The Economics of Wind and Solar Power Generation
Those who make power-generation decisions are always looking for less-expensive power alternatives and comparing the economic impact of wind, solar, thermal, natural gas, coal, and others. One effective way to measure these economics is by looking at the LCOE: a measurement of the average cost of producing a unit of electricity over the lifetime of the generating source. Knowing this allows for the comparison of price-to-production for different sources of power.
Let’s look at the LCOE and economic outlook for just two renewables: wind and solar – as described in the Citi Research report entitled “Evolving Economics of Power and Alternative Energy.”
To assess the LCOE of a wind project, the key factors include:
- Wind turbine costs
- Financing costs
The costs of operation are minimal, although there are geographic limitations. In the United States, wind generation is primarily in the central corridor (Midwest to Texas), with some wind power in the Northeast and West Coast.
Turbine costs continue to decline – especially as things trend toward larger turbines. The outlook for wind is dependent on the wind levels in the areas it will be built and the cost of base load alternative. Fortunately, the industry continues to innovate and move to aggressively invest to improve turbine economics. In addition, wind financing costs have improved.
Keys to driving down wind LCOE: Reduce turbine costs and improve efficiencies.
Solar continues to gain market share around the world and the outlook is still very favorable. The lower cost of production and materials will likely decrease module costs. The system costs are comprised of module costs plus balance of systems (BOS). System costs vary based on end user, location, and other factors.For example, the raw input prices (poly, ingot, wafer, cell) are subject to global markets and an industry learning curve while BOS costs are more specific to location.
Solar LCOE is also sensitive to secondary inputs, such as module lifespan, opex, degradation, and IRR. A critical and ever-changing input of the system cost is the PV module which continues to be reduced as cumulative PV installations increase.
Solar is still early in the growth cycle but has already competed with average residential electricity prices in Germany, Australia, and the southwestern U.S. In 2013, solar was the second largest source of new generation capacity behind natural gas.
The future of solar continues to prove optimistic as costs continue to decline and LCOE improves.
Keys to driving down LCOE: Improve efficiencies, lower system costs, and extend life of assets.