Imagine that you are the obesity patient that for years has been complaining that healthy food is too expensive for your purse. Then unexpectedly comes the consumer agency with a sample of shopping bags, revealing that your perception is wrong: The junk food you are eating is actually more expensive than the healthy food you know should be eating.
The report I refer to is a new IEA study published last week, “Projected Costs of Generating Electricity”.
Actually, in this case, the consumer agency itself was partly responsible for your flawed perception.
In its regular publication World Energy Outlook, the message from IEA has until recently been that large-scale solar PV cost 2-3 times more than the conventional alternatives. (For a more detailed discussion of IEAs traditional approach to PV, refererence is made to the report “IEA and Solar PV: Two worlds apart” I wrote for The Norwegian Climate Foundation February 2014, summarized in this article)
This new IEA report is based on data for 181 plants in 22 countries, including 3 non-OECD countries.
It then applies a coherent set of assumptions to calculate the so-called Levelized Cost of Electricity (LCOE) for each of the main power generation technologies. The most remarkable finding in the report is the dramatically improved competitiveness of solar PV, compared to the established baseload technologies coal, nuclear and natural gas.
Several data in the analysis underpin this finding:
- As shown in table below, the median LCOE from all solar PV plants has dropped from 500 to below 200 USD/MWh since 2010, whereas the power from combined-cycle gas, coal and nuclear has become slightly more expensive in the same period.
- By equalizing costs and revenues using a 3 % real interest rate, which the IEA economists believe is a reasonable proxy for the “social cost of capital” today, the median cost of ground-mounted PV drops to below 100 USD/MWh. This is equivalent to the median cost of power from combined-cycle natural gas plants (CCGT), and only 20-30 % higher than cost from existing coal and nuclear plants in the OECD area.
- If we apply the higher 7 % real interest rate, the median cost of the capital-intensive ground-mounted PV increases in the study to around 125-130 USD/MWh, only 20–40 % higher than the baseload alternatives gas, coal and nuclear.
- PV competitiveness is most relevant to study in sunny countries. The data from the only sunbelt-countries in the report, United States and China, confirm the remarkable progress made by solar PV. The reported costs from ground-mounted PV in the US and China are as low as 55 USD/MWh at 3 % interest rate and 74 and 80 at 7 % respectively.
- In China, solar PV is already 40 % (3% interest rate) or 20 % (7% interest rate) cheaper than natural gas-fired power using the most cost-efficient technology CCGT. In the US, which has the lowest natural gas costs of all countries, solar PV is still cheaper than gas assuming a 3 % real interest rate. Even with 7 % interest rate, ground-mounted PV in the US is only 8 dollar/MWh more expensive than natural gas.
Of course, the data and assumptions used in the report should be treated with caution. Many will argue the data points are too limited, the fuel price assumptions to high or too low, the cost data inaccurate, etc. The model furthermore applies a 30 $/t carbon cost to all technologies. This might look a bit high given today’s carbon prices, but is highly realistic – if not moderate – considering the 30-40 year lifetime of newly built power plants.
The principal comment, however, is that the report – notwithstanding its remarkable finding – still underestimates the cost competitiveness of solar PV. This is partly because it only reflects historic construction costs and does not take into account the projected decline in costs of PV, and partly because it excludes (with the exception of China) all the sunbelt countries where most of the new power generation capacity will be added in the decades to come.
The implications of these findings are indeed far-reaching. I will highlight two of them:
- Given the low -risk character of constructing and operating of PV plants, the report shows how the cost of PV can be further cut by reducing the risk-premium demanded by lenders and investors. As elaborated by the IEA team, this can most cost-efficiently be obtained if governments, development banks and other financial institutions are prepared to underwrite the external risks associated with such circumstances as off-taker default, changes in law and taxation, etc. The more such guarantees made available to solar power developers, the cheaper solar power will be.
- Governments and utilities must halt looking at wind and solar PV as a supplement to “baseload” coal and gas generation. As recommended by the IEA experts, they should instead seek to transform the electricity system in a way that will enable a continuously growing penetration of the ever cheaper solar PV and wind power.
- In practice, this means replacing baseload plants with flexible generation plants, extending and upgrading the grid to make it more resilient, improving the management and balancing of electricity demand through the roll-out of smart-grid applications and not least – in line with the projected decline in battery costs a.o – invest in electricity storage that will enable the cheap PV and wind to be consumed when most needed.
Suddenly, thanks to IEA this time, the prospects for a predominantly renewable electricity-mix look closer and more attractive than ever. This is not least good news for the ministers and negotiators soon heading to Paris to hammer out a realistic and affordable global roadmap towards decarbonization. We do not need new technologies; the solutions for the electricity sector are here, waiting to be rolled-out on a global scale.