It now makes less economic sense to build a fossil-fuel power plant than ever before, according to a new analysis. While it's probably too soon to sound the death knell for coal and natural-gas-fired electricity plants, the results from the study by Bloomberg New Energy Finance are an indication of the increasing importance of renewables in the developed world's energy mix, and a warning that fossil-fuel plants may no longer enjoy the competitive advantage over renewables they once had.
The study by BNEF, released in October, found that for the first time, the widespread adoption of renewables is lowering the “capacity factor” for fossil fuels. The capacity factor refers to a power plant capacity's maximum potential achieved over time. For example a solar project may have a 20 percent capacity factor because the plant can only produce, on average, 20 percent of the 100 percent maximum capacity the plant achieves when the sun is shining brightest. In comparison a natural-gas plant might have a 70 percent capacity rate because the fuel source is far less intermittent and its production is only limited by seasonal demand and maintenance. Related: Natural Gas Companies Slammed By Low Prices
The BNEF report gathered data to estimate the costs associated with each kind of energy, excluding subsidies. The results are startling. It found that the capacity factors for coal and natural gas are falling, and those of renewables are rising. For example the capacity factor for natural gas dropped from 70 percent in the first half of 2014 to 62 percent in the second half of 2015. For wind, the capacity factor rose from 32 to 37 percent during the same period and for solar, it increased from 17 to 20 percent.
Why is that important? Because while solar and wind only represent around five percent of total U.S. electricity, there is now enough renewable energy to influence when coal and natural gas plants run. As more renewables are installed, coal and natural gas plants use less inputs, thus increasing the cost of coal and natural-gas-fired power. As their costs go up, more renewables are installed, and the vicious cycle is perpetuated.
"Renewables are really becoming cost-competitive, and they're competing more directly with fossil fuels," BNEF analyst Luke Mills is quoted as saying. "We're seeing the utilization rate of fossil fuels wear away."
That is particularly troubling for power companies planning to invest in fossil-fuel power plants because it indicates that over time, the plants will be used less. In contrast, while solar and wind projects have a high up-front capital cost, the source of power once they start producing it is free. Meanwhile the cost to produce renewable forms of electricity has come down rapidly. Related: Oil Jobs Lost: 250.000 And Counting, Texas Likely To See Massive Layoffs Soon
BNEF found that wind power is now the cheapest form of electricity in both Germany and the UK. In the United States in 2014, wind became the least expensive electricity including subsidies. Without subsidies, which end in 2017, wind is expected to be cheaper than coal and gas within a decade, according to Bloomberg.
A Wind Technologies Market Report from August shows wind prices falling from nearly 7 cents a kilowatt hour in 2009 to 2.35 cents per kWh in 2014. Solar is more expensive than wind, but prices are also dropping.
The U.S. Energy Information Administration has advanced combined cycle natural gas as the cheapest form of electricity (levelized cost of electricity for plants entering service in 2020) at $72.60 per megawatt hour, followed by onshore wind at $73.60/MWh, hydro-electric power at $83.50/MWh, conventional coal at $95.10/MWh, and advanced nuclear at $95.20. Geothermal is cheaper than all the sources at $47.80/MWh, but it comes with a subsidy of $3.40/MWh. Solar photovoltaic power weighs in at $125.30 per megawatt hour, with an $11/MWh subsidy.
If wind and solar power are becoming cost-competitive against natural gas and coal, will new fossil-fuel power plants ever get built?
The answer seems to depend on how much economic growth is achieved. In its 2015 annual energy outlook, the EIA plotted a graph of electricity generation from 2013 to 2040. Various scenarios from low economic growth to high economic growth, and in between, high or low oil prices, are presented. Related: Will Iran Double Down On Downstream When Sanctions Are Lifted?
In a reference case the EIA predicts that total electricity generation increases by 24 percent between 2013 and 2040. Of the 4.797 billion kilowatt hours generated in 2040, coal's share drops from 39 percent in 2013 to 34 percent in 2040. However at that amount, coal will still account for the largest percentage of U.S. power generation 25 years away. Next closest is natural gas, which grows from 27 to 31 percent in 2040. Nuclear power generation in the United States will decline from 19 percent of the total in 2013 to 16 percent, reflecting the impacts of planned nuclear plant builds and retirements.
Renewable energy, says the EIA, will grow substantially from 2013 to 2040, from a low of 50 percent growth in a low economic growth scenario, to a high of 121 percent should the economy be firing on all cylinders. In the reference case, renewables' total share of U.S. electricity moves from 13 percent in 2013 to 18 percent in 2040, with the highest percentage of growth, unsurprisingly, coming from wind and solar.
So while the capacity factors for fossil-fuel plants are falling and those of renewables are rising, if EIA's predictions bear out, it appears likely that more natural-gas plants could be built to meet the increased demand for gas, as well as more solar and wind installations which, as has already been explained, are becoming cost-competitive with gas and coal. In sum, while there will almost certainly be changes to the percentages of power types produced in the United States, if the total amount produced continues to go up, by 2040 there will very likely be a need for all of them: nuclear, natural gas, oil, renewables, hydro-electric, and yes, even coal.
By Andrew Topf of Oilprice.com
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