How Renewable Energy Can Be Cost-Competitive

As Director-General of the International Renewable Energy Agency (IRENA), I accepted with pleasure the opportunity to write about the remarkable transformation of the energy sector by renewable energy technologies. The topic was suggested to me in the gracious invitation by the UN Chronicle, and we will come to it in a moment, for it says a lot about where renewable energy is today and how it is perceived.

But first, we need to talk about why renewable energy is so important. The world is facing an unprecedented turning point. Climate change represents a real and imminent threat to the prosperity that many enjoy today, and that millions aspire to and are working towards. But of course, it is more than this. It is about the survival for the most vulnerable of this planet’s citizens, and about the protection of ecosystems and biodiversity that we should be safeguarding. The changing climate is largely being driven by emissions from burning fossil fuels, although there are other important contributors. To stem climate change we must reduce our consumption of these carbon-intensive fuels. Renewables can and must be a central part of this plan.

The increased deployment of renewables will also bring other benefits. Renewable energy technologies create jobs, reduce local air pollution and require less water. Renewable energy technologies almost exclusively use local resources and therefore help insulate our economies from external energy security shocks. Critically, for many of our 173 Member and signatory States, renewable energy is also one of the fastest ways to expand access to electricity. The highly modular nature of many of these technologies, especially solar photovoltaics (PV) and onshore wind, also means that for the first time in the history of the electricity sector individuals and communities are playing an active role in their own electricity provision. As such, renewable energy technologies are spearheading a change to a more democratic, distributed energy system.

The benefits of renewable energy are many and obvious, but so have been the barriers to their uptake. Market structures, a lack of understanding of emerging renewable technologies, difficulty in accessing finance, high financing costs, inadequate regulatory frameworks, lack of remuneration for offsetting fossil fuel externalities (e.g. carbon and local air pollutant emissions), small markets and policy uncertainty have all played a role in hindering the deployment of renewables. Fortunately, with diligent work by industry, Governments, financing institutions and regulators, many of these barriers are falling away.

Renewable power generation technologies have accounted for more than half of all new power generation capacity additions in every year since 2011. Today, 164 countries have renewable energy targets, up from just 43 in 2005. A record high of more than 130 gigawatts (GW) of renewable energy was added to the global energy mix in 2014 and investment in the sector increased from US $55 billion in 2004 to more than US $260 billion in 2014. In 2014, new capacity additions of solar PV set a new record of 40 GW, while wind power also had a record year with 52 GW added.

THE ROAD TO COMPETITIVENESS

The economics of renewable energy technologies are critical to understanding their potential role in the energy sector, and how quickly and at what cost we shift the energy sector onto a truly sustainable path. Unfortunately, most Governments have not systematically collected the necessary data to track the trends in the evolution—many would rightly say revolution—of renewable energy technology costs. The result is that too often misconceptions about costs or out-of-date data have undermined policy effectiveness.

To fill this gap, and ensure that robust policy can be made based on accurate, timely data from a trusted source, IRENA has developed a world-class database of around 15,000 utility-scale renewable power generation projects and nearly three quarters of a million small-scale solar PV systems.

The trends emerging from this data show not only the success of deployment policies in driving down costs, but also what will underpin the transformation of the energy sector in the future.

The cost-competitiveness of renewable power generation has reached historic levels. Biomass for power, hydropower, geothermal and onshore wind can all now provide electricity competitively compared to fossil fuel-fired power generation where good resources and cost structures exist.  

Solar PV module prices in 2015 are 75 per cent to 80 per cent lower than their levels at the end of 2009. Between 2010 and 2014 the levelized cost of electricity (LCOE) of utility-scale solar PV has fallen by half. The most competitive utility-scale solar PV projects are now regularly delivering electricity for just US $0.08 per kilowatt-hour (kWh) without financial support, compared to a range of US $0.045 to US $0.14/kWh for fossil fuel power. But even lower costs are being contracted for 2017 and beyond. A recent tender in Dubai of US $0.06/kWh ably demonstrates this shift, even in a region with abundant fossil fuels.

