For decades, the main factor sustaining the primacy of fossil fuels in our energy ecosystem has been lower costs vs. renewables (and powerfully entrenched interests and lobbying, but that’s another story). However, in 2014 and 2015 something big happened: for the first time in history renewable technologies reached a point where the cost didn’t skew as heavily in the favour of fossil fuels, meaning the biggest incentive for non-environmentally friendly energy sources is beginning to evaporate.
Wind Outpaces Coal and Natural Gas
According to a study by Bloomberg New Energy Finance released in October 2015, the Levelised Cost of Energy (LCOE) for onshore wind in Europe for the first time fell below that of coal and natural gas. LCOE is the cost per MWh a specific power source needs to sell at to break even. This factors in construction costs, maintenance, fuel, capital costs and other factors. Essentially, it is the sum of all expenditures derived from a project compared to that project’s estimated energy output over its lifetime. In the UK and Germany, which are the two most advanced countries in this area, wind currently has a LCOE of $85 and $80 per megawatt hour respectively, with coal costing $115/MWh in the UK and $106/MWh in Germany and natural gas sitting at $115 for the UK $118 for Germany. This means that when accounting for all factors onshore wind is not only much better for the environment, but also much better from an economic perspective.
What about solar?
Cost per MWh for solar energy is higher than wind, especially at home in the UK, and in Western Europe in general. In part this is due to solar energy’s lower capacity factor versus wind. Capacity factor is the real power a power plant produces over time as a percentage of its maximum potential output if it were possible for it to run at 100% efficiency non-stop. In the case of solar energy that would mean 24 hours of sunlight, with clear skies, no precipitation, and enough wind to cool solar panels and keep their efficiency high. Obviously this scenario is impossible, since solar panels usually operate at a fraction of their nameplate power output. In the case of the UK, solar energy’s capacity factor sits at around 11% (being slightly less in the north and slightly more in the south), pushing its LCOE upwards. Although this looks like a bad proposition and terribly inefficient we have to take into account that when we look at the actual cost of solar energy the capacity factor is already included in the price. Furthermore, as the price of photovoltaic panels continues to drop (in the short term) and improvements to the technology increase their efficiency (in the mid to long term) we will see solar’s LCOE continue to fall, eventually reaching a point where it is cost competitive with fossil fuels. It is also worth mentioning that solar energy’s capacity factor varies heavily from one region to the next, so while the UK produces acceptable results given its local climate, other sunnier regions like India, certain areas of China, or the Southwestern United States have significantly higher capacity factors.
The self-reinforcing positive feedback loop
Unlike fossil fuels (key word fuel), once solar and wind farms have been built they produce energy essentially for free. There are some maintenance costs associated with keeping wind turbines and the electrical systems on solar farms operating but these are generally small. More importantly, solar and wind have no fuel costs, as they draw their energy directly from the environment. In contrast, coal and natural gas plants have to constantly buy more fuel, and even with the cost of fossil fuels dropping over the last few years (not coal, which may be dying out) that is still more than the virtually non-existing marginal cost of renewables.
This is where capacity factor comes into play: just as the weather can reduce solar and wind energy’s capacity factor, which drops because of a lack of wind and sunlight resulting in less efficiency and down time, the same happens to fossil fuel power plants when they are switched off. With the volume of installed solar and wind slowly rising, energy companies now have the ability to choose whether to cover grid demand with electricity with no fuel cost (solar and wind), or with gas and coal. Of course when given the choice these companies will always go with the free option, resulting in traditional power plants being offline more frequently or operating at less than maximum output. This reduces their capacity factor making them more expensive to use, and as they become more expensive organizations put more money into renewables. The more renewables we install, the more they will be used over fossil fuel plants, driving down the efficiency of the latter and making them more expensive in comparison.