Navigant Research Blog

As Race Tightens, Renewable Energy Costs Fall Quickly

— March 20, 2014

The most common metric used to compare the costs of different power generation technologies is levelized cost of energy (LCOE).  LCOE is defined as the average cost per unit of electricity over the life of a project, which is driven primarily by capital costs, operating costs, financing, and capacity factor (power output relative to the installed capacity).  All of these factors vary by technology and are continually changing.  The chart below shows a snapshot of LCOE for various technologies estimated by Navigant Consulting as of late 2013.  Note that each estimate provided represents an average of a wide range of values, given the many variables such as plant size, age, and location that exist within each technology.

U.S. Levelized Cost of Energy

(Source: Navigant Consulting)

PV Solar Cost Continues Its Precipitous Decline

This chart looked much different 5 years ago, and it will likely be very different in another 5 years.  Photovoltaic (PV) solar and wind in particular have seen dramatic cost reductions in recent years.  For example, average selling prices for PV solar modules have dropped from $3.50 per watt in 2007 to a current price of below $1.00 per watt for large customers.  In addition to declining costs, PV solar has been experiencing improved performance.  Different technologies will also have varying impacts on overall system output.  In warmer climates, for example, thin-film modules will generally produce higher capacity factors compared to crystalline silicon.  Similarly, tracking devices – which allow solar panels to follow the sun – improve the capacity factor of a PV system.  Over the past couple of years, single-axis tracking systems have seen an increase in market share due to lower prices and increased reliability.  While most of the adoption is currently in western states, where the performance benefit of tracking is the greatest, we expect to see more tracking systems across the entire market as prices continue to decline and reliability increases.  For example, Public Service Company of New Mexico recently filed for approval of 23 MW to be built in 2014 at a contracted price of just $2.03 per installed watt.

Wind Cost Resumes Its Downward Trend

The LCOE of wind power has experienced a similar decline since its modern day peak in 2009.  Average power purchase agreement prices for wind plants in the interior (windy) part of the United States were around $50 per MWh (in 2013 dollars) that year, compared to an average of $23 per MWh in 2013.  The newest generation of wind turbines have capacity factors that are approximately 10 percentage points higher (i.e., 45% instead of 35%) compared to just 5 years ago.  With the new large rotor turbines yet to be integrated into the U.S. fleet, we can expect continued improvements in the years ahead, with many projects achieving capacity of factors above 50%.

Mature technologies are also able to secure more favorable financing.  This is due to the lower perceived risk by financial providers, which improves the price competitiveness of these projects.  Both wind and solar are now becoming mainstream technologies and will ultimately become cost-competitive without the need for incentives.  As the newer renewable technologies mature, we expect them to benefit from more attractive financing terms, as well.

Readers should be cautioned that LCOE is only part of the story.  The short-term variability of renewables imposes some cost, especially at higher penetrations.  Resources and projects may require new or expanded transmission investment, which is typically not included in general LCOE estimates.

For those interested in hearing a lively discussion on this subject, representatives from Navigant Consulting, the Lawrence Berkeley National Laboratory, and the National Renewable Energy Laboratory will participate in a panel session covering LCOE forecasts for renewable energy and grid parity projections as part of a renewable energy workshop on May 5, 2014 at the AWEA WINDPOWER 2014 conference in Las Vegas.  For more information, click here.

Notes:  The chart assumes federal incentives only (e.g., 30% investment tax credit [ITC] for solar and accelerated depreciation).  PV is fixed axis.  Concentrated solar power (CSP) assumes trough technology.  Natural gas price of $3.00 per MMBtu.  Geothermal assumes installed cost of $5 per watt, capacity factor of 80%, and ITC of 10%.  Wind assumes 35% net capacity factor with no production tax credit (PTC)/ITC.

Bruce Hamilton is a director in the Energy Practice of Navigant Consulting.

 

EPA’s New Emissions Standards Will Save Lives

— March 18, 2014

In an earlier blog, I argued that disagreements over the scientific merits of climate change too often overshadow the immediate public health and air pollution impacts of fossil fuel consumption.  The Environmental Protection Agency’s (EPA’s) public statements on its new Tier 3 vehicle emissions standards have done an excellent job of focusing on the real public health benefits of the new regulations without engaging in the climate change debate.

