Is renewable energy cheaper than fossil fuels?

Answer:  Mostly, yes, but there are complications

From The Climate Brink.

Is renewable energy (RE) cheaper than fossil fuels?

To begin to answer this, we need to define what cost we’re talking about. Let’s first talk about the cost of RE energy vs. fossil-fuel energy on a grid that’s dominated by dispatchable power, such as fossil fuels. This is what most electrical grids are like today.

 

For a grid dominated by dispatchable power (i.e., power sources that can be turned on or off at will), the intermittency of wind and solar imposes no costs. Thus, the relevant cost comparison is between the so-called Levelized Cost of Energy (LCOE) of the various energy sources:

Virtually all credible analyses agree that RE has the lowest LCOE. Therefore, it is the cheapest energy source for grids that contain a lot of dispatchable power.

 

This explains why, for example, 95% of the power scheduled to be hooked up to the ERCOT (Texas) grid is RE (solar, wind, or batteries). Natural gas is 5%.

 

For a grid that’s mainly fossil fuels, every kW of renewable power (RE) you add displaces a kW of expensive and dirty fossil fuel power. But, as the grid gets more and more RE, that changes. At high levels of RE deployment, the intermittency of the wind and solar means that you need to add several kW of wind and solar to displace a single kW of fossil fuels. This drives up the marginal cost of RE energy.

 

In addition, high RE levels mean that RE is competing with the most efficient and cheap fossil-fuel generation, some of which have not yet been paid off. Additionally, the more RE you add, remaining RE sites are higher cost and lower quality.

The net result is that, beyond some point, the price of energy on the grid starts increasing as you add RE. Qualitatively, the price of electricity vs. RE deployment looks like this:

Right now, around 20% of our electricity comes from wind and solar and this is already saving consumers billions of dollars a year. As we increase RE deployment, the price of electricity will continue to decline and consumers save money.

 

Then we reach the minimum price point. One study from NREL concluded that this occurs when RE penetration reaches 57% (in 2050). At this point, electricity produced on this grid is cheaper than a fossil-fuel heavy grid and, as a bonus, we’re also emitting a lot less CO₂.

 

As we move beyond 57%, the declining value of wind and solar to the grid means the price of energy increases. However, it remains below what we’re paying today for a fossil fuel grid until we get to around 90% RE.

 

Let me repeat for those in the backrow: we can get to a 90% RE grid and pay about the same as we’d pay with a fossil-fuel heavy grid. And this doesn’t account for the external costs of fossil fuels (see below).

A significant amount of the discourse about RE focuses on the cost of achieving net zero by 2050, which requires completely eliminating fossil fuels. No one knows how much this will cost, but some studies have produced eye-popping numbers: 

Many analyses have looked at this goal and they agree that a lot of the costs of reaching net zero are driven by the cost of phasing out the last few percent of fossil fuels. The reason is that the last few percent of emissions are the hardest to abate and the ones for which technology to replace fossil fuels is expensive or undeveloped. For example, decarbonizing long-distance airline flights is one of the last things we’ll decarbonize because it would probably require biofuels, which could have very high costs.

 

This is quantified in this plot, which shows the incremental abatement cost (orange line) as a function of how much RE is on the grid. For a 95%-RE grid, the abatement cost is $200/tonne, increasing to $930/tonne for 100% RE.

Figure 1 of Cole et al.

Thus, it’s easy to look at the price tag for getting to net zero and conclude, “Wow, this is too expensive.” But that misses the fact that the cost of getting to a slightly lower value, e.g., a 90% clean-energy grid, is actually quite modest.

 

These net-zero estimates also hinge heavily on future innovation — a variable notoriously difficult to predict. History has shown us, particularly in the last decade, that technological advancements can drastically outpace predictions, as seen with the enormous drop in the cost of solar panels, which no one predicted.

 

External costs

All of these discussions focus on the market price of energy. Such a discussion neglects the extensive subsidies that distort the energy market. While RE sources receive financial support, the subsidies for fossil fuels are substantially larger and more ingrained within global economies.

 

Moreover, the price of fossil fuels seldom reflects their full societal costs — what economists call externalities. Recent estimates of the cost of climate impacts puts it around $185/ton of CO₂ emitted. These costs are not included in the cost of fossil fuels.

 

Air pollution from fossil fuels kills millions of people every year. Like the climate impacts, the costs of this are not included in the price. Fossil fuels have also been linked to significant political and social instability. For instance, the U.S. invaded the Middle East twice in the last 35 years in order to stabilize the oil supply. The Russian invasion of Ukraine is intimately tied to fossil fuels. These costs are also not included in the costs of fossil fuels.

 

If we added these externalized costs to the cost of fossil fuels, the argument increasingly tilts in favor of RE.

 

Summary

In any complex discussion, you need to carefully define the question you’re asking. Much of the discussion around renewable energy focuses on net zero, because that’s what we ultimately need to aim for. We really don’t know how much achieving net zero by 2050 will cost because it will depend to a large extent on future innovation.

