Are wind and solar really cheaper than fossil fuels?

Does Bloomberg New Energy Finance's claim that renewables are already cheaper than new fossil fuel plant add-up or could such claims backfire?

Last week Bloomberg New Energy Finance (BNEF) put out a press release headed,  

RENEWABLE ENERGY NOW CHEAPER THAN NEW FOSSIL FUELS IN AUSTRALIA

Australia wind beats new coal in the world’s second-largest coal exporter

In its first sentence the release then stated,

“Unsubsidised renewable energy is now cheaper than electricity from new-build coal- and gas-fired power stations in Australia, according to new analysis from research firm Bloomberg New Energy Finance.”

This made for great headlines and received wide coverage including in Climate Spectator.  But people should be careful before celebrating victory over fossil fuels just yet.

In many respects such sensational headlines rather than helping the cause of renewable energy could actually backfire.  In reading such headlines the natural conclusion of the man in the street and the average politician is, “great news, no need to worry the climate problem is solved.”

And the attitude of the clean energy and climate change sceptic is, “Yeah sure right, ok then let’s scrap the Renewable Energy Target and see how far they get.”

The reality is that wind, solar PV, solar thermal, bioenergy and even energy efficiency have a long way to go before they are the ubiquitous default options for meeting our energy needs.  Even including a $23 carbon price the wholesale electricity prices on the eastern seaboard is averaging about $55 per megawatt-hour (MWh).  That is still well below the price required to get-up the cheapest renewable option, wind power.

In some very favourable circumstances you can get a wind farm up for $80/MWh (Trustpower seems to have got Snowtown II up for something close to $80), but most private-sector developers I talk to want and need a price closer to $90 to $100/MWh to get finance.  Furthermore once trading in carbon commences, it’s reasonably likely that the carbon price will drop closer to $10 taking the wholesale electricity price with it. 

When you look at the detail behind the headline you find that while the underlying analysis is reasonable, for the average Joe, it isn’t likely to mesh with their interpretation of renewables being cheaper than coal.  BNEF actually found the underlying “cost” for new build coal excluding government policy considerations was $56 per MWh or $61 to reflect expected rises in the price of coal. This is substantially lower than wind.

What made coal more expensive than wind was down to two factors that fundamentally hinge on government policy:

1-     Banks are extremely reluctant to finance new coal fired power stations because they perceive a high risk that government will impose stringent constraints on carbon emissions in the future. According to BNEF this leads to a finance risk premium over lower carbon alternatives that increases the effective cost of new coal by $32/MWh.

2-     BNEF assumed the carbon price would ascend from $23 per tonne of CO2 to $44 in 2020 and keep rising further after 2020. Taking into account the 40 year lifetime of a coal this worked out to an extra cost of $51 per MWh once discounted back to today.

On point 1, BNEF are spot on - banks will not lend you the money to build a new coal fired power station in Australia right now. Unless of course a state government is involved in underwriting the carbon risk such as the WA government with Bluewaters 2.  Judging from the public statements of Queensland Energy Minister McArdle, you wouldn’t want to completely discount the idea they might do something similar. 

On point 2 these carbon price assumptions are what government probably should do if policy action matched rhetoric. But they are out of the ballpark of what will happen based on current policy settings.  For BNEF’s prices to become a reality requires Europe to address its massive oversupply of emission allowances, and the market is yet to be convinced this will happen.  Also I’d suggest that if government really did follow through with a credible carbon pricing regime then banks would have greater comfort about regulatory settings and reduce the risk premium they currently apply to coal power stations.

In terms of wind being cheaper than combined cycle natural gas, the key assumption behind that conclusion is that new gas contract prices will rise from the $4 per GJ that most power plant are paying today, to $12 per GJ for new plant.  This is noticeably higher than what a range of experienced Australian gas market analysts are currently forecasting out to 2020.  Nonetheless as I wrote back in November, it seems reasonably likely that by the time new CCGT is required around 2020, its costs will be higher than wind. 

In terms of Solar PV, BNEF found it was not competitive with coal or gas at a wholesale market level until 2020 and this also hinged on the two points above as well as very substantial reductions over the current cost of the technology. 

One should note that Solar PV’s economics even without subsidies look reasonably good in comparison to households getting their power from an electricity retailer. But this could be wiped away tomorrow through a regulator’s pen that changed pricing structures to allow network costs to become a fixed charge, that was unavoidable. This is not beyond the realm of possibility, and the Queensland Competition Authority recommended changes that would have had an equivalent effect.

For new renewable energy projects to be viable at the kind of scale required to make a meaningful difference will require government policy intervention for at least some time to come. While the economics of renewables are far better than what critics realise, one needs to be careful making triumphant claims.

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