Renewable Energy

Utility-Scale Wind and Solar Energy is Cheaper than Conventional Generation

Lazard has released its Levelized Cost of Energy Analysis (LCOE)—Version 11.0. The central findings of LCOE V11.0 analysis include:

1) certain Alternative Energy technologies (e.g., wind and utility-scale solar), which became cost-competitive with conventional generation several years ago, are, in some scenarios, approaching a LCOE that is at or below the marginal cost of certain conventional generation technologies;

2) despite the sustained and growing cost-competitiveness of certain Alternative Energy technologies, advanced economies will require diverse generation fleets to meet baseload generation needs for the foreseeable future; and

3) a rational and cost-based analysis is necessary to enable a modern grid, cost-effective energy development and an increasingly clean energy economy.

George Bilicic

“The growing cost-competitiveness of certain alternative energy technologies globally reflects a number of factors, including lower financing costs, declining capital expenditures per project, improving competencies and increased industry competition,” said George Bilicic, Vice Chairman and Global Head of Lazard’s Power, Energy & Infrastructure Group.

“That said, developed economies will require diverse generation fleets to meet baseload generation needs for the foreseeable future,” concluded Bilicic.

Jonathan Mir

“Energy industry participants remain confident in the future of renewables, with new alternative energy projects generating electricity at costs that are now at or below the marginal costs of some conventional generation,” said Jonathan Mir, Head of Lazard’s North American Power Group.

“The next frontier is energy storage, where continued innovation and declining costs are expected to drive increased deployment of renewables, which in turn will create more demand for storage,” concluded Mir.

Note: This analysis did not take into account potential social and environmental externalities (e.g., the social costs of distributed generation, environmental consequences of conventional generation, etc.) or reliability- or intermittency-related considerations (e.g., grid investment required to manage intermittency).

Certain Alternative Energy technologies (e.g., wind and utility-scale solar), which became cost-competitive with conventional generation several years ago, are, in some scenarios, approaching a LCOE that is at or below the marginal cost of certain conventional generation technologies:

  • Global LCOE values for Alternative Energy technologies continue to decline, reflecting, among other things: (a) downward pressure on financing costs as a result of continuously evolving, and growing pools of capital being allocated to Alternative Energy; (b) declining capital expenditures per project resulting from decreased equipment costs; (c) increased competition among Industry participants as markets evolve policies towards auctions and tenders for the procurement of Alternative Energy capacity (and away from standard offer programs, Feed-in-Tariffs, etc.); and (d) improving competencies in asset management and operation and maintenance execution
  • As LCOE values for Alternative Energy technologies continue to decline, they are, in some scenarios, at or below the marginal cost of certain conventional generation technologies (e.g., coal and nuclear, which can have variable and fuel costs that are significant on a $/MWh basis). Lazard believes this trend will lead to ongoing and significant deployment of Alternative Energy capacity. However, such displacement will be moderated by the intermittent nature of Alternative Energy generation (discussed further herein) and the current reluctance of capital providers to underwrite merchant exposure, as well as an understanding of the need for resource diversity in a modern electric grid
  • Costs continue to decline for Alternative Energy technologies, albeit at a modestly slowing rate. The gap between the costs of certain Alternative Energy technologies (e.g., utility-scale solar photovoltaic and utility-scale onshore wind) and conventional generation technologies continues to widen as the cost profiles of such conventional generation technologies remain flat (e.g., coal) and, in certain instances, increase (e.g., nuclear)
  • A number of leading Industry participants are beginning to develop utility-scale wind and solar “plus storage” offerings, thereby increasing capacity factors and serving grid needs not currently met by existing intermittent generation resources. Lazard has included a preliminary analysis of the levelized cost of one such illustrative future offering, which compares favorably to its nearest competition, solar thermal with storage
  • Certain large-scale conventional and renewable generation projects (e.g., IGCC, nuclear, solar thermal, etc.) continue to face a number of challenges, including significant cost contingencies, high absolute costs, competition from relatively cheap natural gas in selected geographies, operating difficulties and policy uncertainty

Unsubsidized Levelized Cost of Energy Comparison (source: Lazard, lick on table to enlarge)

Despite the sustained and growing cost-competitiveness of certain Alternative Energy technologies, advanced economies will require diverse generation fleets to meet baseload generation needs for the foreseeable future

  • As electricity generation from intermittent renewables increases, the timing imbalance between peak customer demand and Alternative Energy production is accentuated; the optimal solution for many regions is to use Alternative Energy technologies as a complement to existing conventional generation technologies
  • While some Alternative Energy technologies have achieved notional “grid parity” under certain scenarios (e.g., best-in-class wind/solar resources), such observation does not take into account potential social and environmental externalities (e.g., social costs of distributed generation, environmental consequences of conventional generation, etc.) or integration- and reliability-related considerations

A rational and cost-based analysis is necessary to enable a modern grid, cost-effective energy development and an increasingly clean energy economy

  • Alternative Energy costs have decreased dramatically over the past eight years, driven by advances in technology, maturation of the supply chain and the resulting economies of scale in manufacturing and installation and, in the U.S., by federal subsidies and related financing tools. A key question for Industry participants will be whether these technologies can continue their cost declines and/or meet growth expectations as the Industry continues to mature, and after the near-term step down and forthcoming permanent expiration of such subsidies
  • Lazard’s rational, cost-based analysis and Industry perspective indicates that robust, modern and sustainable electricity systems must combine low-cost renewables with baseload conventional technologies in order to achieve sustainable energy independence, a cleaner environment and a stronger economic base
Conclusion

Importantly, while energy storage could one day fundamentally change the way the U.S. and global power grids operate, Alternative Energy generation technologies, which remain intermittent despite significantly decreased costs, must for now be deployed as one element of a diversified generation fleet capable of meeting the needs of an advanced economy.

In this regard, Lazard has been and remains a strong proponent of coordinated federal and state energy policy that is grounded in rational cost analysis and that will enable smarter energy development, sustainable energy independence, a cleaner environment and a strong economy.

Lazard
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