Do Renewables make economic sense?

The renewables industry has historically been plagued by shouts of “it’s too expensive” and “coal is so cheap”, well hold onto your hats fossil fuel industry, that argument just doesn’t stack up anymore!

IRENA just published their incredibly useful analysis of the cost of renewable energy for 2023, and for those of us who see the imperative for a rapid and meaningful transition away from fossil fuels it makes for really good reading.

First let’s look at how we judge the cost of energy so we’re all on the same page. Energy in the form of electricity is economically measured in cost per kilowatt hour or megawatt hour. Watts stay the same, the precursor multiplier (kilo or mega) is just a volume thing. If we’re to compare across different energy systems we invoke a standard value called the Levelized Cost of Energy (LCOE)… sounds complicated, it really isn’t. We look at the costs to produce each unit of electricity based on the capital costs of installing the generating system, the operational costs across the lifetime of the system and the total amount of electricity produced by that system over its life. Total Costs divided by Total Energy gives us an LCOE for that particular technology at that particular site. With that tool in hand we can compare any energy generation technology at any place we choose to put it, to predict how good it will be – if we put solar panels somewhere where the sun isn’t great, the amount of energy produced is small, but costs remain the same, so the LCOE is high, and vice versa.

As we started to introduce renewables a couple of decades ago the LCOE was not very good at all, many times that of the existing coal and gas plants. The only way renewables ever got a hold was through government subsidies such as feed-in-tariffs, renewable obligation certificates and the like. These mechanisms broadly meant either a user paid penalties for using fossil derived energy supply, or the government paid the difference between the existing cost of energy and the renewably generated cost of energy. These types of techniques spurred adoption and drove capability building. This really is one of the crowning achievements of governments around the world towards mitigating (at least a little bit) climate change, and a major reason that power as a sector now produces (unit for unit) less emissions than it did in the 1990’s. We should celebrate that more; it is a great job well started.

These support mechanisms have, over a decade or more, transformed the economics of renewables. Let’s look at some headline values just released in the IRENA report: a global range of LCOE for a fossil fuel-based unit of electricity in 2023 ran in between 0.069 and 0.244 USD per kWh. So that’s what we need to beat. The big dogs in renewables are wind and solar so let’s start there, drum roll please: for installations commissioned within 2023 solar PV comes in at 0.044 USD/kWh, onshore wind romps home at 0.033 USD/kWh, that’s 56% and 67% cheaper respectively. Even complex offshore wind systems are now supplying 25% cheaper power than that from a fossil fuel equivalent. Catching up rapidly we have concentrating solar power (CSP) which is now only 17% more expensive and, given the trend, should reach parity or below quite soon. Those numbers are truly impressive when you consider that in 2010, solar PV was more than 400%, CSP 340%, offshore wind 130% and onshore wind 23% higher cost than their fossil fuel equivalents.

The support mechanisms offered by governments have driven both technology developments and volume manufacture. Capacity factors have increased as designs improved, and greater understanding of the best way to site and control the devices have also contributed – more energy from the same cost means lower LCOE. There are also volume benefits derived from learning how to produce the technology cheaper, from production line type techniques and from investment in larger capacity production plant. For solar PV, in a somewhat unexpected turn of fortune, the sheer capacity of production is now making the industry rather challenging to make good returns; a position that will drive consolidation within an oversupplied market and potentially start to plateau out the hitherto downward rush of pricing in the market.

All of this is great news, but the story is not finished. At TII we are looking at the next generation of renewables, and there is room for revolution yet. More efficient solar panels, based on different or additional semiconductor materials, techniques to extend the life of existing and new panels, coatings and additives that improve power outputs are just a few of the groundbreaking developments underway. We also working on sustainable cooling systems, enhanced wind turbine designs, capturing energy from waste, making cost effective biofuels, the list goes on.

I think we can be confident that the future of renewables is eventually a complete dominance of the electricity grid. Arguments about the cost effectiveness are now spurious and where the climate is suitable there is no good line of reasoning that says fossil power plants are the sounds choice. Yes, we’ve even more improvements still to make, yes storage will need to be deployed and yes, our grid will look different. But it is no longer a philosophical or sustainability argument; economics as well as defence of the climate and biosphere mean the right choice is clear.

Readers interested in the detail are referred to the excellent report below:

IRENA (2024), Renewable power generation costs in 2023, International Renewable Energy Agency, Abu Dhabi. https://www.irena.org/Publications/2024/Sep/Renewable-Power-Generation-Costs-in-2023 ?