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The Cost of Everything and the Value of Nothing: Falling Costs Are a Game-Changer

by

Lynn Scarlett

Global Managing Director, Public Policy, The Nature Conservancy

May 2017

For the average U.S. consumer, electricity is an unremarkable fact of their existence—when they flip the switch, the light comes on. But behind that simple act is a feat of forecasting, engineering, logistics and timing that is mind-bogglingly complex. At the heart of this process is the mix of generation sources—the different electric power plants that are put online or taken offline on a day-by-day, hour-by-hour basis, so that when someone flips a light switch, enough electricity is available to meet that demand.

Planning, building and maintaining the right generation mix to feed the electricity needs of customers is what utilities do, and they do it remarkably well, all in all. Most consumers in the United States experience very few power outages over the course of a year. And it isn’t just about having the right mix of generation in the moment, but looking 20 years or more into the future, and ensuring that as generation units reach the end of their useful lifespan, they are replaced with new capacity that can meet the challenges of the marketplace in the future.

It is in everyone’s interest to use generation sources that operate cheaply. But as is often the case, how much something costs is dependent on what you’re including in the equation. Sometimes, however, the cost savings become so clear that no matter how you measure it, one source will be undeniably cheaper. Most experts will tell you that is why coal has experienced such decline—natural gas and gas-fired generation is just as effective at meeting demand and, by every means of measure, is much cheaper.

Wind turbines are a growing source of electric power in the United States. © Kent Mason
Wind turbines are a growing source of electric power in the United States. © Kent Mason

For a long time, the same thing was true when you compared coal to solar and wind energy—any way you looked at it, coal was cheaper. The earliest versions of solar technology from the 1950s only converted about 4.5% of the available energy into electricity, meaning that a solar array had to be very big to generate a useful amount of wattage. Subsidies and renewable portfolio standards were used, starting in the 1990s, to incentivize people to build renewable energy systems, but it was the technological advancement partly spurred by those efforts that has dropped the costs and changed the game. By 2012, efficiency rates of solar energy had tripled, and by 2015, the technology in solar cells and panels had advanced to the point where they converted 23.5% of the available energy, bringing the cost per watt generated to around $.70. And the price continues to drop.

We are approaching the place where renewables like solar and wind are often going to be the cheapest generation source compared to their fossil fuel counterparts.

Infographic gamechangers everything 1

In fact, when one looks at the levelized cost of energy (i.e., the cost per kilowatt-hour (kwh) over the life of a generation asset), renewables already are often cost-competitive with natural gas, and over time, a better investment. Levelization factors in not only the cost of operation of the plant, but also the cost of installation and financing. It’s true that the cost of energy from a plant that’s already been built is naturally going to be cheaper than the power coming from new generation, but fossil-fired units are being retired at a fairly steady clip (over 40 coal generating units were being retired in 2017 alone). Utility-scale renewable installations compare favorably to their fossil fuel-fired counterparts when one considers they are cheaper to build, can be easier to finance, and have a useful lifespan that is often longer than natural gas units.

Also significant to the cost equation is the price of fuel, another game changer. Many who compare fossil fuel-fired generation to renewable generation leave out running costs, including fuel costs, focusing instead on the capital cost of building the generation asset. Most power purchase agreements for natural gas set a daily rate that covers the cost of the physical plant over the life of the contract, and then include an extra, variable surcharge for fuel costs. These costs are usually determined after power is delivered, based on the market price of the fuel, and passed through to the ratepayers. For the last several years, the price of natural gas has been so low that these costs have caused little concern. They increase the overall cost per kwh to customers by fractions of pennies.

But as anyone who has ever watched the movie “Office Space” will tell you, fractions of pennies sooner or later add up to real dollars, and lots of them. Natural gas is a commodity whose price is dictated by the vagaries of supply and demand. While supply is currently plentiful, and extreme spikes in demand are rare, market-driven pricing makes no promises over the long term. With solar and wind, there is no cost for fuel, and therefore no cost to pass on. Renewable generation offers the opportunity to serve customers at a stable price that is less subject to market volatility. Data from the Lawrence Berkeley National Lab shows that by 2023, most of the contracts signed for wind generation in the past five years will be delivering power at a lower cost per megawatt hour than natural gas.

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Maybe that’s why the fourth annual State of the Electric Utility survey, conducted by the industry publication “Utility Dive,” shows 80 percent of North American utility employees expect the use of utility-scale solar energy to increase moderately or significantly. Even more interesting is what these industry insiders said when asked what was the most compelling reason to invest in clean energy technologies. Fully one-third of respondents cited economic reasons—declining prices (15%), earnings growth and business model evolution (11%) and hedging prices against fossil fuels (7%).

But the largest number of Utility Dive survey respondents (20%) cited consumers’ preference for clean energy. Ultimately, this is the game changer that cuts through that debate over costs, and makes the winning difference, all other things being equal. Large corporations like Amazon and Google and Apple and Walmart have already committed to clean energy and want to buy power that can be had at fixed prices with zero emissions. In a marketplace where large companies can choose who provides their electricity, renewables now often have an advantage. In the complicated calculation of which generation to build to meet the demand for electric power, a generation source that can deliver power with no fuel costs and less price volatility, and which customers prefer, is a valuable asset indeed.


Originally Posted on National Geographic

May 19, 2017