While federal subsidies have certainly been a major historical driver of U.S. wind industry growth, it is presumptuous to assume that federal policy mechanisms will continue to play this role.
Read MoreEarlier this month Bloomberg New Energy Finance (BNEF) announced findings that the LCOE for wind and solar is now cheaper than coal and gas in Europe. Further the organization said that it is actually the renewables that are pushing up the LCOE of gas and coal. Because the BNEF analysis is so deep and complex — it uses thousands of data points the company says — the press release that it issued was hard to understand. Here we take a deeper look at the process involved in comparing energy generation technologies to determine exactly why renewables will continue to push out fossils for the foreseeable future.
First, what is LCOE? Short for levelized cost of electricity, LCOE takes all of the factors into producing a megawatt-hour (MWh) of electricity into play. This includes everything from the cost of equipment, labor, permits, etc. to build the plants; the cost of fuel to run them; the cost of operations and maintenance over the lifetime of the plant; and the cost of capital to pay for everything mentioned above. All of these costs, which BNEF derived based on actual deals and projects around the world, were tallied and then divided by the by the amount of energy the plants will produce (which depends very much on capacity factor) over their lifetime to arrive at a final cost for each and every MWh of electricity that will be produced by the power plant.
It’s a very useful metric for comparing generation technologies in an apple-to-apples format. But what will be most fascinating to energy stakeholders is that renewables are now inching out fossils in some regions of the world.
Why different regions? The cost of building, operating, maintaining and fueling a coal plant in China will not be the same as building, operating, maintaining and fueling one in, for example, Europe. Similarly, the output of an onshore wind farm in a location where the wind never stops blowing will be different that the output of a wind farm in a location where the wind picks up and then dies down frequently over the course of a year.
This is why LCOE is useful – because while in a wind farm, the fuel is free, the output is much less than a coal plant, which could theoretically run 90 percent of the time (this is called its capacity factor or utilization rate). But what happens to that coal plant’s capacity factor is greatly affected by the amount of other generation available to send power to the grid. So, as more wind energy is available because there are more wind farms built, the capacity factor of that coal plant goes down: now instead of running 90 percent of the time, it runs maybe 75 percent of the time, which then pushes up its LCOE.
While we were not able to get our hands on a publishable chart before press time, a deeper look at the BNEF analysis shows not only that the LCOE for wind and solar is beating coal and natural gas in some regions of the world, but that other renewable technologies such as geothermal, biomass incineration and small hydro also have very low LCOEs and in many regions are cost competitive or cheaper than fossil or nuclear energy.
More Numbers
To get down to the nitty-gritty, specifically, the global average LCOE for onshore wind dropped from $85 per megawatt-hour in the first half of the year, to $83 in H2, while that for crystalline silicon PV solar fell from $129 to $122.
In the same period, the LCOE for coal-fired generation increased from $66 per MWh to $75 in the Americas, from $68 to $73 in Asia-Pacific, and from $82 to $105 in Europe. The LCOE for combined-cycle gas turbine generation rose from $76 to $82 in the Americas, from $85 to $93 in Asia-Pacific and from $103 to $118 in EMEA.
Seb Henbest, head of Europe, Middle East and Africa at Bloomberg New Energy Finance, commented: “Our report shows wind and solar power continuing to get cheaper in 2015, helped by cheaper technology but also by lower finance costs. 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.”
Among other low-carbon energy technologies, offshore wind reduced its global average LCOE from $176 per MWh, to $174, but still remains significantly more expensive than wind, solar PV, coal or gas, while biomass incineration saw its levelized cost stay steady at $134 per MWh. Nuclear, like coal and gas, has very different LCOE levels from one region of the world to another, but both the Americas and the Europe, Middle East and Africa region saw increases in levelized costs, to $261 and $158 per MWh respectively.
Among the country-level findings of the BNEF study are that onshore wind is now fully cost-competitive with both gas-fired and coal-fired generation, once carbon costs are taken into account, in the UK and Germany. In the UK, 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.
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 US, coal and gas are still cheaper, at $65 per MWh, against onshore wind at $80 and PV at $107.
Luke Mills, analyst, energy economics at Bloomberg New Energy Finance, said: “Generating costs continue to vary greatly from region to region, reflecting influences such as the shale gas boom in the U.S., 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.
“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.”
Lead image: The Green Evolution. Credit: Shutterstock.
Read MoreEarlier this month Bloomberg New Energy Finance (BNEF) announced findings that the LCOE for wind and solar is now cheaper than coal and gas in Europe. Further the organization said that it is actually the renewables that are pushing up the LCOE of gas and coal. Because the BNEF analysis is so deep and complex — it uses thousands of data points the company says — the press release that it issued was hard to understand. Here we take a deeper look at the process involved in comparing energy generation technologies to determine exactly why renewables will continue to push out fossils for the foreseeable future.