 

But a large chunk of the cost of net zero is driven by the last few percent of decarbonization. If you talk about, say, a 90% clean grid, the cost of achieving that using today’s technology is approximately zero. And this cost comparison excludes the external costs of fossil fuels: climate impacts, air pollution, geopolitical instability. Taking all factors of those into account, there’s no question that we can largely decarbonize today and end up with a better economy and cleaner environment.

 

I found this article extremely enlightening.  It put into words something which I had only intuitively understood.  But it highlights how the cheapest RE now might not be the cheapest RE in 2040 (ignoring of course technological advances).  For example, CSP (concentrated solar power) is more expensive than solar panels.  However, it can produce dispatchable electricity, which means it will be very valuable for that last 10% of electricity supply.  Another example:  SMRs (small modular reactors) are prolly 3 or 4 times as expensive as solar, now.  But to convert solar into dispatchable power would require at least 12 hours of storage.  That's still very expensive, though no doubt battery costs will continue to decline.  But so might the costs of SMRs.  Again, for that last 10%, SMRs might be the answer.    Yet another example: power-to-gas.  Using green methane (produced using green electricity to make hydrogen by electrolysis, which is then converted into methane by the Sabatier process) to run peaking gas plants will be expensive, but again, makes sense for the last 10%.

We may have an answer sooner than we thought.   The state of South Australia has been steadily increasing the percentage of renewables in its grid for 17 years.  So far this year, it has averaged 75%.  It could reach 100% within 5 years.  Now, this isn't a perfect test for how high renewables can go, because SA (unlike, say, Texas) has high-voltage links with other grids, so it can buy or sell power to the other states.  Nevertheless, we will get a clear idea of the issues quite soon.  

Renewables costs rise .....

 .... but so do coal and gas costs. 

It seemed as if Lazard had stopped producing their famous LCOE (levelised cost of electricity) calculations when they released no estimates in 2021 and 2022.  This was a great pity, because although there are others (e.g., BNEF, IRENA) who produce estimates of the cost of electricity from renewables, Lazard has been doing it on a consistent basis for 15 years.  But all at once they came out with their latest estimates a few weeks ago.  There have been some small changes in format and some additional data.  For example, they now release the LCOEs of wind and solar with and without four hours of storage.  Four hours storage is enough to take us to 80-90% renewables on a mixed grid with a blend of wind and solar.  

To reach 100% requires seasonal storage for times when it is windless, cloudy, and cold, called (who knows why?) "dunkelflaute" (pronounced doonkelflowta, which is, mysteriously, German for "dark flute")  To put it differently, there are rare occasions (10 to 20 days a year) when renewables output, even with 4 hours of storage, will not keep the grid going in the face of high demand and low renewables output.  We might only need a couple of weeks of long-term storage and only use it a few times a year, but that is prodigiously expensive using li-ion batteries (it may be much cheaper using vanadium-flow batteries, which don't suffer from "vampire drain").  

Michael Liebreich here mentions green ammonia as a fuel for long-duration storage.  I've talked about using the Sabatier process before to produce green methane, for the same purpose.  But making green ammonia is easier, because it is much easier and cheaper to extract nitrogen from the atmosphere than to extract carbon dioxide.  Lazard does not cost green ammonia for long-duration storage, so I haven't included it.  I have however estimated a wind+solar system with 10% peaking gas, in effect using natural gas as long-term storage.  Actual green methane (synthetic natural gas) or ammonia would be at least twice as expensive.   On the other hand, most of the cost of peaking gas is capital cost, because the plant and equipment has to be ready to go at all times, but it's only used for 10% (or less) of the time.  In that context, fuel cost is less important.

Lazard no longer provides an estimate of the cost of CSP (concentrated solar power), presumably because the company now developing it is in Australia.  That company, Vast Solar, is cagey about the plant’s LCOE, but describes it as "competitive".  It will provide 10 hours+ of storage, which means it's not competing directly with wind and solar with just 4 hours of storage, but with long-duration storage, which is more expensive.  $140/MWh? That's what Lazard was estimated for CSP 5 years ago.  

In addition, I have added a column for NuScale's small modular reactor, assuming 80% wind and solar and 20% SMR nuclear, and using the most recent data for its LCOE.    As the percentage of wind and solar increases in the grid, the need for long-term storage increases, especially at high latitudes, so that's where nuclear may be needed to reach 100% carbon-free generation.   Unlike the giant old-fashioned nuclear plants, the NuScale SMR can be ramped up and down (by 40% per hour), which would make it easily fit in with a mostly renewable grid.  Given the costs of long-duration storage, the NuScale SMR would be cost-effective, provided NuScale can prevent any further rise in its LCOE, which like all other LCOEs has risen sharply in response to supply chain difficulties.

As always, Lazard covers only the US.  But these markets are global, except for gas, which is much cheaper in the US than in the rest of the world.

The rise in LCOEs of renewables is mostly due to supply chain difficulties, caused by Covid and the war on Ukraine.   I suppose we can assume that these difficulties will gradually disappear, and the trend of steady declines in costs will continue.  Even as they stand, however, new-build wind and solar, with 4 hours of storage, remain cheaper than new-build coal, and comparable to new-build baseload gas (remembering that gas is a lot cheaper in the US than in Europe)  Lazard also comments that a large gap has opened up between large and small projects, with larger projects located at the bottom of the costing columns in the chart below.

