Renewable energy continues to be the future fuel source of choice for power generation. The benefits of renewables – and here we’re speaking primarily of wind, solar – to deliver carbon-free electricity and address climate change and air pollution are well known. If these energy sources can compete on price as well as environmental performance, their adoption will be far quicker.
Data and market analysts suggest that the costs of renewable energy overall is dropping quickly, even as preferential tax treatment for wind and solar are scheduled to be phased out. The outlook for the price competitiveness of renewables looks bright, but is the industry at a point where it can stand on their own?
Current Cost of Wind and Solar
The past decade has seen the cost of renewable energy drop consistently in the United States, as well as in much of the rest of the world. Advances in technology have improved the efficiency of renewable generation, while improvements in the manufacturing process has helped bring down production costs. The result is more affordable renewable energy.
Looking at global electricity costs in 2018, data from the International Renewable Energy Agency (IRENA) shows how costs across different renewable technologies have dropped.
Breaking these costs down into a single number is difficult as different nations face varying costs. Additionally, soft costs, hardware costs, and installation costs all vary significantly in different countries as the following chart shows.
Breaking down costs for the United States, IRENA found that U.S. onshore wind energy cost $0.048 per kilowatt hour (kWh) in 2018 – a 66 percent drop from costs in 1984. Utility scale solar cost $0.082/kWh – a 60 percent drop from eight years earlier.
Comparing Renewable Costs With Other Generation
The reduction in costs achieved by renewables is impressive, but only so far as it makes them competitive with traditional fossil fuels.
The U.S. Energy Information Administration (EIA) tracks levelized costs and levelized avoided costs to approximate relative values. These metrics are imperfect and do not account for some unique attributes of different energy sources. Fossil fuel plants may be more expensive to operate than nuclear, but nuclear is more expensive to build. Natural gas is dispatchable, meaning these plants can be turned on and off quickly to match demand, while renewables like wind and solar rely on external factors to determine if they can generate. Some of these attributes come with their own advantages to the utility industry.
In the end, though, these levelized costs can provide a suitable starting point for comparing costs of generation sources. The EIA analysis below shows the relative affordability projected in the coming years of renewable energy sources compared with their traditional nonrenewable counterparts.
In terms of direct comparisons, the recent IRENA report details how renewable generation is becoming more of an obvious economic decision. Over 75 percent of onshore wind power and 80 percent of utility scale solar expected to be built by 2020 will provide electricity at a lower price than the cheapest generation from new coal, oil or natural gas.
Factoring in the Tax Subsidies
In the United States, renewable energy currently enjoys government support. The current federal tax credits include production tax credits (PTC) for new wind capacity (as well as geothermal and closed-loop biomass) at $24 per megawatt hour (MWh), adjusted for inflation and applicable for each of the first 10 years of plant operation. Plants that began construction by 2016 received the full PTC, with benefits declining each year construction started after that year. The PTC is scheduled to expire at the end of 2019.
The solar investment tax credit (ITC) allows for 30 percent credit for utility scale and small-scale solar projects that began construction before 2020. The tax credit for solar energy begins to phase out in 2020. The upcoming sunset dates demonstrate that policymakers have confidence that renewables are ready to stand on their own. Furthermore, future projections from EIA, IRENA, and other forecasters predict renewables to be cost competitive even accounting for these credits expiring.
Expected Renewable Price Trends Going Forward
The cost reductions for renewables are expected to continue. IRENA data predicts solar energy can drop to $0.048/kWh in 2021, while wind could drop to $0.045/kWh over the same time period. As technology advances, the cost of renewable energy will likely go even lower.
The renewable industry has already reached the point where new renewable generation is a good investment compared to new fossil generation. But the next step comes when new-build onshore wind and solar is cheaper than it costs to operate existing coal plants. The United States has already entered this ‘coal cost crossover’ according to research by Energy Innovation. Renewable generation could already replace 74 percent of U.S. coal generation with an immediate cost savings to electricity customers. A figure projected to rise to 86 percent by 2025.
Of course, all predictions are subject to future energy policies, including tax credits but also tariffs on solar technology imports. The overall trend is for renewable energy prices to continue to decline with the outcome of increased renewable energy generation.