First, what is LCOE? Short for levelized cost of electricity, LCOE takes all of the factors into producing a megawatt-hour (MWh) of electricity into play. This includes everything from the cost of equipment, labor, permits, etc. to build the plants; the cost of fuel to run them; the cost of operations and maintenance over the lifetime of the plant; and the cost of capital to pay for everything mentioned above. All of these costs, which BNEF derived based on actual deals and projects around the world, were tallied and then divided by the by the amount of energy the plants will produce (which depends very much on capacity factor) over their lifetime to arrive at a final cost for each and every MWh of electricity that will be produced by the power plant.
It’s a very useful metric for comparing generation technologies in an apple-to-apples format. But what will be most fascinating to energy stakeholders is that renewables are now inching out fossils in some regions of the world.
Why different regions? The cost of building, operating, maintaining and fueling a coal plant in China will not be the same as building, operating, maintaining and fueling one in, for example, Europe. Similarly, the output of an onshore wind farm in a location where the wind never stops blowing will be different that the output of a wind farm in a location where the wind picks up and then dies down frequently over the course of a year.
This is why LCOE is useful – because while in a wind farm, the fuel is free, the output is much less than a coal plant, which could theoretically run 90 percent of the time (this is called its capacity factor or utilization rate). But what happens to that coal plant’s capacity factor is greatly affected by the amount of other generation available to send power to the grid. So, as more wind energy is available because there are more wind farms built, the capacity factor of that coal plant goes down: now instead of running 90 percent of the time, it runs maybe 75 percent of the time, which then pushes up its LCOE.
While we were not able to get our hands on a publishable chart before press time, a deeper look at the BNEF analysis shows not only that the LCOE for wind and solar is beating coal and natural gas in some regions of the world, but that other renewable technologies such as geothermal, biomass incineration and small hydro also have very low LCOEs and in many regions are cost competitive or cheaper than fossil or nuclear energy.
More Numbers
To get down to the nitty-gritty, specifically, the global average LCOE for onshore wind dropped from $85 per megawatt-hour in the first half of the year, to $83 in H2, while that for crystalline silicon PV solar fell from $129 to $122.
In the same period, the LCOE for coal-fired generation increased from $66 per MWh to $75 in the Americas, from $68 to $73 in Asia-Pacific, and from $82 to $105 in Europe. The LCOE for combined-cycle gas turbine generation rose from $76 to $82 in the Americas, from $85 to $93 in Asia-Pacific and from $103 to $118 in EMEA.
Seb Henbest, head of Europe, Middle East and Africa at Bloomberg New Energy Finance, commented: “Our report shows wind and solar power continuing to get cheaper in 2015, helped by cheaper technology but also by lower finance costs. 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.”
Among other low-carbon energy technologies, offshore wind reduced its global average LCOE from $176 per MWh, to $174, but still remains significantly more expensive than wind, solar PV, coal or gas, while biomass incineration saw its levelized cost stay steady at $134 per MWh. Nuclear, like coal and gas, has very different LCOE levels from one region of the world to another, but both the Americas and the Europe, Middle East and Africa region saw increases in levelized costs, to $261 and $158 per MWh respectively.
Among the country-level findings of the BNEF study are that onshore wind is now fully cost-competitive with both gas-fired and coal-fired generation, once carbon costs are taken into account, in the UK and Germany. In the UK, 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.
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 US, coal and gas are still cheaper, at $65 per MWh, against onshore wind at $80 and PV at $107.
Luke Mills, analyst, energy economics at Bloomberg New Energy Finance, said: “Generating costs continue to vary greatly from region to region, reflecting influences such as the shale gas boom in the U.S., 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.
“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.”
Lead image: The Green Evolution. Credit: Shutterstock.
Read MoreThe abundance of diverse renewable energy resources, growing demand for power, macroeconomic stability, and historically high electricity prices continue to position Mexico as one of the most attractive destinations for investments in renewable power generation.
Despite enjoying some of the highest wind and insolation levels in the world, Mexico has yet to develop most of the potential of its renewable energy sources. As of 2013, thermal sources represented 75 percent of Mexico’s installed capacity, followed by hydropower generation, which accounted for 19 percent of total capacity, while other renewable sources, such as wind, solar and geothermal energy represented less than 6 percent of electricity generation in Mexico.
Read MoreThe abundance of diverse renewable energy resources, growing demand for power, macroeconomic stability, and historically high electricity prices continue to position Mexico as one of the most attractive destinations for investments in renewable power generation.
