Renewables on track to beat ‘fuel parity’ with combined cycle gas turbines
In November, the UK Government published an updated version of its Electricity Generation Costs analysis. This is a rigorous assessment of Levelised Cost of Energy (LCOE) for a very wide range of generation options, forecasted for 2020 and 2025. It’s aimed at UK conditions, and there could be criticisms of the input assumptions, but a major benefit of this kind of study is that it compares competing technologies on the same basis, or at least on mutually consistent assumptions.
Given everything else that was going on in November 2016, it is not surprising that the report did not get much airtime. The continued decline in PV and wind costs was noted—the report has a section specifically highlighting the frankly enormous reductions from the costs forecast in the previous issue (2013), for large-scale PV, onshore wind, and offshore wind.
For projects commissioning in 2020, the cheapest options available at significant scale all have similar costs: H-class combined cycle gas turbines (CCGTs) at 78 EUR/MWh, onshore wind (projects larger than 5 MW) at 74 EUR/MWh, and large-scale ground-mounted solar at 79 EUR/MWh. By 2025, wind and PV are the clear winners at 72 and 74 EUR/MWh; CCGT costs increase to 96 EUR/MWh due to higher assumed gas and carbon costs.
A good result for renewables. In fact, by 2025 even large hydro, small building-mounted PV, and near-shore wind will be competitive with large CCGTs. However, on closer inspection of the figures there’s a more important and perhaps surprising conclusion. A common criticism of costings of the variable renewables (wind, PV, and others) is that they don’t include the costs for ‘backup’ generation to cover demand when needed. In the UK the worst case is an extended period of anticyclonic weather in winter, resulting in days or weeks of very low winds, low temperatures, and high electricity demand. This criticism is justified, though the assumption that every wind or PV project should be ‘charged’ the capital cost of fossil generation of the same capacity is overly simplistic. However, the UK figures show that even with this overly simplistic assumption, wind and PV still win.
How? Well, the cost forecasts include fixed and variable costs. For CCGTs in 2025, the fuel, carbon, and variable O&M costs alone total 86 EUR/MWh. This is significantly more expensive than the total costs for wind and PV. So, wind and PV projects could indeed afford to pay for the costs of CCGTs, to be treated as ‘firm’, and would still be the cheapest generation option available at scale.
Or in other words, a CCGT operating in 2025 as ‘baseload’ will find it cheaper to buy the output of wind or PV projects, whenever available, in preference to buying and burning gas.
This marks the next stage in cost-competitiveness of renewables. First there is ‘retail parity’, where behind-the-meter wind or PV beats the retail price of electricity to residential, commercial or industrial consumers. Then there is ‘wholesale parity’, where renewable costs compete on wholesale or spot markets. And now on the horizon we can see ‘fuel parity’, where renewables become cheaper than just the fuel (and carbon) costs of fossil generation.
In fact, the ‘horizon’ is not that far off: interpolating the UK figures for 2020 and 2025 shows that fuel parity is forecast for 2023. That is only 6 years from now. Companies currently developing potential new CCGT projects will no doubt be factoring this into their calculations.