The cost of renewable energy has decreased significantly over the past decade. However, the idea that fossil fuels produce cheaper power is still very common. So, how does the cost of these two types of energy compare? And which is cheaper?
Well, there are now solar and wind farms producing electricity at a lower cost than coal, which has long been considered the cheapest source of power.
Renewable energy sources are also becoming the best energy option from the business standpoint, regardless of what a corporation may think about climate change. For example, companies that use solar generation are consistently achieving lower electricity costs that those who continue using only the power grid.
The residential sector also benefits from renewable-energy generation, especially when you consider that homes pay higher kilowatt-hour prices than businesses.
The cost of renewable power is steadily decreasing around the world. According to the International Renewable Energy Agency (IRENA), all renewable sources experienced cost decreases in 2018. For instance, solar and wind power costs decreased by 13%, hydroelectricity costs decreased by 11% and biomass power costs decreased by 14%.
The Reality About Fossil Fuel Generation Costs
When renewable generation technologies are compared with conventional power plants, the cost comparison is not always fair. In many cases, new renewable energy projects are compared with old fossil fuel power stations.
- Renewable energy projects that started operating recently are still burdened by financing costs, which increase kilowatt-hour prices.
- On the other hand, many power plants fired by fossil fuels are already decades old. This means financing costs were covered long ago, and investors already obtained their return on investment.
When the comparison is based on new renewable generation and new fossil fuel generation, the balance tilts in favor of renewable sources. In fact, there are now solar and wind farms with lower kilowatt-hour prices than old coal power plants.
The cheapest coal power is normally in the range of 3 to 4 cents per kilowatt-hour, but there are solar and wind power projects with contract prices below 3 cents/kWh.
Many fossil fuel power plants with low kWh prices are approaching the end of their service life. When new generation projects are considered, the business case is generally better for renewable sources.
Also, consider that governments and businesses are becoming environmentally aware, and companies that depend on highly polluting energy sources can hurt their corporate image.
Additional Cost Advantages of Renewable Energy
The electricity cost of clean energy sources is not only lower, but also more stable. This is a big advantage of most renewable sources of power.
For example, sunlight follows a daily pattern, while wind and rainfall follow the local climate. Although hydroelectric power plants are susceptible to drought, the availability of sunlight and wind will not change in the foreseeable future.
Since renewable energy generation depends on stable inputs, electricity costs will remain stable in the long run – they only depend on maintenance.
Fossil fuels, on the other hand, lack price stability, since their supply is vulnerable to economic and geopolitical factors.
For example, if a power network relies heavily on gas turbines, price volatility in the natural gas market will have a strong effect on the kilowatt-hour price. On the other hand, renewable energy systems only have predictable maintenance costs, since their energy inputs are free in most cases.
How Renewable Energy Has Changed the Electric Sector
For decades, the business model of power companies experienced almost no change. While the technical details are complex, the overall operation can be summarized as follows:
- Electricity production is centralized at power plants, which are owned by energy companies or private generators.
- Electricity is delivered to homes and businesses, using a transmission and distribution network.
- Consumption is measured for each user, and the bill is calculated by applying the corresponding tariff.
However, renewable energy sources have changed this business model, since they allow generation at the point of use.
For example, homes and businesses can deploy solar power systems and other technologies, assuming the role of both consumers and generators. Electricity flows in power grids had been in only one direction for decades, and now the movement is in both directions.
But while renewable energy sources have brought cheaper and cleaner electricity, they also come with technical challenges of their own.
For example, both solar panels and wind turbines have a variable electricity production that depends on external inputs. Power companies only had to manage variability in consumption, but renewable sources have introduced variability to generation as well.
Fossil fuels are losing their cost advantage over clean energy sources, while having a higher environmental footprint. However, they still bring a key benefit to the table: being able to produce electricity on demand.
- Neither solar panels nor wind turbines can produce energy on a night without wind, but conventional power plants can continue operating if their fuel is available.
- Hydroelectricity is not affected by this, since water can be stored in a reservoir to generate power when needed. However, hydropower is demanding in site conditions, lacking the versatility of wind turbines and solar panels.
For this reason, energy storage is very promising in the clean power industry, precisely because it eliminates the main limitation of solar panels and wind turbines.
Lead-acid batteries have existed for a long time, but they suffer from low efficiency and a short service life. Lithium-ion batteries are much more promising, since they have the high efficiency and response speed required in the electricity sector.
Batteries are still limited by their high price, but the International Renewable Energy Agency predicts price reductions of up to 60% by 2030.
How Emerging Technologies Can Enhance Renewable Sources
Blockchain has potential applications in energy trade and accountability. The technology can be used as part of a trading platform, where power grid users can sell and purchase energy freely. Homes and businesses who generate surplus energy become net producers, while those who purchase energy can optimize their mix based on the price and source.
Since blockchain keeps track of transactions, it can also be used to hold large consumers accountable for their energy consumption (if made non-anonymous). For example, blockchain transactions can reveal which large consumers are relying heavily on fossil fuel generation.
The main application of the IoT is making clean energy sources smarter. As previously mentioned, solar panels and wind turbines depend on external inputs. They deliver power when possible, not necessarily when it is needed the most. However, an IoT platform can link multiple clean energy systems together, combining them with batteries:
- The generation and storage capacity connected to the system is aggregated, and the platform essentially becomes a virtual power plant.
- Even when capacity is distributed among multiple buildings, the system can mimic the operation of a conventional power plant.
Renewable generation can already compete with the cost of fossil fuels, and emerging technologies can add value in the near future. Energy storage systems can eliminate the variability of solar and wind power, while the IoT makes renewable generation smarter.
About the Author: Michael Tobias, PE, LEED AP, CEM
Michael Tobias is the founder and principal of Chicago Engineers, an Inc 5000 Fastest Growing Company in America. He leads a team of 30+ mechanical, electrical, plumbing, and fire protection engineers from the company headquarters in New York City; and has led over 1,000 projects in Chicago, New York, New Jersey, Pennsylvania, Connecticut, Florida, Maryland and California, as well as Singapore and Malaysia.
He is a graduate of Georgia Tech class of 2004, with a Bachelors of Mechanical Engineering with honors. His innovative approach to MEP engineering comes from graduating GE’s Engineering Leadership Program, where he designed wind turbines and biofuel power plant engines. Michael’s passion within design is energy efficiency and green technology. His focus is on integrating MEP/FP engineering design with architecture to create as seamless a system as possible. He is an advocate for green design and technologies, and has designed to both Passive House and Net 0 energy standards. He has spoken numerous times at the AIA, been featured in Georgia Tech’s Alumni magazine, and is an engineering expert on Discovery Channel’s show “Impossible Engineering”.
A New York native, Michael grew up in Rockville Centre, LI. He currently lives in Brooklyn with his wife and children. Outside of work, he enjoys exploring the outdoors, whether it’s on a bike, a pair of skis, or a surfboard. He is passionate about growing personally and professionally every day, and about doing innovative work in the engineering world to help disrupt the traditional construction industry.