Despite enjoying some of the highest wind and insolation levels in the world, Mexico has yet to develop most of the potential of its renewable energy sources. As of 2013, thermal sources represented 75 percent of Mexico’s installed capacity, followed by hydropower generation, which accounted for 19 percent of total capacity, while other renewable sources, such as wind, solar and geothermal energy represented less than 6 percent of electricity generation in Mexico.
Read MoreA new study by the International Monetary Fund puts the total cost of fossil fuel subsidies at approximately $10 million a minute globally, when health costs and environmental degradation are included, never mind the effects of a destabilized climate in future centuries.
The most perverse of these subsidies are aimed at finding new reserves of oil, gas and coal, even though it is generally understood that these must be left in the ground if we are to avoid catastrophic irreversible climate change.
When drilling for oil was a start-up industry in the 1890s, it cost today’s equivalent of $500 a barrel to get it out of the ground, according to UC San Diego’s James Hamilton in his study Oil Prices, Exhaustible Resources, and Economic Growth.
The first federal tax break for the oil and gas industry came within its very first years. The Intangible Drilling Costs (IDC) still allows the industry to write off most drilling costs, like the tertiary injectants deduction, in full, immediately, rather than at normal business depreciation rates.
Enacted in 1926, the Percentage Depletion Tax Credit actually increases when prices go up, as it allows companies to deduct a flat percentage of income received from oil or gas wells, frequently resulting in tax deductions in excess of investment.
The Independent Petroleum Association of America describes the tax credit this way: “This deduction is a standard part of the American tax code that supports the development of U.S. oil and natural gas that would otherwise be uneconomic to produce.”
When coal was a start-up industry (in the U.S.) in the late 1700s, it was given tax-free status, smelting was given incentives, and competing old world coal imports were taxed at 10 percent. Four centuries later, coal is still receiving $5 billion in incentives a year. The result is coal-fired electricity at about US $0.04 per kilowatt-hour (when burned in power plants that are already built, the costs of which have already been passed along to ratepayers).
“There are dozens and dozens of tax credits for conventional energy,” said SolarReserve CEO Kevin Smith, based on the knowledge he gained in 30 years of building natural gas plants. “For example, if the Keystone pipeline goes ahead; the refineries who refine that type of alternative fuel get a 50 percent ITC. There are depreciation allowances for wells as they start to degrade, there are just a long list of tax advantages. And all of them are a permanent part of the tax codes.”
These and other oil and gas subsidies total about $7 billion a year in the U.S., according to Taxpayers for Common Sense Understanding Oil and Gas Tax Subsidies.
For centuries, the U.S. Congress has made these sorts of federal investments in each new form of fossil energy.
Permitting, Leasing Show Inequities, Too
State-level policies increase expenses for renewable energy project developers by making permitting onerous for new projects. In California for example, permitting has historically been almost nonexistent for fossil fuels, but has set a much higher bar for renewable energy.
Permitting solar farms in California can be a three-year multi-million-dollar process. Fossil fuel companies can simply declare on a one page form their intentions to drill next Friday. Further, land leasing costs are higher for solar and wind than for fossil fuels. Land leases for oil and gas were still at 1920s prices in 2009, when the BLM was setting market rates for the renewable industry.
The coal industry pays land rents for natural resource extraction on land that has been undervalued since the 1800s. In the last 30 years, the treasury has lost nearly $30 billion in revenue by undervaluing public lands in Wyoming and Montana where Powder River coal is mined, according to Tom Sanzillo, Finance Director at the Institute for Energy Economics and Financial Analysis (IEEFA).
Make Renewable Subsidies Permanent
It is almost impossible to reverse permanent subsidies in the tax code. It has never happened in the U.S., so some advocates believe that a more practical solution would be: if you can’t beat them, join them.
The coal industry’s PTC for producing refined coal is $6.71 a ton — in 2015. The wind industry’s $0.023 per kWh PTC keeps flickering out every few years. Renewables have been stymied by stop/start subsidies that almost seem designed to scare off investors, because none are permanently in the tax code the way fossil fuel subsidies are.
Uncertainty alone makes subsidies less effective. If the ITC and PTC were permanent, renewable investment would be more predictable, so supplying equipment for projects and capital cost would be less, bringing generation costs down. While some investors are able to stomach the risk of buying into renewables projects without knowing whether the tax credits will still be there when their projects reach fruition, most cannot.
Because subsidies for fossil fuels are permanent, the effect is much greater, because permanence provides a stable and predictable investment environment not given to renewables.
One way to create a level playing field with fossil fuels would be make the subsidies for wind and solar just as permanent as those for fossil fuels. Either that, or remove all subsidies for all forms of fuel, something very unlikely to happen.
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