Unlike almost all their rivals in the energy-generation space, solar panels and wind turbines are mass-produced goods. That means they’re subject to the rules of continual improvement and falling costs that we see with semiconductors, household products and clothing as production volumes rise and factories undercut each other. Traditional power plants are essentially large-scale construction projects, which rarely achieve the same sorts of efficiency dividends.
As a result, the cost of new-build renewables has been sinking. The highest-cost solar and wind projects in the U.S. will now produce electricity at least as cheaply as as the lowest-cost coal plants, according to a report last year by Lazard Inc.
In Australia, that price differential means one of the world’s largest coal exporters is unlikely ever to build another generator powered by the stuff, Catherine Tanna, managing director of EnergyAustralia, told a Bloomberg Invest conference in Sydney Wednesday. By the early 2020s, renewables will have gotten so cheap that it will be more cost effective to build them than to operate even an existing coal or nuclear plant, Jim Robo, CEO of Florida-based NextEra Energy Inc., said during an investor call in January.
[Read more here]
The chart below shows the gap between the cost of new coal and the cost of new solar in some Asian economies, which are all places the coal industry hopes to expand sales. They're all places where electricity demand is rising strongly (in developed countries electricity demand is stagnant or slowly declining)
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| Source: Bloomberg |
The trends in the charts are obvious. The gaps between coal power LCOEs and solar LCOEs ranges from -$11/MWh in India to +$47/MWh in Indonesia (which has lots of cheap poor-quality domestic coal) In the Philippines (+$4/MWh) and Thailand (+$12/MWh) it is likely that new solar will become cheaper than new coal over the next year; in China and Vietnam (+$21/MWh) 2020 seems more plausible as the cross over point, while in Indonesia it will be after that. But the point is that any analyst can see this trend. It takes 5 years to build a new coal-fired power station and they last for 30 years. Who wants to be stuck with expensive power for 30 years? Even if coal is for this year and next year cheaper than solar, over the full lives of the assets (the coal power station and the solar farm) solar will be cheaper. A classic case of stranded assets.
But there are important implications for storage:
The trouble with things that get extremely cheap, however, is that you often end up with too much of them. That situation is exacerbated by the no-off-switch nature of wind and solar power. Take California’s recent mandate to put solar panels on the roofs of all new buildings. As my colleague Liam Denning wrote last week, one likely effect will be to push more electrons into a mid-afternoon electricity market that’s already glutted with supply.
That’s where storage comes in. Most power markets are structured in the form of minute-by-minute auctions, where the grid will buy whatever electricity is cheapest. One result is that where renewables penetration is greatest, wholesale electricity prices have occasionally gone to zero or even into negative territory.
For conventional generators, that’s terrible news: They must either sell electricity for less than the cost of producing it, or temporarily shut down — which creates essentially the same problem, since it reduces a plant’s capacity utilization and undermines its return on capital.
If you’re in the storage business, however, it’s a compelling proposition. As we argued last year when Tesla Inc. installed a lithium-ion grid battery outside of Adelaide, negative prices give storage operators the opportunity to get paid to charge their cells, and then paid to discharge them as well.
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Of course, as the amount of storage increases, that will by itself reduce the negative and the maximum prices, and storage will become less profitable. However this diminishing profit margin will be offset by falling storage costs, to the extent that even a small gap between peak and trough prices will be profitable.
Quacking the code
Solar: No possible doubt whatever
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