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Why wind and solar are already better value than fossil fuels

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When radio shock jock Alan Jones got the cost of wind energy so horribly wrong in front of a million or so viewers on ABC TV last month, he did more than misplace a decimal point. He repeated an often-made misunderstanding about the costs of energy, and why renewables are already better value than fossil fuels.

Jones, appearing on ABC TV’s Q&A program, claimed that wind energy cost $1,500 a kWh, as opposed to coal which he put at $75/kWh. He had his numbers terribly confused, mixing up kilowatt-hours with megawatt-hours, repeating an error first made in The Australian that lifted the cost of wind energy tenfold.

Jones admitted his error, but he remained unbowed on his view of wind energy and renewables in general. Like the Coalition government, its advisors, and other opponents of renewable energy, including elements of the Murdoch media, Jones is convinced that renewable energy will cause overall consumer costs to soar. But he is wrong about that too.

Citigroup has published a detailed analysis of the costs of various energy sources, and it concludes that if all the costs of generation are included (known as the levellised cost of energy), then renewables turn out to be cheaper than fossil fuels and a “benefit rather than a cost to society.”

That gap, and that benefit, will widen significantly in coming years, particularly in the time-frames that the world needs to act on climate change and transition the global energy systems from coal and gas to clean energy sources such as wind and solar.

Capital costs are often cited by the promoters of fossil fuels as evidence that coal and gas are, and will, remain cheaper than renewable energy sources such as wind and gas.

But this focuses on the short-term only – a trap repeated by opponents of climate action and clean energy, who focus on the upfront costs of policies. This was the same argument used by the Abbott government when trying (and succeeding) in cutting the renewable energy target.

It is the same argument used by Abbott in panning Labor’s 50 per cent renewable energy target, when it plucked an $85 billion cost out of the air, and in responding to critics of its weak emissions reduction target of 26 per cent cuts by 2030 (when it plucked a figure of $600 billion for robust action).

As the Guardian has reported, the Abbott government’s own modelling shows little difference between ambitious and weak targets. That’s because the benefits of action over time usually offset the initial cost.

The same can be said of the cost of energy. In its publication, Energy Darwinism II,  Why a Low Carbon Future Doesn’t Have to Cost the Earth, Citigroup used this graph below to illustrate how the upfront capital cost of wind and solar technology are much higher than that of coal and gas, for instance.

renewables capital costs citi

Indeed, the capital cost of wind and solar – for the equipment, account for around 60 per cent of their total costs. Half of the remainder comes in financing, and this is falling rapidly as new vehicles such as YieldCos bring down the cost of debt and equity.

On other hand, fuel costs can account for 80 per cent of the cost of gas-fired generation, and more than half the cost of coal. And gas costs vary dramatically, from $US3 a unit in the US, to $US8 a unit in Europe (and now in Australia), to up to $US15 a unit in importing countries such as Japan.

Citigroup says it is “dangerous” to rely on assumptions of capital expenditure when the pace of change in an industry is so rapid, and the rate of evolution so fast. “Examining capex on a standalone basis runs the risk of overstating the cost of renewables, and understating the total cost of conventional generation technologies,” Citigroup noted.

So, how do these technologies compare on an LCOE basis?

This next graph shows the lowest cost wind (in the best regions) is already beating coal and gas. Solar in the sunniest regions will do so by 2020. And the cost of solar and wind will continue to fall, with solar eventually beating wind.renewables lcoe citiEven these estimates rely on relatively conservative estimates of the cost falls in solar. Citigroup estimates a “learning rate” of 19 per cent – meaning that solar costs will fall that much with each doubling in capacity (a variation of Moore’s Law). This translates into cost falls of 2 per cent a year.

But as real-life experience shows, cost falls are happening faster than that. Last week, one of the big solar module manufacturers, Trina Solar, said costs had fallen 19 per cent in the past year, and would continue to fall by at least 5 per cent to 6 per cent a year in coming years as efficiencies were improved, manufacturing and labour costs fell.

Even with that quibble, Citigroup says that there is a financial advantage in installing renewable energy.

“We should think of installing renewable energy as a benefit rather than a cost to society,” it writes.

“This is one of the key benefits of examining total spend on an LCOE basis, as it demonstrates well the shifting relative economics of different generation technologies. Most important is this point that as renewables become ‘cheaper’ than conventional, there is effectively a net saving to using them.”

So, why does this matter?

Well, Citigroup says that between 2014-2040, the world is likely to invest some $US190 trillion into energy – whether it takes action on climate change or not.

The difference between taking no action and Citi’s own “action” scenario results in little difference in costs, in fact it would result in a saving of $1.8 trillion, as we reported last week. But the even greater savings comes in avoided damage to the economy in environmental impact. Those costs, if the world persisted with a business-a-usual rate, could be as high as $72 trillion.

