Why wind and solar are already better value than fossil fuels

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.

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.