What is the cheapest technology?

Carbon Tracker’s work on the energy transition has already demonstrated the value in challenging traditional energy model assumptions. There is a confusing picture in the energy debate about which technologies are the cheapest option, yet the world is clearly at a point where more renewables are getting built and there is uncertainty about new coal and gas plants.

Levelised Costs of Electricity (LCOEs) provide one way of comparing the costs of technologies, although it is widely recognized that there are large ranges of values for each technology, and that other important factors such as daily peak pricing and the system value of wind and solar also come in to play. It is clear that the answer to the question which is the cheapest is: “It depends”.

This analysis is an attempt to demonstrate why it is useful for those using LCOEs to make investment or policy decisions to challenge the underlying assumptions, and understand how the landscape is changing. This research highlights how a series of modest incremental changes to average LCOE assumptions can have a profound cumulative impact on the affordability of power generation technologies.

Renewables better on average in 2016 – with or without a carbon price

It is worth reiterating that there are a range of LCOEs for any technology, and global LCOE averages cannot give a definitive answer as to what is the better investment in a specific situation. However, what the global averages with real world 2016 assumptions tell us is that already the average LCOEs for solar and wind are lower than their coal and gas competitors. The 2016 updated and 2020 2D scenarios apply a conservative carbon price of $5/ton and $10/ton, respectively. These carbon price levels and other environmental policies (such as air pollution regulations) may in fact be higher in some regions.

Importantly, the LCOEs for wind and solar in the 2016 updated scenario are not dependent on our carbon pricing assumptions to come out lower than coal and gas. It should also be noted that fuel prices for coal ($80/t) and gas ($7/mmbtu) plants could decline significantly in the future, potentially compromising the competitiveness of wind and solar. However, in our 2020 2D scenario it is clear that on average, even very low fuel prices would not tip the advantage back to fossil fuels.

This suggests that the tide has turned, and is borne out by the growing number of locations where unsubsidized renewables are being built. It also shows why any investors basing their investment decisions on coal and gas continuing to be the cheapest source of electricity could be deeply misguided, given the relative shifts this LCOE sensitivity shows.

Comparison of LCOE results across all scenarios.

 

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*Revised and updated 19th September 2016