Lately, the internet has been overrun with headlines about how solar energy has officially become the cheapest form of electricity in the world.
This is … not quite right. Solar has seen remarkable cost declines and is competing in more circumstances with every passing year. But it is not the world’s cheapest source of electricity.
The main reason is that there is, at least currently, no such thing as “the world’s cheapest source of electricity,” if that’s taken to mean cheapest, all costs considered, in all places, at all times.
No such fairy dust exists; different sources perform differently in different economies and different electricity systems. What can be said about solar is that it is rapidly increasing the range of circumstances under which it can compete on costs, without subsidies.
Two remarkable facts, drawn from two recent analyses, serve to illustrate the point in dramatic fashion — not “world’s cheapest” dramatic, but pretty dramatic.
Solar is competitive with wind in the developing world
That annual report (which I covered in this post) covers the development of renewable energy in emerging nations. It shows, among other things, that those countries, led by China, are now investing more in renewable energy and installing more renewable energy capacity than developed nations.
It also shows that, thanks to recent cost declines, the capital costs of new solar in emerging economies has nudged down barely below the costs of new wind:
As Randall says, “solar was bound to fall below wind eventually, given its steeper price declines, [but] few predicted it would happen this soon.”
Keep in mind, this is only capex — capital costs. The total cost of energy wind produces for emerging nations is still cheaper, because wind turbines produce more output per megawatt of capacity than solar panels. (They have a higher “capacity factor,” in the lingo.) But it is an impressive milestone nonetheless.
It is one reason that solar PV capacity is set to outpace wind for the first time this year. In a year-end note, BNEF chair Michael Liebreich says, “the latest projections from our solar and wind analysis teams are that there will be almost 70 gigawatts of photovoltaics added globally in 2016, up from 56 gigawatts in 2015, and that wind installations will total 59 gigawatts, down from 62 gigawatts last year.”
Together, wind and utility-scale solar are now the cheapest available energy sources in the places that are building the most of them. Liebreich says bluntly, “renewable energy will beat any other technology in most of the world without subsidies.”
Utility-scale solar now has a lower total cost of power than natural gas
The second remarkable fact comes from Lazard, the investment bank and research firm. Every year for 10 years, it has issued a report assessing the total “levelized cost of energy” (LCOE) of various sources. The LCOE of a particular source is calculated by dividing the total lifetime costs of building and operating the source by the total lifetime energy output of the source. Total costs divided by total energy = LCOE.
There are lots and lots of reasons to take LCOE with a grain of salt. Comparing sources purely on $/MWh is somewhat limited; a more holistic approach is needed to really get at the socioeconomic merits of an energy source.
But it is a useful baseline. If nothing else, it serves as an indicator of industry opinion — Lazard’s annual report is very widely read.
Without further ado, let’s look at the results of Lazard’s Levelized Cost of Energy Analysis 10.0. (Above the dotted line are “alternative” sources, below are “conventional.”)
Our second remarkable fact is tucked away there on row five: Cutting edge solar has nosed ahead of natural gas.
Specifically, utility-scale, thin-film solar PV plants produce cheaper power, on average, than new natural gas plants. (“Thin-film” solar involves advanced materials other than crystalline silicon, which has been the standard material for solar panels for most of the history of solar.)
Both onshore wind and solar PV have seen insane drops in cost over the past eight years — 66 and 85 percent, respectively. (Thanks, Obama!)
These falling prices have led to our current state of affairs: On an LCOE basis, onshore wind is the cheapest form of electricity; utility-scale thin-film solar PV is the second cheapest.
Think about that for a minute. The cleanest energy is the cheapest. That’s a pretty big deal.
Now that you’ve had your reverie, let’s bring it back to earth with a few caveats that help explain why solar is not yet “the cheapest electricity in the world”:
1) In the developed world, wind and solar are not competing with new power plants.
In China and other emerging nations, population, GDP, and electricity demand are all rising quickly. They need new electricity generation, and when one surveys the options for new power plants, renewables look really good. That’s why emerging nations are installing more renewable capacity than their Western counterparts.
