are all areas where policy lags behind technology and institutions threaten to stymie growth.

Now renewable technologies have reached an inflection point: Rapid cost declines in renewable energy technologies made them the cheapest available sources of new electricity, even without subsidies, in 2017.  In many locations across America, building new wind energy projects is cheaper than running existing coal-fired power plants.

Despite the Trump Administration’s rhetoric and policy proposals to boost fossil fuel economics, economic tailwinds are behind wind, solar, and complementary technologies like storage and demand response.  Updated levelized cost of energy (LCOE) data and forecasts from international energy analysts show that renewable energy costs keep falling, making changing outdated institutions more urgent than ever.

Levelized cost of energy plummets for wind and solar

The 2017 edition of Lazard’s annual Levelized Cost of Electricity (LCOE) study showed unsubsidized onshore wind and utility-scale solar are both cheaper than new coal, and are cost-competitive with new combined-cycle natural gas. LCOE provides a basis for comparing the economics of different generation technologies by measuring the total cost (including financing) of building and operating a power plant over its assumed lifetime. Think of it as evenly comparing apples to oranges.

Part of what LCOE fails to capture is the value different types of energy.  Energy’s value changes based on its attributes, such as time of day and season, pollution, location, reliability, ability to change output, and ability to provide other essential reliability services.  So LCOE is a starting point to decide what resource is the best fit for a certain set of needs or services.  Still, it gives a fair basis for comparing the cost of power from different sources.

source: Lazard Levelized Cost of Energy 2017

Lazard reports the mean unsubsidized LCOE for utility-scale solar to $50/MWh in 2017, while the mean LCOE for wind energy fell to $45/MWh.  In resource-rich areas like the desert Southwest or Great Plains, this gets even cheaper – solar as low as $43/MWh and wind as low as $30/MWh were reported in the Lazard study, cheaper than the cheapest new combined cycle natural gas plant.

Of course, these prices don’t reflect the federal subsidies currently in place which make wind and solar even more affordable today.  These additional incentives have yielded some incredible numbers in recent solicitations.  For example, Public Service Company of Colorado recently issued a request for bids from developers for 615 megawatts of generation.  The results were astounding – the median for wind bids was less than $20/MWh (meaning half the bids were lower), while the median solar bid came in under $30/MWh.  Wind and solar are not only the cheapest sources of power money can buy in Colorado, they’re cheaper than keeping old coal plants running on a marginal cost basis.

Results of Xcel 2017 all-source solicitation

 

Wind and solar installations drove down prices

Wind and solar prices dropped precipitously as their deployment increased, validating one rationale for federal tax incentives and state-level renewable portfolio standards (RPS), which drove the majority of early deployment.  As the LCOE for utility-scale solar fell 85 percent from $350/MWh in 2009 to less than $50/MWh in 2017, cumulative installations rose from 1 GW to more than 30 GW over the same period.

 

Onshore wind is even cheaper than solar is most of the U.S., with nearly triple the installations. The LCOE for wind energy declined 50 percent from around $135/MWh in 2009 to less than $45/MWh in 2017, as cumulative onshore wind installations rose from around 35 GW to 84 GW in over the same period.

 

These declines outstripped the cost trends for natural gas-combined cycle (down 27 percent), coal (down 8 percent), and nuclear (up 20 percent) from 2009 to 2017, flipping a decades-long economic story that once favored conventional fuel-fired generation.  Now the country’s largest corporate buyers are meeting their clean energy goals while saving on their bottom lines.  Utilities are dramatically revising their integrated resource plans to include more renewables.  Clean is cheap.

Renewable energy costs will continue falling

The story doesn’t end here.  Assuming utilities, power markets, transmission development, and other institutions can change, renewable deployment will continue or accelerate its pace, while costs will continue falling.

