Solar and Wind Energy Start to Win on Price vs. Conventional Fuels NOVEMBER 23, 2014 AT 7:57 PM NYT > Business Day / By DIANE CARDWELL

For the solar and wind industries in the United States, it has been a long-held dream: to produce energy at a cost equal to conventional sources like coal and natural gas.

That day appears to be dawning.

The cost of providing electricity from wind and solar power plants has plummeted over the last five years, so much so that in some markets renewable generation is now cheaper than coal or natural gas.

Utility executives say the trend has accelerated this year, with several companies signing contracts, known as power purchase agreements, for solar or wind at prices below that of natural gas, especially in the Great Plains and Southwest, where wind and sunlight are abundant.

Those prices were made possible by generous subsidies that could soon diminish or expire, but recent analyses show that even without those subsidies, alternative energies can often compete with traditional sources.

In Texas, Austin Energy signed a deal this spring for 20 years of output from a solar farm at less than 5 cents a kilowatt-hour. In September, the Grand River Dam Authority in Oklahoma announced its approval of a new agreement to buy power from a new wind farm expected to be completed next year. Grand River estimated the deal would save its customers roughly $50 million from the project.

And, also in Oklahoma, American Electric Power ended up tripling the amount of wind power it had originally sought after seeing how low the bids came in last year.

“Wind was on sale — it was a Blue Light Special,” said Jay Godfrey, managing director of renewable energy for the company. He noted that Oklahoma, unlike many states, did not require utilities to buy power from renewable sources.

“We were doing it because it made sense for our ratepayers,” he said.

According to a study by the investment banking firm Lazard, the cost of utility-scale solar energy is as low as 5.6 cents a kilowatt-hour, and wind is as low as 1.4 cents. In comparison, natural gas comes at 6.1 cents a kilowatt-hour on the low end and coal at 6.6 cents. Without subsidies, the firm’s analysis shows, solar costs about 7.2 cents a kilowatt-hour at the low end, with wind at 3.7 cents.

“It is really quite notable, when compared to where we were just five years ago, to see the decline in the cost of these technologies,” said Jonathan Mir, a managing director at Lazard, which has been comparing the economics of power generation technologies since 2008.

Mr. Mir noted there were hidden costs that needed to be taken into account for both renewable energy and fossil fuels. Solar and wind farms, for example, produce power intermittently — when the sun is shining or the wind is blowing — and that requires utilities to have power available on call from other sources that can respond to fluctuations in demand. Alternately, conventional power sources produce pollution, like carbon emissions, which face increasing restrictions and costs.

But in a straight comparison of the costs of generating power, Mr. Mir said that the amount solar and wind developers needed to earn from each kilowatt-hour they sell from new projects was often “essentially competitive with what would otherwise be had from newly constructed conventional generation.”

Experts and executives caution that the low prices do not mean wind and solar farms can replace conventional power plants anytime soon.

“You can’t dispatch it when you want to,” said Khalil Shalabi, vice president for energy market operations and resource planning at Austin Energy, which is why the utility, like others, still sees value in combined-cycle gas plants, even though they may cost more. Nonetheless, he said, executives were surprised to see how far solar prices had fallen. “Renewables had two issues: One, they were too expensive, and they weren’t dispatchable. They’re not too expensive anymore.”

According to the Solar Energy Industries Association, the main trade group, the price of electricity sold to utilities under long-term contracts from large-scale solar projects has fallen by more than 70 percent since 2008, especially in the Southwest.

The average upfront price to install standard utility-scale projects dropped by more than a third since 2009, with higher levels of production.

The price drop extends to homeowners and small businesses as well; last year, the prices for residential and commercial projects fell by roughly 12 to 15 percent from the year before.

The wind industry largely tells the same story, with prices dropping by more than half in recent years. Emily Williams, manager of industry data and analytics at the American Wind Energy Association, a trade group, said that in 2013 utilities signed “a record number of power purchase agreements and what ended up being historically low prices.”

