Energy costs: Renewables close in on fossil fuels, challenging on price

Nick Cunningham | Oilprice.com

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Coal has been getting the squeeze for years now, but the plunging cost of renewable energy is already starting to give natural gas a run for its money. The implications for the incumbent fossil fuel industry are dire.

“Coal and gas are facing a mounting threat to their position in the world’s electricity generation mix, as a result of the spectacular reductions in cost not just for wind and solar technologies, but also for batteries,” according to a report from Bloomberg New Energy Finance (BNEF).

The surprising finding from the report is that renewable energy is challenging gas and coal in several ways in electricity markets. BNEF says that fossil fuels are getting hit by renewables in bulk generation, dispatchable generation, and the “provision of ‘flexibility.’”

First, bulk generation. Wind and solar have become so cheap on a levelized cost of electricity (LCOE) basis, that they are increasingly representing the go-to source of new electricity generation projects.

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More surprising, however, is the sudden challenge of batteries in the market for “dispatchable power,” where generators must respond to grid demands by ramping up or down power generation. For years, critics of renewable energy have fallen back on the argument that “the sun doesn’t always shine and the wind does not always blow.” That has long been the Achilles Heel of renewable energy – its intermittency, and therefore, its lack of reliability.

But BNEF says that wind and solar are increasingly being paired with energy storage technologies, which allows for “’variable’ sources to smooth output, and if necessary, shift the timing of supply.”

The third segment of the electricity market where renewable energy is threatening fossil fuels is for “flexibility,” or, as BNEF puts it, the “ability to switch on and off in response to grid electricity shortfalls and surpluses over periods of hours.” The falling cost of batteries means that they are “increasingly cost-effective and are starting to compete on price with open-cycle gas plants.”

Up until now, wind and solar costs looked competitive on paper, but the intermittency problem was cited as a reason why renewables would grab only a small slice of the market, a problem that was thought to persist for years to come. But the plunging cost of energy storage might mean that the energy transition unfolds faster than previously anticipated.

The writing on the wall for coal has been clear for some time. But the threat to natural gas was not thought to occur so soon. Natural gas has been billed as a “bridge fuel,” a bridge that could last for decades until the cost of renewable energy came down.

However, the economics are pretty dire for fossil fuels. The LCOE for onshore wind currently stands at about $55 per megawatt-hour (MWh), which is a global comprehensive average that incorporates equipment, construction, financing, operating and maintenance costs, and average run time. That cost is down 18 percent from the first six months of 2017, an impressive and significant decline.

Solar LCOE costs without tracking comes in at $70/MWh, which is also down 18 percent from the first half of 2017.

These averages obscure some truly low-cost wind and solar potential in certain parts of the world. BNEF says that onshore wind in India averages $39/MWh, down by nearly half from 2017. Solar PV in India only costs $41/MWh. That compares favorably to the $68/MWh for coal and $93/MWh for natural gas. In fact, clean energy is cheaper than coal and gas in both China and India.

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To be sure, that doesn’t include energy storage. When adding in batteries to these projects, wind-plus-battery costs $34-$208/MWh and solar-plus-battery costs $47-$308/MWh. BNEF acknowledges this very wide cost range, but noted that “the center of those ranges is falling fast.”

Battery storage alone could soon begin to compete with gas. BNEF says that four-hour battery storage will be competitive with gas by 2025, even where natural gas is incredibly cheap, such as in the U.S.

“Some existing coal and gas power stations, with sunk capital costs, will continue to have a role for many years, doing a combination of bulk generation and balancing, as wind and solar penetration increase,” Elena Giannakopoulou, head of energy economics at BNEF, said in a statement. “But the economic case for building new coal and gas capacity is crumbling, as batteries start to encroach on the flexibility and peaking revenues enjoyed by fossil fuel plants.”

Ultimately, this will undermine the case for coal and gas around the world, perhaps sooner than analysts previously thought. BNEF says that wind and solar will be cheaper than coal in most places in the world by 2023.

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