The National Renewable Energy Laboratory’s (NREL) Annual Technology Baseline (ATB) 2017 predicts wind and solar will get even cheaper. NREL considers recently installed and anticipated near-term projects to forecast onshore wind’s most likely mid-range LCOE will be $39/MWh in 2020, $33/MWh in 2030, $31/MWh in 2040, and $28/MWh in 2050. Similarly, NREL forecasts utility-scale solar’s most likely mid-range LCOE will be $51/MWh in 2020, $45/MWh in 2030, $41/MWh in 2040, and $37/MWh in 2050. By comparison, NREL forecasts the LCOE of conventional fuel-fired generation will hold steady or even increase.

Utility CEOs are even more bullish.  On a 2017 Q4 earnings conference call, the CEO of NextEra, one of the largest independent power producers and utility companies in the U.S., predicted that by the early 2020s, it will be cheaper to build unsubsidized new renewables than to continue running existing coal and nuclear plants.  Xcel’s Ben Fowke is betting big on renewables as well, announcing the company will reduce carbon emissions 80 percent below 2005 levels by 2030, with 60 percent renewable energy.  Fowke says the plan’s main goal is affordability; it’s intended to keep customer bills at or below the consumer price index.

These trends could double installed U.S. renewable energy capacity by 2020. The Federal Energy Regulatory Commission’s most recent Energy Infrastructure Update expects 116 GW of proposed utility-scale solar and wind net additions to come online by December 2020, roughly twice the current total installed generation capacity of 115.5 GW. Wind would add 72.5 GW (with only 68 MW of retirements) while utility-scale solar would add 43.5 GW new capacity (with just 2 MW of retirements). The same scenario sees significant coal retirements, an unchanging nuclear fleet, and much more natural gas build, putting solar and wind at a combined 16.7% of total capacity.

Reaffirming the need to reform institutions and promote complementary technologies

U.S. grid operators are already integrating higher penetrations of wind and solar energy without risking reliable power supplies, but fully capitalizing on cheaper renewable energy relies on regulators and utilities collaborating on several important policy actions.

First, wholesale market design should create value streams for resources that shift supply and demand from times of renewable excess to times of deficit, a service we often call grid flexibility.  FERC’s landmark Order 841, which requires wholesale markets to create a “participation model” for electric storage resources, is an important milestone. Future rules concerning distributed energy resource aggregation should provide points of entry for demand-side resources to provide the same services in energy and ancillary services markets.  Additional recommendations are in the recent America’s Power Plan report, A Roadmap for Finding Flexibility in Wholesale Markets.

Second, utilities need strategies to retire older generation that is no longer profitable while dedicating funds to assist communities affected by closures.  Even when replacing existing coal with new renewables would save customers money, vertically integrated utility balance sheets may nevertheless have undepreciated balances in the hundreds of millions for those now-stranded assets.

Third, aligning the financial incentives of utilities with a more efficient, clean system can reduce barriers to customers providing much-needed flexibility.  We already know through pilot programs in California and New York that demand-side alternatives to gas-fired peakers and bulky distribution upgrades can be cost-effective.  And we’re only scratching the surface. Systematic changes to how utilities make money, such as performance-based regulation, can create new revenue streams for utilities to maximize efficiency and find innovative solutions to integrate renewables.

Finally, streamlined siting and transmission planning and access are keys to keeping the cost and risk low for renewables development.  Renewable resources are often far from electricity-hungry cities and factories.  Siting wind and solar can require large tracts of land, and transmission to access it can criss-cross between environmentally sensitive ranges, between federal, state, and private lands.  But development doesn’t have to come at the expense of our natural resources.  Early consultation, landowner-friendly compensation structures, and pre-screened development areas such as renewable energy zones in the Western Interconnection, Texas, or offshore, can dramatically reduce risks to developers while protecting natural areas and other rights of way.

By focusing on policies that work with changing U.S. energy economics, utilities can improve their bottom line and regulators can reduce consumer costs, while accelerating the clean energy transition.