All these data are before tax and subsidy and also a price on carbon emissions.

Observe that even the marginal costs (i.e., ignoring capital costs, depreciation, debt repayment and interest rates)  of coal are on average above the total costs of brand-new wind and solar farms.   A mere 10% fall in the costs of new-build wind and solar with 4 hours of storage would make them cheaper than new-build baseload gas, even in the US.  

The rise in the renewable percentage is likely to continue, even though costs have temporarily risen,

Nuscale SMR costs jump to $119/MWh

From IEEFA

Last week, NuScale and the Utah Associated Municipal Power Systems (UAMPS) announced what many have long expected. The construction cost and target price estimates for the 462-megawatt (MW) small modular reactor (SMR) are going up, way up.

From 2016 to 2020, they said the target power price was $55/megawatt-hour (MWh). Then, the price was raised to $58/MWh when the project was downsized from 12 reactor modules to just six (924MW to 462MW). Now, after preparing a new and much more detailed cost estimate, the target price for the power from the proposed SMR has soared to $89/MWh.

Remarkably, the new $89/MWh price of power would be much higher if it were not for more than $4 billion in subsidies NuScale and UAMPS expect to get from U.S. taxpayers through a $1.4 billion contribution from the Department of Energy and the estimated $30/MWh subsidy in the Inflation Reduction Act (IRA).

It also is important to remember that the $89/MWh target price is in 2022 dollars and substantially understates what utilities and their ratepayers actually will pay if the SMR is completed. For example, assuming a modest 2% inflation rate through 2030, utilities and ratepayers would pay $102 for each MWh of power from the SMR—not the $89 NuScale and UAMPS want them to believe they will pay.

The 53% increase in the SMR’s target power price since 2021 has been driven by a dramatic 75% jump in the project’s estimated construction cost, which has risen from $5.3 billion to $9.3 billion. The new estimate makes the NuScale SMR about as expensive on a dollars-per-kilowatt basis ($20,139/kW) as the two-reactor Vogtle nuclear project currently being built in Georgia, undercutting the claim that SMRs will be cheap to build.

NuScale and UAMPS attribute the construction cost increase to inflationary pressure on the energy supply chain, particularly increases in the prices of the commodities that will be used in nuclear power plant construction.

For example, UAMPS says increases in the producer price index in the past two years have raised the cost of:

• Fabricated steel plate by 54%
• Carbon steel piping by 106%
• Electrical equipment by 25%
• Fabricated structural steel by 70%
• Copper wire and cable by 32%

In addition, UAMPS notes that the interest rate used for the project’s cost modeling has increased approximately 200 basis points since July 2020. The higher interest rate increases the cost of financing the project, raising its total construction cost.

Assuming the commodity price increases cited by NuScale and UAMPS are accurate, the prices of building all the SMRs that NuScale is marketing—and, indeed, of all of the SMR designs currently being marketed by any company—will be much higher than has been acknowledged, and the prices of the power produced by those SMRs will be much more expensive.

Finally, as we’ve previously said, no one should fool themselves into believing this will be the last cost increase for the NuScale/UAMPS SMR. The project still needs to go through additional design, licensing by the U.S. Nuclear Regulatory Commission, construction and pre-operational testing. The experience of other reactors has repeatedly shown that further significant cost increases and substantial schedule delays should be anticipated at any stages of project development.

The higher costs announced last week make it even more imperative that UAMPS and the utilities and communities participating in the project issue requests for proposal (RFP) to learn if there are other resources that can provide the same power, energy and reliability as the SMR but at lower cost and lower financial risk. History shows that this won’t be the last cost increase for the SMR project.

The problem with this analysis is that renewable costs have also risen (see chart from Lazards' latest LCOE calculations below).  Supply chain difficulties because of Covid, the Ukraine War, China's Covid lockdowns, "onshoring" (returning manufacturing to your own country, to reduce supply chain difficulties) and rising interest rates have increased wind and solar costs for the first time in decades.   And, presumably, as we improve the supply chain, these costs will fall.   Also, if more NuScale's SMRs can be built, unit costs will fall, in a classic learning curve feedback loop.

We may well need SMRs at high latitudes, while SMRs even in lower latitudes will add to grid security, because the more different sources of electricity available to the grid, the more balanced and secure it is.  It would be a pity not to at least try NuScale's SMRs, given the strong possibility that component prefabrication will cut costs compared to the hugely expensive giant nuclear power plants which are a decade behind schedule everywhere.  

I have said before that if nuclear is necessary for de-carbonising the world's electricity grid, I would grit my teeth and support it, because the climate emergency is so severe.  But the problems with nuclear remain:  expense and delay.  This SMR will only start operating in 2030, if there are no further delays.  By then, if we are to avoid an increase in global temperatures since pre-industrial times of more than 1.5 degrees C, we will need to have increased the share of renewables in the grid to 80%.  The last 20% will be the hardest to de-carbonise.   SMRs may be necessary for that.   

Source: Lazards
Click on graphic to see clearer image