The cost of renewable energy is something that can be misunderstood.
In this guide, we look at the true cost of renewable energy, and compare it to fossil fuel and nuclear energy costs.
Summary – The Cost Of Renewable Energy
- There are several different types of renewable energy sources
- Each type of renewable energy has a different cost (and, costs can vary from country to country, and State to State)
- The cost of renewable energy should be differentiated from electricity prices – the cost being the cost paid to supply a unit of electricity, and the price being what is paid for that unit of electricity by the end user. Costs are essentially producer side, and prices are consumer side
- Costs for renewable energy include capital and operational/running costs, which can be expressed individually, or, as lifetime costs that are all inclusive (LCOE – levelized cost of electricity)
- What is not mentioned as frequently are the indirect costs of different energy sources, such as infrastructure costs (grid upgrade and redesign, storage batteries, and so on), and other indirect costs such as taxes, subsidies and higher electricity prices
- Cost can even be stretched out to include the external costs to address problems caused by a particular energy sources (such as air pollution, climate change, and so on)
- Renewable energy technology and capital like solar and wind are consistently getting cheaper with more investment, demand, and so on
- New coal plants and fossil fuel power related technology is getting more expensive. We may also have to consider carbon taxes/prices and polluters taxes in the future for dirtier energy sources
- Renewable energy has many benefits – so, the cost has to be weighed against benefits to understand if renewables are more of an investment for the long term future than a cost.
- We have to ask what we are definitely getting out of renewables compared to fossil fuels and nuclear
- We have to ask how each energy source that provides us power is impacting key factors of society such as electricity prices, and social, environmental and economic factors
Main Cost Factors For Energy Sources
The main cost factors are usually:
- Capital costs (construction and all costs to get the project up and operating)
- Fuel costs and operational/running costs (fuel, maintenance costs, repair costs, wages, handling any wastes etc.)
This costs can be separated, or can be calculated together.
Refer to this resource for a list of the different energy sources and their estimated capital costs (cost to construct) – https://en.wikipedia.org/wiki/Cost_of_electricity_by_source#Levelized_cost_of_electricity
From cheapest to most expensive:
- gas/oil combined cycle power plant – $1000/kW
- onshore wind – $1600/kW
- solar PV (fixed) – $1060/kW (utility), $1800/kW
- solar PV (tracking)- $1130/kW (utility) $2000/kW
- battery storage – $2000/kW
- conventional hydropower – $2680/kW
- geothermal – $2800/kW
- coal (with SO2 and NOx controls)- $3500-3800/kW
- advanced nuclear – $6000/kW
- offshore wind – $6500/kW
- fuel cells – $7200/kW
- Upfront costs of renewables can be expensive, but the lifetime costs drop renewable energy sources to the same level of cheaper than fossil fuels
- Read more at https://www.ucsusa.org/clean-energy/renewable-energy/barriers-to-renewable-energy#bf-toc-0
- Fuel costs can be given per kWh and tend to be highest for oil fired generation, with coal being second and gas being cheaper. Nuclear fuel is very cheap per kWh (wikipedia.org)
Renewable energy tends to be very cheap to run because usually fuel (that is converted into electricity) doesn’t cost anything e.g. water, sun, wind are all freely available. However, renewable energy sources can be more labor intensive for renewables compared to fossil fuels, and this must be a consideration in operational costs.
LCOE (Levelized Cost Of Electricity) Of Each Energy Source
LCOE is essentially the cost to produce one unit of electricity (usually in $ per kWh) over the lifetime of production.
It takes into consideration investment, operations and maintenance costs, fuel, electrical energy generated, discount rate, and expected lifetime of the electricity producing asset.
Adding up the cost and discount factors, it is one common way to compare the different energy sources and their costs to produce the same unit of electricity.
- LCOE is … the net present value of the unit-cost of electrical energy over the lifetime of a generating asset
- … the LCOE is calculated over the design lifetime of a plant, which is usually 20 to 40 years, and given in the units of currency per kilowatt-hour or megawatt-day
An estimate of the LCOE of different energy sources in the US in 2018 was:
- Hydro – 39.1 (LCOE in $/MWh)
- Solar PV – 45.7
- On Shore Wind – 49.8
- Gas Combined Cycle – 46.3-67.5
- Nuclear – 77.5
- Biomass – 92.2
- Coal – 98.6-104.3
The full table and supporting information can be accessed at https://en.wikipedia.org/wiki/Electricity_pricing
Global, national and regional LCOE estimates and calculations can be viewed at https://en.wikipedia.org/wiki/Cost_of_electricity_by_source#Levelized_cost_of_electricity
LCOE’s differ in different places in the world – by country, by region, by State, by city, and so on.
Increasingly, old coal and gas plants are running at a higher LCOE than hydro, and new solar and wind technology (solar and wind are dropping in cost).
