Is Renewable Energy Cheaper?

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Is Renewable Energy Cheaper?

Photo by Rahul Ramachandram

The price of developing solar and wind power projects have reached cost parity with their fossil fuel power plant competitors, and in many cases renewables are now much cheaper.

18 November 2022 – by Tim Daiss   Comments (0)

Is Renewable Energy Cheaper than Fossil Fuels?

Renewable energy development is catching up. In many cases, it is bypassing its fossil fuel counterparts with cheaper capital expenditure and time to build in addition to helping rein in harmful emissions from fossil fuel production.

Moreover, a Mackenzie report finds that the oil and gas industry’s operations around the world account for around 9% of all human-made GHG emissions. The sector also produces the fuels that create another 33% of global emissions. As such, the fossil fuel industry contributes 42% of all GHG emissions.

However, amid the war in Ukraine, demand destruction has continued to unfold. Since the start of the year, oil prices have reached multi-year highs, topping USD 100 per barrel for the first time since 2014. Meanwhile, natural gas and LNG prices in Europe and Asia have hit record highs for most of the year, with more pricing headwinds ahead for both fuels.

That demand destruction should gain momentum over the next two years. Goldman Sachs recently raised its 2022 Brent oil price forecast to USD 104 per barrel from USD 99 and its 2023 forecast to USD 110 per barrel from USD 108. These prices, coupled with a continued strong US dollar, could also dent the demand for both fuels.

Solar and Wind Power Cost vs Fossil Fuels Cost

Yet, higher and volatile fossil fuel prices will also bode well for more renewable power generation, especially as the price of developing solar and wind energy projects reaches cost parity with fossil fuel power plant competitors. Meanwhile, green hydrogen development costs continue to drop.

The Case for Renewables – Cheaper Renewable Energy

Building LNG import terminals is often more expensive than building new solar and wind power projects and takes much longer. Large commercial solar power projects can take as little as 12-18 months to build and become operational. Renewable power frees economies.

Wind power project construction time is usually even shorter. According to the European Wind Energy Association, a 10 MW wind farm can easily take two months to build. And a larger 50 MW wind farm can take around six months to build.

However, depending on its scale, an LNG import terminal can take as many as three years to build. This includes the time taken to add the necessary LNG infrastructure and pipelines. Often, that time horizon can extend to five or more years, depending on regulatory and geopolitical factors. However, building gas-to-power plants offers a mixed bag, taking as little as a year but up to six years to build.

What is the Cheapest Energy Source?

Aside from build-out times, a World Economic Forum report finds renewables were the world’s cheapest energy source in 2020. It also found that the cost of large-scale solar projects had plunged by 85% in a decade.

Moreover, of the wind, solar and other renewables that came on stream in 2020, nearly two-thirds, some 62%, were less expensive than the cheapest new fossil fuels.

By 2020, concentrating solar power costs had dropped by around 16%, onshore wind by 13%, offshore wind by 9% and solar PV by 7%. Therefore, renewable energy is on an upward trajectory as the cheaper energy source.

International Renewable Energy Agency (IRENA) said that cheaper renewables give developed and developing countries a compelling reason for energy transition and to phase out coal. It helps them meet growing energy demands, saving costs and adding jobs. Emerging economies will save up to USD 156 billion over the lifespan of the renewable projects added in 2020 alone, the agency added.

The Rise and Fall of LNG

Renewables, however, still face strong competition from an entrenched LNG sector emboldened by geopolitical and energy supply headwinds in Europe.

Spurred on by the energy crisis, global LNG investments will now peak at USD 42 billion in 2024. This is a 50% jump from current spending, a Rystad Energy report said in August.

Those greenfield investments are as much as 20 times the amount funded in 2020, when only USD 2 billion was invested. One of the reasons for that low figure was the COVID-19 pandemic. Another reason was the gathering pushback against LNG and gas as a major fuel for power production and the transition.

Rystad also forecasts that LNG project approvals after 2024 will “fall off a cliff as governments transition away from fossil fuels and accelerate investments in low-carbon energy infrastructure.”

Green Hydrogen Catches Up

A year before the Russia-Ukraine war, green hydrogen-fossil fuel cost parity was mostly thought to be several decades away. Now, as oil and gas prices hit multi-year and record highs, the time needed to reach cost parity has narrowed.

There is a multitude of hydrogen forms in use today. Green hydrogen, which involves no carbon emissions, is powered by renewable energy. It is produced by splitting water through electrolysis and is also an infinite resource.

Next is the blue hydrogen, produced using natural gas while capturing emissions with carbon capture storage utilisation (CCSU) technology. However, it is more controversial, as CCSU technology is still not without its drawbacks, including unproven and energy-intensive technology.

Additionally, pink hydrogen, generated through electrolysis powered by nuclear energy, is another form. And finally, grey and brown hydrogen are often produced using coal. Notably, the emissions increase as you move further down the hydrogen production chain.

Currently, China is the world’s largest hydrogen producer. But, it usually produces brown hydrogen for the industrial sector. However, the country is trying to pivot to cleaner hydrogen development.

As such, falling renewable energy prices, coupled with the dwindling cost of electrolysers and increased efficiency due to technology improvements, have increased the commercial viability of green hydrogen production, a World Bank report said in June.

There are a number of variables to consider when trying to predict when green hydrogen-fossil fuel cost parity will emerge. Nonetheless, the longest time horizon for cost parity is still approximately 2050.

According to UK-based Aurora Energy Research, however, green hydrogen could be produced in some EU member states by 2030 for around EUR 3/kg, thus reaching cost parity with blue hydrogen (produced from natural gas). But, it cannot compete with grey hydrogen yet. For this, the costs would have to drop to around EUR 2/kg, the report adds.

by Tim Daiss

Tim has been working in energy markets in the Asia-Pacific region for more than ten years. He was trained as an LNG and oil markets analyst and writer then switched to working in sustainable energy, including solar and wind power project financing and due diligence. He’s performed regulatory, geopolitical and market due diligence for energy projects in Vietnam, Thailand and Indonesia. He’s also worked as a consultant/advisor for US, UK and Singapore-based energy consultancies including Wood Mackenzie, Enerdata, S&P Global, KBR, Critical Resource, and others. He is the Chief Marketing Officer (CMO) for US-based lithium-sulfur EV battery start-up Bemp Research Corp.

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