Renewable Energy Starts to Makes Fossil Fuel More Expensive

A new report out from Bloomberg New Energy Finance (BNEF) found an interesting side effect of increased wind and solar power use—fossil fuel prices are rising.

BNEF's Levelised Cost of Electricity Update for the second half of 2015 found that the costs of wind and solar power have continued to go down while the costs of gas-fired and coal-fired electric generation have gone up! Moreover, the cycle will continue as wind and solar flourish.

"For the first time, widespread adoption of renewables is effectively lowering the capacity factor for fossil fuels," wrote Bloomberg Business' Tom Randall. "That's because once a solar or wind project is built, the marginal cost of the electricity it produces is pretty much zero—free electricity—while coal and gas plants require more fuel for every new watt produced. If you're a power company with a choice, you choose the free stuff every time."Solar and wind farm. Courtesy NREL

"Our report shows wind and solar power continuing to get cheaper in 2015, helped by cheaper technology but also by lower finance costs," said Seb Henbest, head of Europe, Middle East and Africa at BNEF. "Meanwhile, coal and gas have got more expensive on the back of lower utilization rates, and in Europe, higher carbon price assumptions following passage of the Market Stability Reserve reform."

The study looked at energy prices around the world. It found the global average levelized cost of electricity (LCOE) is coming into parity or price equality, with fossil fuel generation. LCOE includes the cost of capital and development expense, maintenance fees as well as financing, beyond just acquiring the power source.

The global average LCOE of wind energy in the first half of 2015 was $85 per megawatt hour. For the second half of the year it is only $83 per megawatt hour (MWh). Solar photovoltaic prices remained higher than the cost of wind and other electric generation technologies, but continued to drop in price from $129 to $122 per megawatt hour.

Meanwhile the cost of coal-fired power has gone up across the world. Thanks to the new E.U. requirements, coal-fired electric generation went from $82 to $105 per megawatt hour there. Likewise the cost of gas-fired energy jumped from $103 to $118 per megawatt hour in the Europe, Middle East and Arica region.

It's a self-reinforcing cycle," Randall observed. "As more renewables are installed, coal and natural gas plants are used less. As coal and gas are used less, the cost of using them to generate electricity goes up. As the cost of coal and gas power rises, more renewables will be installed."

Now in Germany and the United Kingdom wind is cheaper than coal. "In the U.K., onshore wind comes in on average at $85 per MWh in the second half of 2015, compared to $115 for combined-cycle gas and $115 for coal-fired power; in Germany, onshore wind is at $80, compared to $118 for gas and $106 for coal," the report found. "In China, onshore wind is cheaper than gas-fired power, at $77 per MWh versus $113, but it is much more expensive still than coal-generated electricity, at $44, while solar PV power is at $109. In the U.S., coal and gas are still cheaper, at $65 per MWh, against onshore wind at $80 and PV at $107."

"Generating costs continue to vary greatly from region to region, reflecting influences such as the shale gas boom in the US, changing utilization rates in areas of high renewables penetration, the shortage of local gas production in East Asia, carbon prices in Europe, differing regulations on nuclear power across the world, and contrasting resources for solar generation," explained BNEF Energy Analyst Luke Mills. "But onshore wind and solar PV are both now much more competitive against the established generation technologies than would have seemed possible only five or 10 years ago."

The report also found increases in the costs of fossil fuel generation in the Americas. Coal power rose from $66 to $75 per megawatt hour in the region while natural gas-fired power rose from $76 to $82 per megawatt hour in the Americas.

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