Especially in the interior region of the country, from North Dakota down to Texas, where wind energy is particularly robust, utilities were able to lock in long contracts at 2.1 cents a kilowatt-hour, on average, she said. That is down from prices closer to 5 cents five years ago.

“We’re finding that in certain regions with certain wind projects that these are competing or coming in below the cost of even existing generation sources,” she said.

Both industries have managed to bring down costs through a combination of new technologies and approaches to financing and operations. Still, the industries are not ready to give up on their government supports just yet.

Already, solar executives are looking to extend a 30 percent federal tax credit that is set to fall to 10 percent at the end of 2016. Wind professionals are seeking renewal of a production tax credit that Congress has allowed to lapse and then reinstated several times over the last few decades.

Senator Ron Wyden, the Oregon Democrat, who for now leads the Finance Committee, held a hearing in September over the issue, hoping to push a process to make the tax treatment of all energy forms more consistent.

“Congress has developed a familiar pattern of passing temporary extensions of those incentives, shaking hands and heading home,” he said at the hearing. “But short-term extensions cannot put renewables on the same footing as the other energy sources in America’s competitive marketplace.”

Where that effort will go now is anybody’s guess, though, with Republicans in control of both houses starting in January.

Two Big Trends Will Fuel The Renewable Energy Boom For Years

This is the big picture.

Carlos Barria/Reuters
The renewable energy revolution is happening faster than many expected.
According to recent report from Citi Research, renewables will continue their market share grabs from coal and gas forSome of this can be explained by the need for cleaner energy.

“Environmental pressures on coal consumption are rising not only in Europe and North America, but also in China and other emerging markets,” according to the Citi analyst’s note. “The most significant change has been in China, where increasing regulations and the establishment of carbon markets should limit the attractiveness of coal power. Moreover, the country is aggressively pursuing an ‘everything but coal’ development plan for the power sector, with rapid growth in capacity for alternative energy sources.”

Coal power plants are increasingly being pushed into “retirement.”

Most people have been expecting natural gas to be coal’s major substitute. However, Citi’s forecast suggests that growth in natgas demand is going to be way less than previously anticipated.

Renewables should take ever-increasing amounts of market share in an environment like this, according to the report.

In the figure above, you can see that coal’s utilized capacity (measured in GW) is projected drop from 198 GW in 2011 down to 181 GW by 2020. Natural gas slightly increases from 115 GW in 2011 to 132 GW by 2020, although that number is less than previously expected (and you can see there’s a dip from 2012 to 2014). Nuclear sees no major change in either direction, starting at 90 GW and ending at 92 GW.

On the flip side, renewables in 2011 were at 50 GW and are expected to rise to 68 GW by 2020.

two reasons.

First, renewables are rapidly becoming cost-effective, and second, environmental restrictions are becoming an increasingly high hurdle.

Renewables Are Getting Cheaper

Thanks to tech advances, the cost of renewables is finally dropping to affordable levels, which is allowing them to proliferate, according to Citi.

“Costs for solar and wind energy are falling rapidly, with learning rates of around 30% for solar and 7.4% for wind,” the report states.

Wind power has already achieved cost parity with the most expensive coal power plants in Europe (slightly above $80/MWh), and by the end of the decade it’s expected to reach cost parity with the majority of plants (around $70/MWh).

Solar is still the most expensive major electricity source at the moment (around $160/MWh), but Citi is projecting that by 2020 solar will drop to wind’s current prices (slightly above $80/MWh).

“Natural gas has already eroded coal’s cost competitiveness in the US, with decreasing costs for wind, solar and ex-US natural gas to follow,” according to Citi.

Below is the global electricity cost curve.

Citi Research
Environmental Restrictions Favor Renewables

Historically there has been a correlation between economic growth and electricity demand growth. But right now we’re seeing the opposite: during a period of economic growth, electricity demand growth has been relatively flat or declined for some regions.

Some of this can be explained by the need for cleaner energy.

