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The Cost of New Renewable Power Generation: Approaching Parity?

Are renewable energy technologies really less competitive than non-renewables? And, given the recent uptake of renewables, is there still a business case for other forms of power generation?

New onshore and offshore wind and large solar photovoltaic (PV) plants still require policy support to bridge the gap between generation costs and market prices of electricity. But this may change in the near future, finds a new report from the International Energy Agency’s Renewable Energy Technology Deployment group. Technology and market dynamics are driving down the costs of renewable power generation while increasing the costs involved in non-renewable generation, the report found. Before long, it said, best-in-class onshore wind and large-scale PV plants should be able to offer attractive business cases to investors in regions with a high proportion of thermal generation without resorting to incentives.

The report, which focused on Canada, France, Germany, Japan, Norway, Sweden and Spain, noted that policies and regulations can significantly affect the business cases of both renewable and non-renewable power sources. Although the high cost of generation for new renewable energy technologies means policy support is currently needed, the report noted that generation costs for renewable power are falling, approaching the costs for gas- and coal-fired plants — especially if the hidden subsidies that thermal generation plants may receive are taken out of the equation.  

Onshore wind generation is already competitive in the report's focus countries. Large-scale PV’s rate of cost reduction is higher, though, due to technology breakthroughs, the emergence of lower-cost suppliers and component oversupply.

At the same time, the report stated, the cost of gas- and coal-fired plants is increasing because they are being used less — largely due to policy support for renewables, construction delays, higher financing rates, and the increasing cost of fuel in some European countries and Japan. Most crucial is the higher capital costs involved in some new-build thermal plants due to emission reduction systems, the report argued. “The future competitiveness of thermal generation is going to be positively or negatively influenced by the shape and provisions of future policies for control of emissions,” it said.

One unsurprising conclusion is that there is no unique cost of renewable or non-renewable power generation. Cost ranges associated with any power generation technology are relatively large and highly dependent on the regulatory and market contexts, the report said. It pointed to best-in-class plants — those with high utilisation rates, low capital costs, and low rates of financing — rather than to any particular technology as having generation costs up to 50 percent lower than average plants. It singled out the case of large-scale PV, where comparing plants built several years apart and based on different technologies showed big differences in cost. Policies in some regions also significantly affect generation costs by offering a variety of reward mechanisms, such as R&D grants, assumption by the TSO of the cost of connecting to the grid, tax breaks and reduction of administrative burdens. 

Both new renewable and new non-renewable power plants find it difficult to compete in regions where the market prices of electricity remain low, said the report. This is driven in part by excess capacity, and also by an installed base that includes depreciated plants.

In general, the costs of both new renewable power plants and new non-renewable generation are higher than the market price of electricity, because of which the report stressed the necessity of maintaining current incentives in order to provide business cases that will interest investors. However, it noted that when incentives do not exist or are not appropriately defined, “the business case of new generation does not hold.”

Lead image: solar power station via worradirek on Shutterstock

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