Onshore wind is now one of the most competitive sources of electricity available. Technology improvements, occurring at the same time as installed costs have continued to decline, mean that the cost of onshore wind is now within the same cost range, or even lower, than for fossil fuels. Wind projects around the world are consistently delivering electricity for US $0.05 to US $0.09/kWh without financial support, with the best projects costing even less.

Concentrated solar power (CSP) and offshore wind are still typically more expensive than fossil fuel-fired power generation options today, with the exception of offshore wind in tidal flats. But these technologies are in their infancy in terms of deployment. Both represent important renewable power sources that will play an increasing role in the future energy mix, as their costs will continue to come down.

Costs for the more mature renewable power generation technologies—biomass for power, geothermal and hydropower—have been broadly stable since 2010. However, where untapped economic resources remain, these mature technologies can provide some of the cheapest electricity of any source.

Given the installed costs and the performance of today’s renewable technologies, and the costs of conventional technologies, the fact is this: renewable power generation is increasingly competing head-to-head with fossil fuels, without financial support.

VARIABLE RENEWABLES MAKE ECONOMIC SENSE

To achieve a truly sustainable energy system, solar PV and wind power will have to play a rapidly increasing role in the provision of electricity. The key challenge is therefore to manage their introduction in such a way as to minimize any additional costs of their integration. Sooner, rather than later, policy support needs to shift from a silo approach that supports individual technologies, to one that sets long-term goals to minimize overall system costs.

There are no technical barriers to the increased integration of variable renewable resources, such as solar and wind energy. At low levels of penetration, the grid integration costs will be negative or modest, but can rise as penetration increases. Even so, when the local and global environmental costs of fossil fuels are taken into account, grid integration costs look considerably less daunting, even with variable renewable sources providing 40 per cent of the power supply. In other words, with a level playing field and all externalities considered, renewables remain fundamentally competitive. 

Variable renewables raise different questions for the electricity system, but the principle is the same: a mix of technologies in a range of locations will be required to meet demand that varies every day. Hydropower, biomass for power, geothermal and CSP with thermal energy storage are baseload technologies, or dispatchable, and pose no special problems for grid operation.

The additional system-wide costs that might be considered over and above the cost for variable renewables are relatively modest. Cost implications for transmission and distribution systems are typically minimal. However, additional reserve to meet voltage fluctuations, to allow for intermittency and provide the capacity to ride out longer periods of low sunshine or wind, can add to overall system costs.

Yet one must also weigh the environmental and health externalities of using fossil fuels for power generation. Without such analysis, renewables do not face a level playing field. If damage to human health from fossil fuels in power generation is considered in economic terms, along with the externalities associated with CO2 emissions (assuming US $20 to US $80/ton of CO2), the cost of fossil fuel-fired power generation rises by US $0.01 to US $0.13/kWh (depending on the country and technology), thereby increasing the cost of fossil fuel-fired electricity to between US $0.07 and US $0.19/kWh.

THE OUTLOOK FOR FURTHER RENEWABLE ENERGY TECHNOLOGY COST REDUCTIONS

Which brings us back to the title of this article. The topic should not be “How renewable energy can be competitive”, because renewable energy technologies are already competitive. The questions must be how do we drive down costs even further and what are the challenges faced in achieving that goal.

This is the critical challenge we face today. IRENA analyses show that the story of renewables competitiveness is nuanced. Wide variations in installed costs exist, not only between countries, but within a country. Some of these differences are due to structural or project-specific issues, but many could be addressed through better policy.

At the same time, cost-reduction opportunities in equipment and project development remain to be exploited. However, in an era of low equipment costs, future cost reductions could increasingly be driven by reduced balance-of-project costs, and lower operation, maintenance and finance costs.

Unlocking these cost-reduction potentials and narrowing the cost differentials between markets will be critical to meeting the world’s economic, environmental and social goals. The next stage of the remarkable story of renewables will be driven by their underlying competiveness. As countries such as Chile, Jordan, the United Arab Emirates and India are finding, renewable energy is now often the most economic source to meet their electricity demand. However, the pace of this change will be too slow for our planet even with renewables being increasingly competitive.

Now is the time to grasp the opportunity to accelerate the deployment of renewables to meet our shared goals of a secure, reliable, affordable and environmentally sustainable energy sector. Because it has never cost so little to do so and it is increasingly the option that will save consumers money today and in the long run.