“Environmental pressures on coal consumption are rising not only in Europe and North America, but also in China and other emerging markets,” according to the Citi analyst’s note. “The most significant change has been in China, where increasing regulations and the establishment of carbon markets should limit the attractiveness of coal power. Moreover, the country is aggressively pursuing an ‘everything but coal’ development plan for the power sector, with rapid growth in capacity for alternative energy sources.”

Coal power plants are increasingly being pushed into “retirement.”

Most people have been expecting natural gas to be coal’s major substitute. However, Citi’s forecast suggests that growth in natgas demand is going to be way less than previously anticipated.

Renewables should take ever-increasing amounts of market share in an environment like this, according to the report.

In the figure above, you can see that coal’s utilized capacity (measured in GW) is projected drop from 198 GW in 2011 down to 181 GW by 2020. Natural gas slightly increases from 115 GW in 2011 to 132 GW by 2020, although that number is less than previously expected (and you can see there’s a dip from 2012 to 2014). Nuclear sees no major change in either direction, starting at 90 GW and ending at 92 GW.

On the flip side, renewables in 2011 were at 50 GW and are expected to rise to 68 GW by 2020.

Coal at Risk as Global Lenders Drop Financing

Coal at Risk as Global Lenders Drop Financing on Climate

By Mark Drajem – Aug 6, 2013 10:56 AM ET

Tomohiro Ohsumi/Bloomberg

An employee stands in front of stockpiles of coal inside a storage yard at the Joban Joint Power Co. coal-fired power station in Iwaki City, Japan.

The world’s richest nations, moving to combat global warming, are cutting government support for new coal-burning power plants in developing countries, dealing a blow to the world’s dominant source of electricity.

Obama Unveils Climate Plan Focused on Power Plants 48:10

June 25 (Bloomberg) — U.S. President Barack Obama speaks about his plan to address climate change. Obama, speaking at Georgetown University in Washington, proposed a sweeping plan that sets goals to reduce carbon emissions and bolster renewable energy while also preparing the country for the impacts of a warming planet. (Source: Bloomberg)

Enlarge image Coal at Risk as Global Lenders Drop Financing on Climate

A coal-fired power station stands in the distance behind a disused coal dredger in the town center in Morwell, Australia, on July 25, 2013. Photographer: Carla

Gottgens/Bloomberg

First it was President Barack Obama pledging in June that the government would no longer finance overseas coal plants through the U.S. Export-Import Bank. Next it was the World Bank, then the European Investment Bank, dropping support for coal projects. Those banks have pumped more than $10 billion into such initiatives in the past five years.

“Drawing back means there is less capital for these projects,” Richard Caperton, managing director for energy at the Center for American Progress in Washington, said in an interview. “I don’t expect private capital to move in and fill the void, either, because there is a real risk that these plants will be turned off early.”

Demand for coal in developing nations has taken on increasing importance as the combination of stricter environmental regulations in the U.S., increasing deployment of subsidized renewable resources and a drop in the price of natural gas have pushed utilities to shutter coal plants.

Among the three government-backed lenders, the World Bank has provided $6.26 billion for coal-related projects over the past five years, according to data from Oil Change International. The Ex-Im bank provided more than $1.4 billion to two coal projects, one in South Africa and another in India.

Curb Investments

While the pull back is unlikely to have a direct impact on China, the world’s top user of coal, it could curb construction of new plants in countries such as South Africa and Vietnam and dampen new export markets for coal mined in the U.S., Indonesia or Australia by companies such as Peabody Energy Corp. (BTU) and Alpha Natural Resources Inc. (ANR)

“We’ve never seen a cascading sentiment that coal is not acceptable like we’re seeing happen right now,” Justin Guay, the head of the Sierra Club’s international climate program, said in an interview. “It’s a snowball running downhill.”

Environmental groups such as the Sierra Club are fighting coal plants and coal mines, because coal releases the most carbon dioxide per unit of energy of any major fuel source. Scientists say carbon emissions are to blame for warming Earth’s temperatures, increasing the number and severity of storms and melting polar ice.

