Wind and Solar – Cheapest Electricity Source?

Wind and Solar – Cheapest Electricity Source?

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Wind power is now the cheapest electricity to produce in both Germany and the U.K. even without government subsidies, according to a new analysis by Bloomberg New Energy Finance (BNEF). The BNEF report analyzed thousands of pieces of data from international business deals and agreements to estimate the actual costs associated with each type of energy.

The news from the clean energy industry here in the U.S. is even more interesting.

For the first time widespread adoption of renewables is effectively lowering the ‘capacity factor’ for fossil fuels.

What’s the ‘capacity factor’ you ask? It’s simply the percentage of a power plant’s maximum potential that’s actually achieved over time.

Consider a solar project. The sun doesn’t shine at night and its intensity can be greatly affected by the weather, the seasons, and finally where the project is located. A solar farm that produces 100 megawatts during the sunniest part of the day and nothing at night might produce just 20 percent of that when averaged out over a year – a 20 percent capacity factor.

Fossil fuel plants, on the other hand, have very high and predictable capacity factors. The average U.S. natural gas plant, for example, might have a 70 percent capacity factor because more fuel can always be added if necessary.

Once a solar or wind project is built and operating the marginal cost of the electricity it produces is pretty much zero – free electricity – while coal and gas plants require more fuel for every new watt produced. If you’re a power company with a choice you choose the free stuff every time.

As Bloomberg pointed out in announcing the report’s findings, “It’s a self-reinforcing cycle. As more renewables are installed, coal and natural gas plants are used less. As coal and gas are used less, the cost of using them to generate electricity goes up. As the cost of coal and gas power rises, more renewables will be installed.”

There are two reasons this shift in capacity factors is important.

First, it shows again the ever increasing impact the clean energy industry and its technological advancements are having on the energy world. It’s impossible to brush aside renewables in the U.S. in the same way it might have been just a few years ago.

“Renewables are really becoming cost-competitive, and they’re competing more directly with fossil fuels,” said BNEF analyst Luke Mills. “We’re seeing the utilization rate of fossil fuels wear away.”

Second, it makes investing in new fossil fuel power plants very risky for the major utility companies. A high capacity factor has always been a comforting piece of the deal when they are spending a billion dollars to build a new natural gas facility that’ll operate for decades to come. They knew that the plant would be operating, and making profits, throughout its lifespan.

Now, though, as renewable energy sources continue to increase their share of the the electricity market nationwide, the expensive plants are sitting idle a lot more often. As pointed out above, when utility corporations are given the choice between creating energy from a costly fuel or a free fuel, the latter choice always wins.

Wind power, including U.S. subsidies, became the cheapest electricity in the U.S. for the first time last year. Without the subsidies, which effectively end by the end of 2017, wind is still expected to be cheaper than coal and gas within a decade.

Wind’s growth is being propelled by cost reductions of two-thirds over the last six years, which now makes wind the lowest-cost source of new generation,”
- said Tom Kiernan, CEO of the American Wind Energy Association (AWEA)

The costs for solar power production are following the same path as wind, with new technologies in construction and declining costs for financing new projects has impacted the industry, as the following state-by-state chart indicates. (Courtesy BNEF, Bloomberg)

Cost of Solar vs Coal & Gas – State by State

Screen Shot 2016-04-28 at 3.52.13 PM

The economic advantages of wind and solar over fossil fuels go beyond price. They also provide predictable electricity prices and a stable return on investments.

Still, it’s remarkable that in every major region of the world, the lifetime cost of new coal and gas projects are rising considerably, according to BNEF. And in every major region the cost of renewables continues to fall.

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