As a result of tightening vehicle emissions standards and requiring refiners to reduce the amount of sulfur in gasoline by two-thirds, the EPA estimates that up to 2,000 premature deaths will be avoided each year, as well as thousands of hospital visits, not to mention countless missed days of work, school absences, and activity restrictions.  By 2030, the EPA concludes that the Tier 3 emissions standards will be saving Americans anywhere from $6.7 billion to $19 billion in health costs each year.  Costs to the consumer have been valued at less than a penny per gallon of gasoline and $72 per vehicle in automaker equipment costs.

The new regulations, which will take effect in 2017, have been largely supported by automakers.  The rules harmonize EPA and California standards, removing the need to develop and certify two types of vehicles.  The oil industry has been aggressively opposed to the standards, arguing that they add prohibitive costs.  However, analysis from the EPA and even some oil industry analysts shows that this concern is overstated.  The oil industry made the same claim over Tier 2 sulfur reduction requirements, which were achieved successfully and cost-effectively.

From Vehicles to Power Plants?

While regulating greenhouse gas (GHG) emissions from motor vehicles is an accepted use of authority from the EPA, the same cannot be said for stationary sources of pollution, such as factories, oil refineries, and power plants.  A crucial upcoming decision from the Supreme Court will determine whether the EPA has the jurisdictional authority under the Clean Air Act to regulate pollution from these stationary sources.  The court’s decision is expected to be handed down in June of this year.

As regulations of GHG emissions get increasingly stringent, cleaner burning alternative fuel vehicles and electric vehicles (EVs) will become more attractive.  According to Navigant Research’s report, Light Duty Natural Gas Vehicles, global annual light duty natural gas vehicle sales will grow from 2.3 million vehicles in 2014 to 3.8 million in 2023.  These increasingly demanding emissions standards will continue to make internal combustion engine vehicles less polluting, even as the overall environmental impact of EVs decreases as the electricity that powers them comes from cleaner sources.  If the Supreme Court rules in favor of the EPA’s jurisdictional authority over stationary sources of air pollution, natural gas usage in power plants could see a large uptick as well, and the coal industry may see the days of building new power plants in its rear view mirror as a result.

 

Keystone Opponents Should Focus on U.S. Oil Consumption

— March 17, 2014

Last month, the contentious debate over the Keystone XL Pipeline resurfaced as the U.S. State Department concluded its final environmental impact analysis, finding the construction of the pipeline will have no significant impact on U.S. greenhouse gas emissions.  The assumption underlying the analysis is that the oil, derived from Athabasca oil sands in Canada, is going to be consumed regardless of development of the pipeline.  Opponents of the Keystone project decried the decision, but they are overlooking a key lever for slowing production from the oil sands: just use less oil in the United States.

Canada is determined to develop the resource, which has been slowly ramping production since 2003.  As such, advocates of the pipeline point out that if not transported via pipeline to the United States, it will be transported via rail (as is the current method) or via a combination of rail and tanker.  An additional scenario involves exporting the oil across the Pacific to meet growing demand in China.  While this is not a near-term prospect, its realization would increase global carbon emissions, not to mention the potential for oil spills because of increased oil tanker transport.  And, oil demand in the United States that would be met from a stable partner, and the largest source of U.S. petroleum imports, would have to be sourced from unstable supply lines from the Middle East.

Opponents argue that oil sands development is not yet a done deal, since alternative transport options besides the pipeline also face opposition.  Opponents take particular exception to the oil sands, as their development is far more carbon-intense than other forms of oil  production.  However, if it is true that the pipeline itself is irrelevant to oil sands development, then opposition efforts should shift to confronting consumption in end-use markets – specifically the U.S. road transportation sector.

Demand Side

In 2012, the United States  accounted for almost 20% of global oil consumption, the majority of which is consumed by vehicles on the roads.  Government programs and policies designed to blunt U.S. demand for oil, such as the Renewable Fuel Standard, can be highly influential on global oil prices, since the United States is the world’s largest consumer.  An increase in global oil supply, due to either increased domestic production of non-oil sand liquid fuels or a significant fall in U.S. demand, would lower the global price of oil.  A price dive in oil would dampen interest in costly oil sands development.

