Cost of renewable energy will fall further globally

Analysis

Wind and solar power costs have dropped to such an extent that onshore wind is now considered one of the cheapest forms of electricity generation. This is despite the steep fall in oil, gas and coal prices since June 2014 (see PROSPECTS H2 2016: Fossil fuels - June 10, 2016).

Although LCOE analyses can be misleading, owing to the inconsistency of assumptions made across studies and the different sensitivities of technologies to those assumptions, Lazard's annual LCOE series provides a good indication of the cost trajectory.

Comparing its June 2010 LCOE study with its November 2015 edition and using figures that do not take into account subsidies or other externalities, interesting results emerge.

Wind power

Onshore wind costs have fallen to 32-77 dollars per megawatt-hour (MWh) from 65-110 dollars per MWh, a reduction of 37.7% over five years.

The offshore wind cost mid-point has also dropped, to 152 dollars per MWh from 173 dollars per MWh.

Combined Cycle Gas Turbine (CCGT)

The cost of electricity generation from CCGTs, the most efficient type of gas-fired plant, has dropped to 52-78 dollars per MWh from 97-126 dollars per MWh, primarily thanks to lower gas prices, although construction material costs have also fallen.

Coal

In 2010, coal's LCOE was estimated at 69-152 dollars per MWh, the high end of the range incorporating 90% carbon capture and compression, but not CO2 transport and storage. By 2015, this had barely moved to 65-150 dollars per MWh.

Nuclear

In 2010, nuclear's LCOE was 77-114 dollars per MWh. By 2015, it was estimated at 97-136 dollars, demonstrating a negative learning rate.

Energy efficiency is pitched at 0-50 dollars per MWh, the 'negawatt' representing the cheapest form of energy.

Solar power

In 2010, solar photovoltaic was estimated at 150-192 dollars per MWh and crystalline ground mounted at 134-154 dollars.

In 2015, rooftop was put at 109-300 dollars per MWh, the bottom end reflecting commercial and industrial applications and the high end reflecting new technologies that could be applied to residential.

The real drop comes in utility-scale crystalline and thin-film, estimated at 58-70 dollars and 50-60 dollars per MWh in 2015, respectively.

Solar thermal

Solar thermal towers with storage have entered the scene, priced at 119-251 dollars per MWh. The range shows the impact of incorporating storage into the plant design.

The low end represents 18-hour storage and the high end represents zero storage.

Real pricing points

The rising cost and lack of control over the capacity of feed-in tariffs and renewable certificate schemes has seen governments move to auctions to allocate new renewable capacity. This has improved competition and made cost reductions more visible.

Depending on the auction design, it has also provided some outlier results due to gaming behaviour, which are unrepresentative of real costs. This occurs when the cost of participation in auctions is low and there is no penalty for non-compliance once a bid has won.

Nonetheless, recent auction prices have shown dramatic declines in bids:

Peru

In February, Peru awarded 162.0 megawatts of onshore wind at an average 37.49 dollars per MWh and 184.5 megawatts of solar photovoltaic at an average 48.39 dollars per MWh. This compares with auctions awarded in 2009 for solar photovoltaic at 220 dollars per MWh and in 2011 at 110 dollars.

Mexico

In March, Mexico auctioned 1,720 megawatts of onshore wind and solar capacity at an average price of 41.80 dollars per MWh.

India

In India, the lowest solar photovoltaic bid was achieved this year at 4.34 rupees (0.06 dollars) per kilowatt-hour (kWh) for a 70-megawatt plant in Rajasthan; 4.63 rupees per kWh was bid for a plant in November 2015 (see INDIA: Energy ambitions rise as 2019 polls near - May 23, 2016).

In April, an auction in Karnataka received five bids for 4.78-4.80 rupees per kWh. These compared with coal-fired projects bid at 1.58-5.53 rupees per kWh, gas at 4.08-4.67 rupees per kWh and wind at 3.51-5.92 rupees per kWh.

The lowest wind and solar bids are competitive with the higher-end of the coal bids.

Denmark

In Denmark, the offshore Horns Rev 3 contract was awarded in 2015 at 77 krone (11 dollars) per kWh, 32% lower than the previous Danish offshore wind tender in 2010 for the Anholt offshore wind farm. Both projects were for 400 megawatts.

United Kingdom

The United Kingdom's February 2015 Contract for Difference auction saw strike prices clear at 119.89 pounds (157.38 dollars) per MWh for 2017-18 delivery and 114.39 pounds per MWh for 2018-19 delivery.

Low bids suggest that project developers are incorporating future cost falls into their bids for plant to be delivered in two-to-three years' time.

Projects also have their own characteristics, which affect costs. For instance, Horns Rev 3 is close to shore and in shallow water, reducing costs.

The Indian solar bids reflect utility-scale projects in government-designated solar parks that have offtake transmission capacity and good road access, providing lower construction costs and allowing bidders to secure power purchase agreements. 'Real' pricing points have to be assessed with some discernment.

Cost trajectory

However, the cost trajectory is clear. Renewables are increasingly competitive with fossil-fuel generation technologies and there is scope for further gains.

In solar, efficiency records are broken each year for all types of cell, while the range of materials employed is widening.

Wind turbines are becoming larger. The under-construction offshore Burbo Bank extension wind farm in the United Kingdom will see 32 8-megawatt turbines installed for a total 254-megawatt capacity, compared with the original project's 25 3.6-megawatt turbines providing 90-megawatt capacity.

Floating wind turbines offer even greater size and increased modularisation in construction. Two such farms are being built, using two different designs, one off Scotland and the other off Portugal.

By contrast, CCS costs have barely budged over the last five years, according to Lazard's LCOE, while nuclear costs have risen. CCS offers little prospect for cost reductions based on conventional amine scrubbing as this both increases capital spending and reduces power output.

Nuclear costs have risen because of new reactor designs and the additional costs of new safety regulations introduced following the Fukushima disaster in March 2011.

Nuclear costs are unlikely to fall unless a single standardised design is adopted allowing modularisation and efficiency gains or a new base technology is adopted. Evolving safety requirements lead to continual reactor redesign, militating against standardisation.