By Bob Wallace & Zachary Shahan
Wind and solar electricity have become some of our least expensive ways to generate electricity in several markets around the world.
Wind is now the cheapest way to bring new electricity generation to the grid in the US as well as many other countries. Solar PV costs are rapidly dropping and solar is expected to join wind over the next few years. Furthermore, low-cost utility-scale solar is already beating out all other sources of electricity in some bidding processes, and home solar power beats the price of retail electricity (on average) in many markets.
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Before diving into specifics, let’s get the requisite context on subsidies out of the way: Some of the information below presents the price after subsidy, while some presents unsubsidized prices (we try to make it very clear in all cases if subsidies are included or not). Wind and solar subsidies are very simple and clear. Fossil fuels, however, get many subsidies that are now baked into the tax code or “hidden” in other ways. Furthermore, the biggest fossil fuel subsidies are the externalities that we pay through health problems and early death. These extra societal costs are huge, and in a “perfect free market” would be internalized by fossil fuel companies, but they are not.
One study conducted by the then-head of the Harvard Medical School found that the extra health and environmental costs of coal in the US comes to $500 billion/year. Health costs alone run between $140 billion and $242 billion every year. That means that we are paying between 9 cents and 15 cents per kWh in tax and health premium dollars for every kWh of electricity we generate using coal.
Ignoring those massive externalities/subsidies for fossil fuels (which no one in their right mind should do), let’s dive into a fun look at the numbers.
Levelized Cost of Electricity (LCOE) is often used in the electricity industry when discussing price. It is generally the estimated price of electricity coming from power plants when taking into account capital costs, operation and maintenance costs, performance, and fuel costs. A recent study from Lazard shows that wind power and solar power are already cost-competitive with all other sources of electricity when it comes to LCOE:
Another way to examine prices is by looking at prices agreed upon in power purchase agreements (PPAs).
Power purchase agreements (PPAs) are contracts between sellers (wind farms, solar farms, etc.) and buyers (utility companies, large businesses, etc.) in which the seller agrees to provide a fixed amount of electricity per year and the buyer guarantees to pay an agreed upon price. PPAs typically run for 20 to 25 years.
Wind power, on average, sold for 2.5¢ per kilowatt-hour in the US in 2013, when looking at PPA prices (2014 numbers are due to come out this week). That’s the average for all reported PPAs, which means they’re a bit under 4¢ per kilowatt-hour without subsidies. These super-low prices are extremely hard to beat, and demonstrate why so much of the electricity generation capacity added in the past few years has come from wind power plants.
Solar PV power prices vary a lot, based on region, size of the project, type of technology, and other factors, but we’re already seeing solar PV projects win PPAs where the promised electricity is cheaper than electricity from new natural gas, coal, or nuclear power plants.
Solar prices are still dropping very rapidly. Below, we’re going to look at “best current prices,” as they should be representative of what is possible and even likely in the near future. One can find more expensive examples, but the market will not support the more expensive, it will continue to seek out the least expensive.
In Austin, a SunEdison power plant won a PPA to sell Austin Energy electricity for less than 5¢/kWh. Federal subsidy would come to ~ 2¢/kWh, which is much lower than then the estimated 9–27¢/kWh in health costs that coal brings us, and I would presume less than the health and environmental costs of natural gas (but I haven’t seen a thorough analysis on that) — and that’s not even taking into account their own subsidies. (Note that Austin Energy has now designated solar power as its default energy generation method through 2024.)
In New Mexico, in 2013, a First Solar* power plant won a PPA with a price of 5.8¢/kWh, while new coal was going for 10–14¢/kWh. That 5.8¢/kWh price doesn’t take into account ~4.7¢/kWh of subsidies, but, again, the coal price doesn’t take into account 9–27¢/kWh in health costs.
In Dubai (in the UAE), ACWA Power bid just 5.98¢/kWh to provide electricity from a solar power to the Dubai Electricity & Water Authority (DEWA) — without subsidy. That was a world record low bid, but even if ACWA Power didn’t exist, the record would have been broken by the second-lowest bid, which was 6.13¢/kWh and came from Fotowatio Renewables & Saudi Abdul Latif Jameel Energy. Both bids came well below the average price of electricity from natural gas in the region, 9¢/kWh.
Lastly, while we didn’t get to see any numbers on a Minnesota case, a judge ruled that a solar power plant there offered a better deal for ratepayers than several competing natural gas power plants.
Price predictability or risk is another important issue to consider. Solar power plants and wind power plants don’t have fuel costs, of course, and have very little maintenance and operation costs. Their big costs are right up front, which makes predicting prices for a PPA very easy. Coal power and natural gas power prices, on the other hand, can vary a great deal depending on the cost of the fuel. In the gas of natural gas, price volatility is particularly strong. This makes the projects (and basing electricity generation decisions on them) quite risky, financially.
While not often discussed, this is one more thing that makes solar or wind power a smarter financial decision. Utilities value the ability to predict future prices. Doing so makes it easier for them to set rates. Some are signing solar and wind PPAs in order to lock in stable prices over time.
Retail power prices ≠ wholesale power prices. The above discussion is all about wholesale power. Utility-scale solar power plants produce electricity at a lower cost than rooftop solar power systems (thanks to economies of scale), but the difference is generally not as wide as the difference between retail and wholesale electricity prices. That means that rooftop solar power is cheaper than retail electricity from your “friendly neighborhood utility” (sarcasm) in even more places than utility-scale solar power beats other options on the wholesale electricity market. On average, rooftop solar power has hit “socket parity” or “grid parity” in Germany, the Netherlands, Italy, Australia, Hawaii, California, Arizona, and several other countries and US states.
Even though a utility can typically generate or purchase solar electricity for less than end-users can generate it, the utility has distribution costs that turn their wholesale costs into retail costs. Furthermore, it is looking to earn a good profit on its customers. Again, these are some of the reasons rooftop solar power is cheaper than retail electricity for tens or even hundreds of millions of people.
Deutsche Bank actually predicts that all 50 US states will be at grid parity by 2016 — that’s next year. (Note that it takes several years to build coal, natural gas, or nuclear power plants.) Deutsche Bank also predicts that ~80% of the global electricity market will be at grid parity by 2017. This is why solar power is scaring coal companies, natural gas companies, and utilities so much, and why you see so many anti-solar myths out there being repeated over and over again… despite being several years out of date.
If you have a price of solar in your head from 5–10 years ago, it is probably several times higher than reality. But now that you’ve read through this article, you should have a much better sense for the current cost of solar power (and wind power as well). Be sure to help educate others by sharing with friends!
*Full Disclosure: I’m long FSLR.
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