Although the existence of the oil sands has been known for almost a century, widespread development has not been economically viable until the last decade.  The cost of oil production from the oil sands is higher than production from more accessible reserves elsewhere.  Past oil price spikes have sparked interest in tar sands development, but those spikes have been short-lived and interest has faded with falling prices.  The steadily increasing price of oil over the last decade has sustained interest in the oil sands, leading to the development now taking place.  However, oil sands development is still a risky gamble, as shown by the losses incurred by Total and China Investment Corporation in 2013.

Increasing oil supply and cutting demand through increased domestic production of shale gas, rising biofuels penetration in the fuel supply chain, improved fuel economy of conventional gasoline- and diesel-powered vehicles, and spreading adoption of electric and other alternative fuel vehicles could effectively slow, if not halt, further development in Canada’s tar sands.  Oil consumption in the United States has declined since its peak in 2005; accelerating that decline, to more than offset increasing consumption in China and other growing economies, could displace much of the economic rationale for tapping Canada’s oil sands.  That would be more effective than asking the federal government to cancel a pipeline.

 

China’s ‘Solar Bubble’ a Coal Bubble in Disguise

— March 14, 2014

Tremors rippled through global financial markets this week after Shanghai Chairo Solar Energy Science and Technology defaulted on its corporate debt.  The first Chinese company to default on domestically issued bonds, Shanghai Chairo is seen as a signal of the over-inflation of China’s red-hot solar market – and, worse, as an indication that the whole edifice of “shadow banking,” shaky corporate debt, excessive property lending, and unsustainable economic growth in China could come crashing down, leading to another global financial meltdown.

That seems overly alarmist.  China’s leaders have for some time been forecasting a modest slowdown in economic growth for 2014, to the 7%-8% range, which would still be the envy of any Western economy.  And Chinese premier Li Keqiang warned on Thursday that future corporate debt failures are “unavoidable” as the country deregulates its financial markets and the government stops propping up unprofitable enterprises.  China’s economy is maturing beyond export-led growth based on cheap commodities, and some regrettable bankruptcies aside, that’s good not only for the Chinese people, but also, ultimately for the stability of the global financial system.

At least that’s the official, reassuring line.  In the energy sector things are slightly more complicated.

King Dethroned

There’s no question that the Chinese solar industry finds itself in a situation of overinvestment and overcapacity.  The spectacular bankruptcy of Suntech, previously headed by China’s “Solar King,” Zhengrong Shi, signaled clearly that the dot-com phase of China’s solar power boom is officially over and a period of sober reassessment – and disinvestment – must inevitably follow.

Still, overseas solar markets, particularly the United States, are enjoying sustained growth, largely thanks to innovative leasing models.  And last month the Chinese government upped its target for new solar installations for 2014 to 14 gigawatts (GW) – a mark that would surpass last year’s total of 12 GW, which itself was the most any nation had added in a single year.  China’s solar industry must adjust to market realities going forward; but the market is growing.

That’s not necessarily true of the coal sector, which could be the real bubble now threatening China’s sustained economic growth.  Nearly 40GW of new coal-fired power generation capacity was added last year, and it’s no longer obvious that demand will continue to grow to soak up all that power.  China has actually closed down more than 80 GW of coal capacity in the last dozen years, and the government reportedly plans to shutter another 20 GW in the coming years.

Wobbly Steel

Indeed, within 5 years there may well be a nationwide cap on coal consumption in China – an extraordinary development in a country whose economic miracle of the last 20 years has been powered almost completely by coal. The less-noticed default of Haixin Steel, a steelmaker based in the coal-producing region of Shanxi Province, China’s Appalachia, could be a more troubling episode than Shanghai Chaori.  Haixin was involved in “triangular debt” arrangements with coal producers and other investors, and its failure could forebode turbulence in China’s heavy industry – and its commodities markets, including coal.

“The truth is Chinese coal consumption is peaking,” writes Justin Guay, of the Sierra Club, “and its plans to build the world’s largest coal pipeline is a bubble that may have already burst.”

If the coal/steel nexus that has fueled China’s growth turns into a bubble, concerns over solar companies going belly up will look minor by comparison.

 

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