On The Economics Of Wind & Solar Power

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By Lion Hirth, from Neon Neue Energieökonomik

November’s COP22 climate summit of Marrakech gave climate policy a fresh tailwind, after the blow of Donald Trump’s election. Even without a strong global treaty, national climate policies are multiplying  —  at least a certain type of policies. While the policy that economists often recommend  — putting a price on greenhouse gas emissions  —  remains patchy, as a recent Worldbank report shows, subsidies for renewable energy are booming: no fewer than 145 countries support renewables today. Germany’s Energiewende is a prominent, but not the only example: Obama’s Clean Power Plan features renewables as a centerpiece of climate policy, India’s National Solar Mission includes a 100 GW solar power target. In addition, China is said to be considering a 200 GW target, and Morocco has announced the building of the largest solar power facility on the planet. Nearly half of all newly added electricity generation capacity was based on renewables. In ten countries, wind and sun deliver more than 10% of electricity consumed. These include Denmark (43%), Portugal (24%) and Spain (23%).

Many hope that wind and solar power will eventually become economically competitive on large scale, leading the way to a global low-carbon economy. Are these hopes justified?

On the cost side, the economics of renewables look impressive. The costs of wind power have dropped significantly. On average, wind now generates electricity at $70–80 per megawatt-hour (MWh) globally, as reported by the two international think-tanks IRENA and IEA. Ten years ago, a rooftop solar array for a single family home cost more than $50,000  —  today it sells for less than $14,000. (America’s LBNL and Germany’s Fraunhofer ISE provide more data.) Germany, which receives less solar radiation than southern Canada, now generates solar power at $90 per MWh. The United Arab Emirates have tendered a solar power station for $58 per MWh and recent auctions in Chile, Peru, and South Africa have resulted in even lower prices.

In some countries, wind and solar power are now cost-competitive with coal- and natural gas-fired power plants, even when carbon emissions are not priced. However, cost structures are very country-specific, and cost-competitiveness is not universal. Renewables tend to be cheaper where it is windy or sunny, where investors have access to low-cost finance, where fossil fuels are pricy, and where emissions are priced. In many places, however, coal-fired power plants remain the cheapest option for producing electricity, driving the renaissance of coal. Still, for renewables to have caught up with fossil plants in cost terms represents a huge success for wind and solar power.

Costs are, however, only one side of the competitiveness equation. The other is value. Merely comparing electricity generation costs between different plant types is misleading, as it ignores the fact that the economic value of electricity from different power stations is not the same. This is because in wholesale markets, the price of electricity fluctuates from hour to hour (or even minute to minute). Some power plants produce electricity disproportionately at times of high prices (so called “peaking” plants), while others produce constantly at low prices (“base load” plants). This little detail has striking consequences for the economics of wind and solar power. Paul Joskow and Michael Grubb observed this a while ago.

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The Beam Magazine is an independent climate solutions and climate action magazine. It tells about the most exciting solutions, makes a concrete contribution to eliminating climate injustices and preserving this planet for all of us in its diversity and beauty. Our cross-country team of editors works with a network of 150 local journalists in 50 countries talking to change makers and communities. THE BEAM is published in Berlin and distributed in nearly 1,000 publicly accessible locations, to companies, organizations and individuals in 40 countries across the world powered by FairPlanet.

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