In the “Citi ‘Action” scenario, the analysts have assumed that the fossil fuel share across the globe declines from currently over 64 per cent to 28 per cent by 2040, whilst solar PV and onshore wind energy could make up to 22 per cent per cent of the electricity mix, and 40 per cent including all renewables (including hydro and others).

“There is a limited difference ($US1.8 trillion) in the total bill to 2040 between our ‘Action’ and ‘Inaction’ scenarios,” Citigroup writes. “However, we demonstrate the higher earlier spend on renewables and energy efficiency in the action scenario, which leads to fuel savings later.

“Comparing the in-year differential cost between ‘Action’ and ‘Inaction ‘shows that there is a net cost per annum of following a low-carbon path until 2025, after which we move into net savings via lower fuel usage.

“At its worst, this net cost is only around 0.1% of global GDP; in a cumulative sense there is a net cost out to 2035, beyond which there is a net saving; at its worst this cumulative net cost is still only around 1% of current GDP. In the context of the potential liabilities, these seem like relatively small figures.

“In a positive sense, a more diverse energy mix could make future energy shocks less severe, as could the non-fuel nature of renewables.

“The greater upfront investment in energy could also help to boost growth and act as a partial offset to the effects of secular stagnation being witnessed currently. Lower long-term energy costs as a percentage of GDP could ultimately serve as a significant boost to GDP, especially compared to the potential lost GDP from inaction.”

  

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  • derekbolton

    When the fraction of the LCoE that’s down to capital and financing is so varied, the discount rate becomes critical. It would be interesting to see how the cost curves compare at different discount rates.

    • john

      Derek I would use 2.3% that is the aim to sustain western democracy and ensure that the discounted value of retirees is pretty shortly rendered worthless.
      Just think about the cost of RE energy it is zero hard to beat that.

      • Mike Dill

        The real issue will be in twenty years when the current crop of solar and wind plants are paid off and still producing energy. Then we will see a truly low cost for RE.

        My solar panels are supposed to last thirty or forty years….

        • john

          No your panels should last for about 25 years
          mind some have lasted that long already you have to make sure you inspect them all the time to ensure there is no moisture intrusting which will degrade the performance.
          At about 25 years using a .5% degrade figure you have to decide to I replace.

          • Don Osborn

            Wrong. The warranty is typically 25 years. Warranties are always shorter than expected life. Most PV modules will last a good 30 plus years. At 25 years you have only lost 10 to 12% at most.

    • James Hilden-Minton

      Capex is most sensitive to discount rate. I was recently shocked to learn that in the US it is customary for utilities to use a 10% discount rate, not because that has anything to do with the cost of capital, but because the industry enjoys a government guaranteed rate of return of 10%. Imagine that when a ten year US Treasury only yields 2.1%, utilities get to raise rates high enough as a legal monopoly to assure a 10% rate of return. The big disconnect hear is that rooftop installers are able to provide financing at 4% to 6%. So a homeowner buying their own solar power is able to get financing effectively at half the cost that the utilities impose on ratepayers.

      So for example a 10 kW solar system for $25k generating 12,500 kWh per year has an LCOE of about 19.3 c/kWh under the 10% utility guaranteed rate of return, or 12.4 c/kWh under 5% consumer financing. So even if the installation costs were the same, the utility would charge the ratepayer more for solar than the she could do for herself.

      So if you, as a ratepayer, are forced to bear 10% financing, you may actually come out better with a system that has lower capex, but higher opex. The whole problem here is that the game is rigged. Why should ratepayers be forced to offer up a 10% return to utilities?

  • davidfriedman

    If this argument is correct, there is no need for carbon taxes, government subsidies of solar energy, or anything along those lines. People prefer cheap energy to expensive energy, so if renewables are really cheaper people will switch to them out of simple self interest.

    But I haven’t noticed people who make this claim, or the claim for peak oil, which would again result in a shift away from fossil fuel with no need for government action, actually taking that position.

    • Rurover

      David,

      Important to look at not just the immediate dollar costs of FF energy.
      To create a level playing field when comparing different energy sources you DO need to account for the “externalities” of fossil fuels (especially coal). ie. The cost to society of lung disease, pollution, environmental damage, mine accidents etc.
      Then we also need to remove the substantial subsidies paid to the fossil fuel industry (far higher on a world wide basis than subsidies paid to install renewables)
      Then there’s the cost of global warming of course. Huge!
      And finally, who pays the cost of mine remediation and power station de-commissioning? The way things are shaping up in Australia, the taxpayers may well be asked to share some of that burden.

      • suthnsun

        As I read it, the externalities were ignored in this comparison.

    • David, I agree with you. Technology and the market will decide what will happen, so it is only a matter of time before we see in Australia a sustained reduction in fossil fuel generation. If so, why all the hysteria around what government does or does not do. The end result is inevitable.

