Low-Energy Fridays: If renewable energy is cheaper, then why don’t we use it exclusively?
The fundamental assertion behind many climate protests and activism is that decision-makers do not do enough. Often, the specific claim is that an apparent solution—transitioning to 100 percent renewable energy—is being sidelined or that decision-makers are under the influence of fossil fuel lobbyists.
As is often the case, this isn’t the full story. An appreciation for the economic impacts of time and location can help us understand why renewable energy is not the global norm despite its low cost.
Yes, renewable energy is cheaper than fossil fuels—but there are caveats. The levelized cost of electricity (LCOE), the lifetime average per megawatt hour cost, is $23.22 for conventional solar power and $31.07 for onshore wind. (To be clear, these are the subsidized costs; the unsubsidized costs are $41.22 and $50.87 respectively.) Natural gas and coal plants, categorized as “thermal plants” because they produce electricity from heat, have a higher LCOE. Natural gas has a relatively low LCOE of $42.72, while coal’s is much higher at $89.33. When comparing the LCOE of these technologies, simplistic analysis would conclude that because renewable energy is cheaper, everyone should use it. Such logic informs increasingly prevalent clean electricity mandates. However, the LCOE ignores basic economic realities that can better determine which energy resources are optimal.
The cheapest renewable energy sources—onshore wind and conventional solar—are not always available. Obviously, solar power only generates electricity when the sun is out. But when the sun is out, solar always produces essentially free electricity, whereas a gas or coal plant can generally produce power at any time but incurs a fuel cost.
The problem is that we still need electricity even when the sun isn’t shining. In fact, the capacity factor—the percentage of a resource’s production as a function of its size—is only 23 percent for solar and 33 percent for wind. In general, as long as fuel is available, thermal power plants can produce electricity to match demand throughout the year even if some plants aren’t called on often.
This means to act as a direct substitute for fossil fuels; renewable energy requires storage technology to make electricity available when customers demand it, not just when it’s convenient to produce. Battery storage costs are falling but still expensive relative to other options, and applications are limited depending on how long a battery can provide electricity before needing to recharge. The U.S. Energy Information Administration (EIA) estimates an LCOE of $36.27 for solar and battery hybrid facilities.
Additionally, even though renewables may have a lower LCOE, their costs are borne in a fundamentally different way than thermal plants. Especially when paired with storage, renewable energy requires significant upfront cost but little to no cost to produce incremental electricity. Some fossil fuel-fired plants can be built fairly cheaply; however, they come with higher operating and production costs along with certain input unknowns, such as what fuel will cost when production is necessary. Put another way, gas-fired power plants are like insurance with a cheap premium but an expensive deductible.
Furthermore, because natural gas prices fluctuate just like any other commodity, using it to make electricity can be either cheaper or more expensive than initially estimated. When policymakers impose a renewable energy mandate, which already exists in many states, they risk higher economic costs if future fuel costs are lower than expected.
Electricity market prices are also based on supply and demand— holding supply constant, prices rise when demand is high and fall when demand is low. This shift happens in concert with the type of energy available and the level of customer demand. As demand increases, utilities must call on more expensive types of energy. While customers paying a fixed rate may not see it on their utility bill, electricity market prices are constantly changing.
For example, California uses a lot of solar power, with electricity market costs at their highest around 8 p.m. due to a combination of higher demand (people home from work and school) and the sun going down, making solar power unavailable. In this case, natural gas is economical during those times. Conversely, electricity is cheapest at the times when solar is most productive—often making solar power less economical despite its low cost.
Another issue is that just because renewables might produce cheaper energy doesn’t mean it’s necessarily cheaper to transmit that energy to a customer. Building transmission lines to carry that electricity to customers can be expensive, so even if energy production costs are low, transmission costs for renewables may be higher than for fossil fuel plants located closer to customers.
Lastly, many fossil fuel-fired power plants remain in operation because they fulfill specific roles within electric power infrastructure. For example, utilities need resources to restore power after a blackout, balance the grid, or preserve electric power reliability (“grid stability”). Historically, fossil fuel-fired power plants have provided these services.
Ultimately, the “100 percent renewable” argument is simplistic and misunderstands our electric grid. There are few serious examples of how to adopt such a system cost-effectively, and the most commonly cited study asserting the viability of this plan was debunked for assuming more hydroelectric generating capacity than is physically possible.
From a climate perspective, this means that ending greenhouse gas emissions for electricity production isn’t as simple as employing renewable energy mandates or subsidizing renewable energy. A better understanding of the challenges around deploying renewable energy also points to the need for easier permitting for electric power infrastructure and a greater focus on bringing down storage and transmission costs in addition to generation costs. Fundamentally, grid planning and operation is a supply-and-demand issue, and the problem is that renewables can’t easily satisfy electricity demand that occurs when they are unable to produce power. The value of renewables will increase if customers shift their power demands to the times of day when renewables can produce electricity, or if they move closer to optimal locations for renewables; however, renewable energy in its current state can’t fulfill today’s electric power system demand requirements completely.
At the end of the day, renewable energy growth is limited by predictable economic constraints including inadequate infrastructure and high storage costs. But renewable energy is currently booming, with more capacity in grid interconnection queues than all existing fossil fuel capacity combined. To overcome innovation challenges, policymakers who care about emissions must focus on the nuts and bolts of economics and markets rather than simple but inefficient policies that rely on subsidies or mandates.