The Paradox of Declining Renewable Costs and Rising Electricity Prices

Most energy observers recognize that the cost of renewable energy has declined dramatically in the last decade. The investment firm Lazard produces a periodic report on the average cost of generation from different electric power sources – the “levelized cost of electricity” in energy geek parlance. Their latest reportshows that over the last decade the levelized cost per unit of electricity from new utility-scale onshore wind and photovoltaic (PV) solar power plants has dropped about 70 and 90 percent, respectively. In many places, the cost of new renewable generation is at or below that of existing conventional sources like natural gas, coal and nuclear.

This would seem to be good news for those interested in making energy clean and cheap. Yet, a recent study suggests that policies that mandate renewable use have driven up the retail price of electricity and have been an expensive way to achieve greenhouse gas reductions – often an implicit reason for those mandates. While it seems paradoxical that electricity prices could be rising while generation costs are falling, this possibility is an artifact of how electricity markets work and how these workings have grown more complex as the industry evolves from a more centralized fossil fuel-based generation base to a more distributed and renewable base. Let’s explore this and see what it says about the road ahead.

Why Renewable Generation Costs Have Plummeted

There are several reasons for the steep reduction in renewable costs. One is the improvement in basic product design. Wind turbines are now much larger and have much higher capacity factors than a decade ago. Although the new designs are more expensive up front, increased capacity and capacity utilization have outpaced those higher costs to lower the cost of energy produced. A typical base-to-blade tip height for onshore turbines is now often over 500 feet – as tall as the Washington Monument – and we are seeing single turbine capacity of 5 MW or more, enough to power around 1,700 US homes over the course of a year.

Another reason for the cost decline is improvement in manufacturing efficiency which has lowered the costs of producing solar PV panels dramatically, particularly in China. And per unit installation “soft” costs are declining as project developers gain more experience and installations have moved from small scale (rooftop solar) to utility-scale operations (solar farms of hundreds of acres).

These dramatic renewable generation cost declines have been attributed to policies such as tax credits, preferential feed-in tariffs, and renewable portfolio standards (RPS), which directly target the use of renewables, expand demand and create cost-reducing economies of scale to meet that demand. Renewables that were once inarguably much more expensive and required large subsidies and mandates to incentivize adoption have slid into grid parity territory, now able to compete directly with conventional sources in many places.


Post Author: D-OLF Hydrometric