Making the switch: Tumbling costs of wind, solar and batteries squeezing fossil fuels

Coal and gas are facing a mounting threat to their position in the world’s electricity-generation mix as a result of the spectacular reductions in costs not only for wind and solar technologies, but also for batteries, according to research from Bloomberg New Energy Finance.

The report on the levelized costs of electricity (LCOE) for all the leading technologies finds fossil fuel power is facing an unprecedented challenge in all three roles it performs in the energy mix — the supply of “bulk generation,” the supply of “dispatchable generation” and the provision of “flexibility.”

In bulk generation, the threat comes from wind and solar photovoltaics, both of which have reduced their LCOEs further in the past year, thanks to falling capital costs, improving efficiency and the spread of competitive auctions around the world.

In dispatchable power — the ability to respond to grid requests to ramp electricity generation up or down at any time of day — the challenge to new coal and gas is coming from the pairing of battery storage with wind and solar, enabling the latter two “variable” sources to smooth output, and if necessary, shift the timing of supply.

In flexibility — the ability to switch on and off in response to grid-electricity shortfalls and surpluses over periods of hours — standalone batteries are increasingly affordable and are starting to compete on price with open-cycle gas plants.

Elena Giannakopoulou, head of energy economics at Bloomberg New Energy, said: “Our team has looked closely at the impact of the 79 percent decrease seen in lithium-ion battery costs since 2010 on the economics of this storage technology in different parts of the electricity system. The conclusions are chilling for the fossil fuel sector. … The economic case for building new coal-and-gas capacity is crumbling, as batteries start to encroach on the flexibility and peaking revenues enjoyed by fossil fuel plants.”

Bloomberg New Energy calculates LCOEs for each technology, taking into account everything from equipment, construction and financing costs to operating and maintenance expenses and average running hours. It found the benchmark global LCOE for onshore wind is $55 per megawatt-hour, down 18 percent from the first six months of 2017, while the equivalent for solar PV without tracking systems is $70 per megawatt hour, also down 18 percent.

Bloomberg New Energy has been analyzing the numbers on levelized costs of electricity for the different technologies since 2009, based on its database of project financings and work by its analyst teams on the cost dynamics in different sectors.

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.