Last week, the financial advisory and asset management company Lazard launched the 12th edition of its Levelized Cost of Energy Analysis where it makes a comparative analysis of the average cost of producing a MWh with different generation technologies (here the complete pdf). Since 2008, when the first edition was launched, it has been a reference in the sector to see how renewables were reducing the cost of generation and approaching what seemed like a chimera a few years ago: the grid parity. But the news is that this is no longer news: that renewables (wind and solar) are now clearly more competitive in new installation than conventional is something that almost no one (with some criteria) discusses. Now the goal is what I would call the point of no return of renewables: that new wind or solar installations are cheaper than keeping conventional already amortized.
And this is what, for the first time, the Lazard report indicates may be happening. That’s why all the headlines in various media such as PV Magazine or El periódico de la Energía have highlighted this fact. Let’s take a closer look at Lazard’s report on LCoE:
- New renewable installation vs. conventional marginal cost
As already mentioned, this is the big news. According to Lazard, in certain cases, both the wind power and the new solar installation (both without subsidies) can have a lower generation cost than the cost of generating coal or nuclear power plants that are already depreciated and that, therefore, their cost is the marginal cost of operation, fuel, maintenance, etc.
- The first thing that is surprising is that we are already at that point. Bloomberg NEF, which is probably the most reputable consultant in the sector, published this year its New Energy Outlook where it predicted that this point would be reached at the earliest in 2028 in projects in Germany and in 2030 in China, in both cases versus Coal installations. If the comparison is with gas installations, the date is brought forward to 2022 and 2023 for China and Germany respectively. It is already known that the profession of fortune teller is especially difficult in the world of energy but 10-12 years difference is a lot even for this world. Surely there is an explanation for such a difference (criteria, assumptions, etc.) but I personally, if I have to choose one of the two sources, I stay with Bloomberg.
- The consequences of reaching this point are very relevant: to begin with, it would give a free hand to force closures of highly polluting plants (e.g. Coal) without economically damaging operators. This, together with private initiatives by the utilities themselves, would accelerate the penetration of renewables.
- Apparently, the previous point seems very positive, but if we go a little further, a massive introduction of renewables would cause a fall in the pool price, which would make projects without PPA less attractive, which could be very detrimental to the renewables themselves.
2. Wind vs Solar
Another thing that catches my attention in the report is the very low LCoE of wind (29 $/MWh) while the cheapest solar is at 26 $/MWh. It is striking because the price levels that are being reached in the auctions seem to indicate that the soil of the solar is lower than that of the wind. Let’s look at some relevant details in this comparison
- Analyzing the assumptions of the analysis, we see that the capacity factor of Wind Onshore is set at a range of 55-38%. That 55% corresponds to the minimum value of 29$/MWh and personally it seems to me something unreal for onshore projects. I find it hard to think that there are projects with 4,800 net equivalente hours. What’s more, the offshore range is 55-45% which seems more real but that the maximum range of both ranges coincides is very rare. I would put a range of 50-30% for onshore.
As for the lifetime of the installations, 20 years are assumed for wind. For Onshore it may make sense (life extension currently has capex associated) but for Offshore it should clearly be 25 or even 30 years.
- Historical reduction ratios are spectacular but seem to indicate some floor for wind while solar seems far from reaching some floor (Bloomberg predicts in solar an additional 30% reduction by 2025).
- It seems clear that solar will be cheaper than wind (if it is not already) and this coupled with being less capital-intensive, less technological risk and very short installation times, makes it look like an unbeatable rival in future multi-technology auctions. But as Jose Luis Blanco, CEO of Nordex-Acciona said at the recent EnerCluster event in Navarre: “although solar may be cheaper, the value of wind MWh will always be higher”. And this is something that legislators should bear in mind when planning future auctions: for regions such as Navarre or countries such as Spain or even for Europe, the return on investment in wind power is very high as a large percentage of the investment is local or regional while, in solar, the trend is that each time the manufacture of all the HW focuses more on China.
Be that as it may, the trend is unstoppable: renewables are already the most installed source of generation and will be even more so in the coming years. Now it is the turn of legislators and market planners to put in place the right mechanisms so that there is no risk of dying of success.