Renewable Energy Almost Price Competitive With Oil And Gas


Outside of Alaska and Hawaii, oil hasn’t been used in meaningful amounts to generate electricity in the United States for decades.  Two of the main climate friendly alternatives: nuclear power and hydropower have stalled for independent reasons related to their perceived environmental impact and safety (and inherent limits on how much hydropower can be generated from geography).

Natural gas has increased its market share largely because it makes meeting environmental regulations easier and is cheap to use to produce power once you buy it, but natural gas is more expensive to harvest and more scarce than coal, although its prices have been less subject to geopolitics because it has historically been hard to transport without pipelines.  The residual is coal, for the very simple reason that it is cheap because it is abundant and inexpensive to strip mine.

Until a decade or two ago, other renewables made up a negligible share of the electricity generation mix.  But, in places like Colorado and New Mexico there has been a dramatic upturn in wind and in solar use.  This has both driven and been driven by, falling prices for solar and wind powered electricity generation.

Over the last 5 years, the price of new wind power in the US has dropped 58% and the price of new solar power has dropped 78%. . . . Utility-scale solar in the West and Southwest is now at times cheaper than new natural gas plants. . . . 

We see the latest proposed PPA price for Xcel’s SPS subsidiary by NextEra (NEE) as in NM as setting a new record low for utility-scale solar. [..] The 25-year contracts for the New Mexico projects have levelized costs of $41.55/MWh and $42.08/MWh. That is 4.155 cents / kwh and 4.21 cents / kwh, respectively. Even after removing the federal solar Investment Tax Credit of 30%, the New Mexico solar deal is priced at 6 cents / kwh. By contrast, new natural gas electricity plants have costs between 6.4 to 9 cents per kwh, according to the EIA. (Note that the same EIA report from April 2014 expects the lowest price solar power purchases in 2019 to be $91 / MWh, or 9.1 cents / kwh before subsidy. Solar prices are below that today.)

The New Mexico plant is the latest in a string of ever-cheaper solar deals. SEPA’s 2014 solar market snapshot lists other low-cost solar Power Purchase Agreements. Austin Energy (Texas) signed a PPA for less than $50 per megawatt-hour (MWh) for 150 MW. TVA (Alabama) signed a PPA for $61 per MWh. Salt River Project (Arizona) signed a PPA for roughly $53 per MWh.

Wind prices are also at all-time lows. Here’s Lawrence Berkeley National Laboratory on the declining price of wind power . . . : After topping out at nearly $70/MWh in 2009, the average levelized long-term price from wind power sales agreements signed in 2013 fell to around $25/MWh. After adding in the wind Production Tax Credit, that is still substantially below the price of new coal or natural gas.

Wind and solar compensate for each other’s variability, with solar providing power during the day, and wind primarily at dusk, dawn, and night.

Energy storage is also reaching disruptive prices at utility scale. The Tesla battery is cheap enough to replace natural gas ‘peaker’ plants

Via Marginal Revolution.

In general, renewable energies are seeing technology and mass production drive price reductions that are better than those in the oil and gas industry.

We’ve seen a modest slump in oil and gas prices due to the advent of fracking and reduced demand in a slumping global economy, but the long term trend is still the inexorable march towards Peak Oil.  The issue is not so much that we will run out of oil and gas reserves, as it is that we will run out of cheap to exploit oil and gas reserves, driving the price of oil and gas ever higher until it reaches a natural limit when extracting oil from recently farmed crops becomes price competitive with oil and gas drilling as a way to produce hydrocarbons.

Coal is a tougher nut to crack.  It is priced where it is not just due to production costs, but because as a product, it can capture the lion’s share of the market at whatever price is just a little bit lower than the alternatives.  Falling renewable prices are likely to reduce coal prices which have more room for downward movement than natural gas prices, given production costs.

On the other hand, environmentally and in other respects, coal is awful.  It makes petroleum look good.  Coal produces lots of conventional air pollutants (in addition to toxic and radioactive pollutants that are present in coal in trace amounts) leading to lots of pollution related deaths and permanent harm to the environment including climate change, and it leads to large numbers of production and transportation and generation related accidental injuries and deaths.  If coal were forced through regulation and taxation to bear the full share of the externalities generated by its use, it would be significantly more expensive than what utilities now pay for it.

This is a huge deal.  A shift in the relative prices per kilowatt-hour of electricity generation by different means doesn’t just shift the market a little.  It is the economic equivalent of a phase change in a substance that crosses a critical pressure-temperature threshold.

Unlike individual consumers of other kinds of energy, electrical utilities are extremely well informed economic actors driven almost purely by economic incentives.  A major shift in preferences by a few hundred firms driven by a transition in relative electricity generation prices, particularly in places where electricity demand is expanding due to urban growth, can dramatically and quickly change the mix of fuels used to generate electricity in a matter of a decade or three.

The author of the piece quoted above, based upon historical trends, argues that “Every doubling of cumulative solar production drives module prices down by 20%.” I’m deeply skeptical that this is a sustainable trend, but I don’t disagree that there are meaningful economies of scale that are yet to be realized in solar and wind power, and that there is room for at least one or two more major scientific breakthroughs that meaningfully reduce cost or otherwise make solar and wind power more attractive.  Still, we don’t need many rounds 20% reductions to make solar power generation much more economically attractive; one or two would be enough to make a huge difference.  So, the trend doesn’t really have to be sustainable for very long to make a big difference.

Certainly, we have already come along way.  I remember as a child reading Popular Science in the 1970s during the energy crisis, reading stories about how solar power cost three or four times as much per watt as conventional sources and hoping that someday it would reach parity with conventional sources in cost.

It has taken four decades to reach that point, which is far longer than the optimists thought it would at the time.  But, we have now just about reached that point and that is a big deal, especially in the West and Southwest of the United States, where the natural conditions are best for solar, and where the most important source of energy demand (air conditioning) closely tracks the availability of solar power to meet that demand.

It turns out that almost all of the price reduction has actually come in the last decade:

Graphic from here.

A utopian world with a very large share of renewables in its power grid seems more attainable now than ever.

from Wash Park Prophet
via Denver News

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