In developed nations, however, electricity demand has largely plateaued. In some places, it’s even falling slightly. For the most part, we have the electricity we need, which means that new electrical generation capacity often displaces existing capacity.
Another way of putting this is that, oftentimes, developed-world renewables aren’t competing with other new sources. They are competing with existing sources, power plants that have already been built and paid off. Those old, partially or completely amortized plants are producing extremely cheap power.
This competition between renewables and existing power plants helps explain why US utilities (and fossil fuel companies, and conservatives) tend to dislike state-level renewable energy mandates. When forced to build new renewable-energy capacity, utilities are effectively creating their own competition, often rendering their existing fossil fuel and nuclear power assets uneconomic. (Thus the many cries for bailouts of existing coal and nuclear plants.)
Competing with existing generators is a higher bar to get over than beating out new power plants on cost.
2) Rooftop solar is still very expensive.
All solar PV is getting cheaper, quickly. Just over the last year, utility-scale solar costs have dropped 11 percent and rooftop solar costs 26 percent. That is crazypants.
However, rooftop solar remains extremely expensive, mainly due to higher labor costs, along with customer acquisition, siting, permitting, and other “soft costs.” Each new 20 kW is its own project.
In fact, residential rooftop solar is close to the most expensive form of electricity on an LCOE basis. Commercial and industrial (C&I) rooftop solar is a little better off — it’s getting to the point where it can compete with new nuclear or advanced-coal plants.
But remember: It’s not competing with alternative forms of new generation, it’s mostly competing with existing generation, relative to which it is wildly expensive.
3) Government support is still needed.
Renewable energy advocates are getting a bit smug these days, claiming that renewables are so cheap they can survive a Trump presidency, no problem. (Rated: four Pinocchios. In fact, none of us will survive.)
Advertising that you can live without subsidies is, as IEA president Fatih Birol put it to me, “playing with fire.” The fact is, federal tax subsidies (the ITC and PTC) materially improve the economics of renewable energy, in ways that have noticeable market impact.
Tax subsidies push wind and utility-scale solar from competitive with natural gas to substantially cheaper than natural gas. That’s no small thing.
4) Lazard’s analysis leaves out one big advantage and one big disadvantage of wind and solar.
The costs of climate change are left out of these LCOE calculations. If they were included — if a reasonable carbon tax were applied across the electricity sector — it would obviously advantage renewables relative to fossil fuels. (It would also improve the position of existing nuclear plants.)
Conversely, a unique challenge facing wind and solar is also left out.
Wind and solar are intermittent resources (the wind isn’t always blowing, etc.), which means the more of them you add to the grid, the more “firming” of the grid you need to compensate. That can be done through flexible backup generation (usually natural gas), energy storage, “load shifting” (moving demand to times of high wind/sun), or a variety of other techniques.
Making the grid more flexible will come at some cost. It has to be done eventually, and the end product will be much more effective, but getting there will cost money. Wind and solar necessitate spending that money.
TL;DR: it’s complicated, but yes, solar is getting way cheaper
First, there’s no such thing as an electricity source that is cheapest in all circumstances, nor is there likely to be such a source any time soon. All sources have advantages and disadvantages; they all have circumstances in which they excel.
Nonetheless, second, it is unquestionably true that things are rapidly moving in the right direction for renewable energy. Utility-scale solar has gotten so much cheaper, so fast, that it is now directly competing with new wind and natural gas plants. That is something no one would have dared predict even a few years ago.
If solar costs keep dropping, then in a few more years there will be no remaining ambiguity: Utility-scale solar will be the cheapest form of new electricity almost everywhere. Where it isn’t, wind will be. And rooftop solar will be edging out natural gas.
That still leaves developed countries with the dilemma of how to deal with no-longer-competitive fossil fuel and nuclear generators, in which utilities have millions of “sunk costs.” But solar will be like an acid bath for them, eating away from the margins inward.
So the hyped headlines are a little out ahead of the facts. But the hype itself is warranted. Solar is winning.