The Limitations Of LCOE
LCOE doesn’t take into consideration:
- Dispatchability, the ability of a generating system to come online, go offline, or ramp up or down, quickly as demand swings.
- The extent to which the availability profile matches or conflicts with the market demand profile.
- The LCOE measure tries to evaluate the lifetime cost of lifetime energy production, from initial build to fuel use and maintenance to decommissioning. Despite its ambitious nature, an LCOE calculation has significant shortcomings, however. It does not consider quality in its formulation. Sometimes, the cheapest option is not the best option, as anyone shopping in a discount store knows, and as we can see by comparing polluting coal-fired power stations to slightly more expensive nuclear power plants.
- More importantly, it does not measure power availability matching to the demand profile. In South Africa, demand peaks in the early evening, between 5pm and 8pm. Solar power availability, by contrast, peaks around lunchtime and produces nothing before 7am or after 6pm (as measured in August). LCOE does not factor in this cost, whether it is addressed by backup power sources or power storage solutions. It also does not account for grid integration, or the cost of acquiring vast tracts of land for solar or wind farms.
Renewable Energy Technology Is Consistently Getting Cheaper
Especially over the last few decades, the price of renewable energy (solar and wind specifically) in many different countries, is getting cheaper.
Increased investment and demand, along with development and newer improved technology is pushing the price of technology down.
- As technology and economies of scale improve over time, the initial capital cost of building an energy generator decreases. This is known as the “learning rate”. Improvements in technology are expected to reduce the price of renewables more so than coal in coming years
- [In Australia … ]
- The price of solar has been falling at the rate of 26 per cent since 1979, every year, and it continues to do so. So our ability to afford this has become much better in the last couple of years …
- “In about 2013-2014, solar started to compete with traditional energy generating technologies”
- By 2015 it was clear it was well on par and in 2017 there is no doubt that solar is the cheapest form of electricity you can make.
- renewable energy capital costs have fallen dramatically since the early 2000s, and will likely continue to do so.
- For example: between 2006 and 2016, the average value of photovoltaic modules themselves plummeted from $3.50/watt $0.72/watt—an 80 percent decrease in only 10 years.
- Renewable energy sources, notably solar and wind, are reaching price and performance parity on-and-off the grid
- Three key enablers – price and performance parity, grid integration, and technology – allow solar and wind power to compete with conventional sources on price, while matching their performance. As technologies, including blockchain, artificial intelligence (AI) and 3D printing continue to advance the deployment of renewables, prices will likely continue to fall, and accessibility will improve
- Australia has the lowest cost for solar PV and Africa has the highest due to investment costs
- South Australia, along with China has the lowest unsubsidised, levelised cost of energy (LCOE) for concentrating solar power
- China, the United States and Germany have already reached price parity for certain renewable sources
- [Smart renewable cities, community energy, emerging markets, and corporate involvement are driving demand for renewables]
Fossil Fuel Technology Is Getting More Expensive
Old coal and fossil fuel power plants were cheaper in decades gone by compared to modern power plants.
Modern fossil fuel power plants and technology are getting more expensive with new generation power plants, air pollution control devices, and expensive technology like CCS. Clean coal technology is also getting more expensive, along with new plant types like super critical and ultra critical coal plants.
Something else that has to be considered is carbon prices/carbon taxes, and polluters tax that may be more heavily enforced in the future – both of which can hit fossil fuel plants harder than renewables.
- [Now, in Australia, coal fired power stations and gas turbines cost more to produce electricity compared to solar farms, when built from brand new]
- [Capital investment costs for fossil fuel plants compared to 60 years ago are very different]
- [in the future, a carbon price in Australia could put super critical and ultra critical coal plants up to a LCOE of around $100 per MWh $80 per MWh … and this is in comparison to a completely renewable electricity system at $75-80 per MWh]
Other Cost Factors To Consider With Different Energy Sources – Indirect, & External
Other than capital and operational/running costs (which are the main costs discussed in most studies and publications), there are indirect and external costs to consider with renewable energy, compared to fossil fuels and nuclear. These indirect and external costs can be harder to calculate, but should certainly be considered.
These indirect and external costs include, but aren’t limited to:
- Infrastructure costs
- Other infrastructure support costs
- Environmental costs (and cost of addressing them)
- Social/health costs (and cost of addressing them)
- Miscellaneous costs
Infrastructure includes things like poles, wires, the design and capacity of the electricity grid, interconnectors, and so on. Anything that facilitates the transmission and delivery of electricity from the generation site to the end user.
Infrastructure costs are unavoidable – there is always infrastructure being built new, upgraded, repaired and replaced, even for existing power stations and to meet future electricity demand. But, there can be new infrastructure needed for new energy sources, or at least a modification to what is already there.
Renewables like solar and wind in particular present challenges with variability/intermittency, and balancing power loads and capacities at different times.
- we can make use of existing infrastructure as much as we can … but we still need [some] new infrastructure [for new energy sources]
- … investment costs associated with replacing old and retiring infrastructure with new plant, in one of the most capital-intensive industries, are significant and unavoidable.
