Comparing the cost of renewables vs. fossil fuels

In most if not all future energy scenarios the share of renewables will grow significantly. But some argue this comes at a considerable cost to consumers, because renewables are more expensive. But are they really?

Not everybody is welcoming the increasing share of renewables in the energy mix or is happy about government policies to support the growth of renewables as part of efforts to combat climate change. Some say that renewables are (too) expensive and are only being deployed because they are being subsidised. All this is costing the consumer dearly, it is argued, because they are facing higher energy bills. Instead, they say, we would be better off with more gas-fired power stations or nuclear plants to secure a low-carbon future. What is the truth in these arguments?

A report  by the International Renewable Energy Agency IRENA says that renewable technologies are now the most economical solution for new capacity in an increasing number of countries and regions. But they would say that, wouldn’t they? Just like the World Coal Association tells us that ‘coal-based electricity is 7% cheaper than gas and 19% cheaper than nuclear. The advantage of coal is even greater compared to renewable energy’. But calculating energy costs is complex and figures can be moulded to fit the argument.

Variations

It is important to note that the cost of renewables varies per region and country and depends on the quality of the resource and capacity factor. Geothermal energy might be cheap in Iceland where there is a good resource, but there are many places where it would not be cost-efficient. Similarly, solar panels make perfect sense in Spain but less so at very northern latitudes. Variables such as access to finance, regulation framework etc. are additional factors determining costs. And more importantly, it should be taken into account that the sun and wind are intermittent sources of power and consequently PV-panels and wind turbines have so-called system costs associated with them. 

Overestimate

Nevertheless, IRENA has compiled an overview of price ranges for different sources of renewable power. Hydropower, biomass, geothermal and onshore wind (in that order) come out as the most competitive options and can compete with fossil fuels, according to IRENA. Offshore wind, utility scale solar farms and CSP are the most expensive forms of renewable power, just outside the range of fossil fuel power. However, costs for offshore, CSP, solar farms and some biomass are rapidly declining. Even fairly recent data, says IRENA, can significantly overestimate the cost of electricity from renewable sources.

System costs

A recent report from the OECD looks at relative costs in a different way, focusing on system costs. These include costs for transmission and distribution grids, balancing, grid instability etc. The report says system costs for variable renewables are high and puts a figure on them. It says system costs for dispatchable technologies are modest and usually below $3 per MWh but can reach $40 - $45 per MWh for wind and solar energy. These figures include costs for back-up generation. The IRENA report acknowledges the impact of variable renewables but says systems integration costs vary wildly and can be significantly reduced through proper system design. 

Externalities

Most calculations for the price of fossil-fuel fired power, however, do not include costs of externalities, such as extra costs for healthcare, negative environmental effects or extreme weather events related to climate change. Some argue that these should be factored in, but it is hard to put an exact price on them. In a similar fashion, it is argued that fossil fuels receive vast amounts of subsidy, distorting their competitiveness compared to renewables and obscuring their real cost to the consumer. The International Monetary Fund recently drew attention to this issue and called for reform and phasing-out of fossil fuel subsidies

Barriers

It may be clear that comparing costs of renewables and fossil fuels is a complicated matter and that figures cited by either side of the argument should not be taken at face value. It depends very much on what is included and what is not: system costs, subsidies and externalities. The International Energy Agency says costs in the rapidly expanding renewable sector have been decreasing and a portfolio of renewable energy technologies is becoming cost-competitive. This is certainly true for established technologies like hydro and geothermal, and onshore wind could be competitive by 2020. But the IEA also says economic barriers remain important in many cases. Costs for renewables need to be reduced further if they are to fully compete with fossil-fuel-based power. The picture would be very different if there was a meaningful carbon price, but for now that remains elusive.