Supporters of the fuel source say it’s a low-cost way for poor nations to provide light, refrigeration and air conditioning to their people.

‘Our Backs’

The move by lenders against coal turns “our backs on millions without electricity and chooses not to help them achieve a better standard of living,” said Nancy Gravatt, a spokeswoman for the National Mining Association in Washington, which represents producers such as Alpha and

Arch Coal Inc. (ACI)

Analysts are divided about long-term global coal demand.

The U.S. Energy Information Administration, in a July 25 report, projected world coal use would increase by a third — to more than 200 quadrillion British thermal units a year — by 2040 as developing nations boost its use.

The cut-back in the financing isn’t causing a reassessment of that outlook, said Greg Adams, the team leader for coal at EIA. “The capacity that is going to be affected is going to be limited,” he said.

Gregory Boyce, chief executive officer of Peabody, the largest U.S. coal producer, noted that German and Japanese coal use is climbing as they cut nuclear-power generation.

China, India

“China and India imports have risen year-to-date and are on a pace to increase 15 percent this year to new record levels as the trends to urbanize, industrialize and electrify continue,” Boyce said in a conference call with analysts on July 23.

Goldman Sachs Group Inc. offers a less buoyant outlook.

“We believe that thermal coal’s current position atop the fuel mix for global power generation will be gradually eroded,” Christian Lelong, an analyst at Goldman Sachs in Australia, said in a report on July 24. “Most thermal coal growth projects will struggle to earn a positive return.”

Coal is now used to generate 40 percent of the world’s electricity, and its use has grown more than 50 percent in the past decade, according to EIA. The U.S. is the world’s second-largest producer of coal, after China, followed by India, Australia and Indonesia. China is the world’s top importer of coal as well, followed by Japan, according to the World Coal Association.

1,200 Plants

According to an analysis by the World Resources Institute in Washington, 1,200 coal-fired plants are proposed globally, with more than three-quarters of those planned for India and China alone. If all are built, which WRI says is unlikely, that would add more than 80 percent to existing capacity.

China can finance its projects on its own, and India has only relied on export financing in a few cases. As a result, the recent changes are likely to impact other nations in Africa and Asia, which don’t have the same access to credit. Each group said in some instances it would still finance coal, and activists are worried about those exceptions.

“The implementation of all three of those initiatives is yet to be fleshed out,” Doug Norlen, the policy director of Pacific Environment, which is fighting these kinds of fossil-fuel projects, said in an interview. “These will be huge steps, if properly implemented.”

That implementation is still an open question.

Project Rejected

For example, as part of Obama’s climate action plan released on June 25, the U.S. pledged to end support of foreign coal-fired power plants, unless they are in the poorest nations or have expensive carbon-capture technology. The U.S. Export-Import Bank is only now developing the procedures to implement that policy, and its board will consider those changes in the coming weeks. The lender shot down a bid to finance a coal plant in Vietnam, its only pending application for coal, just three weeks after Obama’s announcement.

Norlen’s group and other environmentalists filed a lawsuit against the Export-Import Bank last week to try to block its financing of coal exports. That support is separate from the policy change Obama announced.

The European Investment Bank set an emission performance standard that would prevent lending to new coal-fired plants unless they also burn biomass. The European Bank for Reconstruction and Development is also under pressure to limit support.

Japan Support

Even after the World Bank said it would help nations transition from coal to natural gas or renewables, it’s still considering support for a coal project in Kosovo.

There’s also the possibility that other lenders, especially export-credit agencies from Japan or China, could step in and replace the World Bank, U.S. and Europe. Japan’s Bank for International Cooperation, its export financing body, has provided more than $10 billion in financing for overseas coal projects, more than any other individual nation, according to the WRI report.

And now China, which wants to export coal-plant technology, may ramp up support as well, said Ailun Yang, the author of the WRI report.

“It is a real concern” that “some of the funding gap for coal-fired plants would simply be filled by the Chinese banks,” she said.

To contact the reporter on this story: Mark Drajem in Washington at mdrajem@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net