- … improving interconnection across the NEM will allow energy resources to be better utilised, both by providing access to lower-cost sources of energy and increasing the diversity of generation with different profiles and different locations
- [there might be a number of good renewable energy zones across an existing energy grid, but a number of new ones might need to be created or accessed to replace existing or retiring fossil fuel generators]
- [renewable energy may lead to] smaller increases in the cost of maintaining power poles and wires and green schemes [but may be offset by lower wholesale power prices]
[there may be changes to] the way new transmission lines and interconnectors are built [or planned, to allow renewables to connect to the grid in a better and cheaper way]
These changes may include:
- Speeding-up and streamlining regulatory approvals and cost-benefit analysis for new transmission infrastructure
- Managing congestion on the power grid so the cheapest power can get to consumers
- Allowing generators to pay for transmission infrastructure in exchange for access to it
- Facilitating “renewable energy zones”
- Making it easier for large-scale storage systems like batteries to connect to the grid
- [Residential renewable energy solar setups in Australia may present future problems for the electricity grid]
- Victoria’s energy grid simply wasn’t designed to cope with a system where each house can feed its own electricity back into the network
- It actually does hurt the stability of the grid … particularly in the mid-afternoon where there’s very low demand
- … smart household batteries will solve many of the problems
- [Additionally, new wind farms present some problems to infrastructure]
- … [existing] transmission lines are thin and can’t handle more power coming into the system
- [so we may see] transmission lines … upgraded to allow for increased renewable energy generation
- [Some of the indirect costs for renewables comes from] their intermittency and the need to build additional transmission lines and generation, most commonly gas-fired turbines, to provide electricity when the wind doesn’t blow and the sun doesn’t shine
- [additional costs are] grid-scale batteries
- … [In Australia] most renewable energy – like that generated by wind and solar – is intermittent, and needs to be “balanced” (or backed up) in order to be reliable. This requires investment in energy storage. We also need more transmission lines within the electricity grid to ensure ready access to renewable energy and storage in different regions, which increases transmission costs.
- And, there are additional engineering requirements, like building “inertia” into the electricity system to maintain voltage and frequency stability. Each additional requirement increases the cost of electricity beyond the levelised cost.
- Renewables in particular need either backup energy sources like combined cycle gas turbines that can ramp up and down quickly.
- AND/OR, energy storage batteries that can store energy for later use (like the big battery installed in South Australia recently – the biggest of its kind at the time). These batteries need to be connected to the grid
- [to deal with capacity issues for a solar farm in Mildura in Australia, a] massive machine [was added], known as a synchronous condenser, to the project. It can balance the energy output and protect the grid
- The downside is it’s a hugely expensive piece of equipment
- [a large number of new renewable energy projects can increase] the complexity of every connection in the market
- [In Australia] the addition of pumped-hydro storage and extra network construction would add a levelised cost of balancing of A$25-30 per MWh to the levelised cost of renewable electricity
Polluting energy sources, or dirty energy sources, can lead to a range of environmental issues.
Two of the most significant are greenhouse gas emissions contributing to climate change, and air contaminants leading to air pollution.
But, there are others like water pollution, ocean warming and acidification, acid rain, and so on.
There are financial costs to address and clean up these environmental issues.
Social & Health Costs
There can also be costs of addressing the social and health issues caused by different energy sources.
One of the most significant social/health issues caused by some fossil fuel energy sources is caused by outdoor air pollution. It can lead to higher mortality rates and several different health problems.
Read more about the potential costs of air pollution in this guide.
There can be other miscellaneous costs indirectly borne by society as a whole as a consequence of using that energy source.
Some of these might include:
Higher Electricity prices
- In Denmark, Germany, Belgium and other countries – caused by renewable and green energy taxes/subsidies, and costs to support renewable portfolio standards and renewable energy credit (REC) programs
Additional and external cost factors are outlined at https://en.wikipedia.org/wiki/Cost_of_electricity_by_source#Levelized_cost_of_electricity
Also, there are some good weighted costs (taking into consideration more than just LCOE) of different energy sources at https://theconversation.com/renewables-will-be-cheaper-than-coal-in-the-future-here-are-the-numbers-84433
Renewable Energy Might Be More Of An Investment Than A Cost (Compared To Other Energy Sources) In The Long Term
Lastly, a cost is different to an investment in a general sense.
An investment provides additional benefits along with a service or product, where as a cost usually just delivers the service/product.
It could be argued that the short term costs and challenges to transition to renewables is a worthwhile investment for the long term future.
However, the social/health, environmental and economic benefits have to be weighed up against the drawbacks, and compared to fossil fuels and nuclear options.
Forbes.com (from Stanford University, the National Bureau of Economic Research and Woods Hole) puts it this way:
- the longer we wait to decarbonize our economy, the more dramatically future GDP will decline