    • Jan Veselý

      Right now, it is a half way victory for renewables. They are winning in the field of new generation. But full victory needs increased rate of old coal plant closures because old, long time paid off plants may be very cheap (mainly lignite plants), so they could probably stay dozens of years.
      German government just paid RWE to stop producing electricity in 2.7 GW from 21 GW of German lignite power plants, the oldest and least efficient. They stopped production and rest in reserves to be probably never fired again and scrapped in 10 years or so. So, there is more space for other generation sources, mainly wind.

    • Alen T

      Is there not a switch already underway? Rooftop solar is now unstoppable, and more RE generation is being installed globally than FF generation. And please don’t make the mistake of referring to solar a subsidised technology, coal & gas receives considerably more subsidies. Therefore it is illogical to make any sort of comparison to unsubsidised solar.

      However, the fundamental reason for having a carbon tax (or any carbon price mechanism) is not to make one generation technology more attractive than the other, but rather to internalise the externality and thus correct a market failure. Deciding which is more attractive, from an economic perspective, will be up to the market.

    • Barri Mundee

      I would support abolition of subsidies to renewables when subsidies to fossil fuels are abolished. One estimate I have seen is that ff receives five times as much in subsidies, worldwide, as renewables.

      • The IEA says direct subsidies to fossil fuels are more than 5 times those of renewables. The IMF says total subsidies to fossil fuels are 10 times greater – $5 trillion a year, if externalities taken into account.

        • And the Citi report does canvass carbon pricing, i.e. taking in the externalities. A low carbon price makes coal less competitive against all competitors.

          And then it says:

          A more relevant scenario would be to apply shorter-term carbon prices to the
          Energy Darwinism curve. Figure 78 and Figure 79 show the Darwinism cost curves
          with a $25/t and a $50/t carbon price. As before, coal is impacted most negatively
          impacted becoming amongst the most expensive generation options at $50/t, and a
          questionable choice at $25/t, especially given the life of a coal plant is potentially 40
          years. Gas continues to span the length of the curves, though clearly assets at the
          upper end of the curve are pushed even further up the curves. Obviously wind and
          solar are the big beneficiaries, with wind in particular becoming the lowest cost
          option at $50/t (and amongst the lowest at $25/t). Solar remains expensive, though
          at $50/t moves into the second quartile of the cost curve.

    • hydrophilia

      You may be correct in the larger picture, but economics fails to accurately model people accurately: they often do NOT choose the cheaper option due misinformation, lack of information, lack of interest (studies have shown that people often require 50% or better return per year), or barriers placed by incumbents.

  • Robin_Harrison

    Trillions of dollars saved means trillions of dollars lost by ‘business as usual’. It’s no wonder they are manning the barricades. Not only will they lose fossil fuel sales, they might even lose their massive subsidies. But don’t hold your breath on that last bit.

  • Ian

    It’s fantastic to have a cost benefit analysis showing renewables to be cost effective, just like smoking cessation policies are justified on the basis of cost savings to the public, but this is only a small part of the justification for renewables. The real reasons for conversion to renewables are 1. climate change mitigation 2. Reducing the risk of resource wars. 3. Energy security. The cost to build out renewables does not really matter, this country has spent billions on road infrastructure, most notably the Pacific Highway and no one seems to mind in the least, or the NBN is set to cost inordinate amounts of money, apparently to allow lightning fast internet times even to rural communities, will there be an economical return on these investments, probably not. Will life be more comfortable, probably. Germany did not really need renewables, they had plenty of safe nuclear power stations, they have made a huge effort to kickstart solar and wind because they were fundamentally concerned about the environment and thought the effort worth the cost. I suppose the most ruthless of us need to see the colour of money, however most don’t actually mind spending more to ensure the future well being of our children and grandchildren.

  • James Hilden-Minton

    In a time of low interest rates and accomodative monetary policy, it makes tremendous sense to drop cheap money into solar and wind assets that can earn 10% annualized returns or better. You can’t find a safe bond that will pay as well as solar. The natural rate of return on renewable investments will flow into local economies were the energy is put to work. These are little wealth engines that will encourage economic growth. Conversely, paying for fuel is a drag on local economies. Money that could have been reinvested in local economies get funneled into the britches of billionaires. Fossil fuels are economic frictions like taxes. But renewable energy creates a self-sustaining economic growth engine.

    Another benefit is that fossil fuel markets are very unstable. This price volatility in fuels also induced price volatilities in other commodities such as food. When the price of fuel gets too high, food prices go up, and in less developed areas people starve. Removing the volatility of energy prices at least removes one key driver of volatility in food prices. It won’t eliminate all commodity volatility, but it should minimize it. Commodity stability would be a very good thing for the global economy.

  • Jonathon Dore

    Hi Giles, ironically you also have an error in the second paragraph, seeing Jones’ $1500 and raising him to $15000. Might leave the unsuspecting reader with the wrong impression of the real cost.