Cheap and Clean: Meet the New Normal in Energy Generation

By Traver Kennedy, Chairman and CEO on May 23, 2017
Traver Kennedy
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A few days ago, Elon Musk, Tesla’s CEO, tweeted to announce that Tesla would begin selling its Solar Roof tiles. The big news was not so much their availability, but their price: $24.50 per-square-foot. According to CNBC, this price is lower than what the industry experts at Consumer Reports had indicated was necessary to “compete with asphalt roofs, once savings from electricity bills were factored in over the roof’s expected lifetime.” They went on to report, “Many had expressed skepticism that Tesla’s product would be as affordable as the company claimed. But after the release of the pricing, Tesla shares closed up more than 1 percent Wednesday [May 10].” Solar roofs, it seems, are no longer for wealthy tree-huggers.

A month earlier, there was also price-related news for wind, the other big renewable. The headline of an article posted in exclaimed, “Wind Energy Now Directly Competing With Coal On Cost.” The article focuses on Xcel Energy who is embarking on the largest wind project in the U.S. because of the cost savings, “rather than the environmental benefits of renewable energy, drove the company’s mission statement: wind was cheap, not just clean.” With the steady decreases in pricing, wind power is now “5.5 percent of total U.S. generating capacity, outstripping hydroelectric.”

Say hello to the new sun and wind power: not only clean but cheap.

Economics Drives Sustainability

Solar and wind did not start cheap. Both renewables began with uncompetitive prices that benefited from subsidies all over the world while the nascent technology caught up with market forces. As the installed base of solar panels and wind turbines grew, both industries gained the experience necessary to innovate further to make them more efficient to the point where they now compete with other sources of energy, such as hydrocarbons.

The price of wind, for instance, has dropped by more than two-thirds in less than a decade. The Department of Energy’s 2015 Wind Technologies Market Report found, “A clear downward trend in PPA [Power Purchase Agreement] prices since 2009 and 2010… After topping out at nearly $70/MWh for PPAs executed in 2009, the national average, levelized price of wind PPAs with the Berkeley Lab sample has dropped to around the $20/MWh level.”

Solar followed a similar path. Scientific American reported last year, “With solar already achieving record-low prices, the cost decline observed in 2015 indicates that the coming years will likely see utility-scale solar become cost-competitive with conventional forms of electricity generation.” This has resulted in “total installed prices dropping by 5 percent for rooftop residential systems, and 12 percent for larger utility-scale solar farms.”

Predictability Drives Prices Further Down

In the energy market, there is more to economics than just the production price. This comes in the form of the ability to predict prices. Unlike hydrocarbons, which need to be explored, extracted and processed, wind and solar have no “fuel” costs. Thus, allowing electricity consumers and utilities to lock-in known electricity rates for long periods of time—up to 20 and 30 years through contracts called Power Purchase Agreements (PPAs).

This new level of predictability gives the whole energy industry a level of stability, which it could not count on just a few years ago when hydrocarbons were the only economically viable game in town. With better visibility and predictability, come the willingness of utility companies to invest in the future without the risks typically associated with energy cost volatility. In fact, it is utilities, not consumers, who generate most of the solar energy in use today. The industry is already working on ways to find win-win arrangements with consumers to accommodate power generation at the edge of the network brought about by innovations like Tesla’s Solar Roof.

Visionary Doers Drive Energy Innovation

Elon Musk wants to do for solar power what Tesla did for electric cars. According to CNBC, he wants to “develop an alternative-energy product that would rival or exceed conventional ones in attractiveness and utility.” He seems to be right on the money with his recent Solar Roof launch at the stated price.

However, both solar and wind have one drawback that has yet to be solved: power variability. As Forbes wrote in January, the declining trend in wind and solar costs “may reverse as the percentage of variable renewable energy (VRE)  energy that isn’t available on-demand but only at specific times, such as when the wind is blowing – reaches high levels.” They cite the case of Germany, which has incorporated “significant amounts of wind and solar,” but has seen price increases as their utilities deal with variability challenges.

We have entered an era where no single energy source dominates all markets. Renewables, like wind and solar, co-exist with other sustainables, such as hydroelectric power generation, alongside nuclear and hydrocarbons. We now use myriad energy sources to balance availability, economics, and sustainability. To solve the challenge of variability, emerging technologies such as Hydrogen 2.0, which enables the generation of clean electricity from hydrogen on-site, 24/7, could be added to the energy mix to kick in when the sun does not shine, and the wind does not blow. It is this collective innovation, coming from all sources of energy, that makes sustainable energy economics the new norm for our society.


Photo courtesy of Christopher Michel.
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