By Nicholas Larsen, International Banker
Thanks to a precipitous decline in generation costs, the last few years have seen much of the world undergo a concerted transition towards renewable-energy sources and away from fossil fuels. Indeed, the costs for renewable-energy technologies have continued to achieve new lows with every passing year. But it has only been recently that the likes of solar and wind have become cost-competitive with fossil-fuel-based power generation. Over the coming years, it seems likely that costs associated with renewables will continue to fall, as governments, investors, financial institutions and the industry itself keep working to improve the cost-effectiveness of the sector. Even today, renewable-energy sources are cheaper than coal in most parts of the world.
With that in mind, then, is a global transition to a principally renewables-driven energy system economically feasible yet? The Abu Dhabi-based International Renewable Energy Agency (IRENA) thinks so. The inter-governmental organisation, which “supports countries in their transition to a sustainable energy future” and has around 160 members, predicted last year that the cost of renewable energy was falling fast enough to make it a consistently cheaper source of electricity generation than fossil fuels by 2020. And judging by the data revealed in its May 2019 report “Renewable Power Generation Costs in 2018”, that prediction remains on course to become a reality.
The figures show a marked decline across the board in the cost of developing new power plants using renewable energy, such that each renewable source is able to compete with fossil-fuel-based power plants. While hydroelectric power is deemed the cheapest renewable-energy source at a global average cost of $0.05 per kilowatt-hour (kWh), the cost of developing new power plants using onshore wind, solar photovoltaic (PV), biomass and geothermal energy are all now below $0.10 per kWh on average. Even offshore wind, which was previously more expensive in comparison, has seen its average cost slide to just $0.13 per kWh. As such, all of these fuel sources can now easily compete with fossil fuels, with the costs of developing new fossil-fuel power plants usually ranging from $0.05 per kWh to more than $0.15 per kWh.
We are now seeing many countries driving this cost improvement home with higher rates of renewables adoption all across the world. For the first time ever in the United Kingdom, for example, renewable-energy sources have supplied more electricity in the country during a quarterly period than fossil fuels. Comprising mainly wind, solar and renewable biomass, the third quarter of 2019 saw the share of renewables within total UK power generation rise to 40 percent, thus confirming National Grid predictions that 2019 would mark the first time that zero-carbon electricity—renewables and nuclear—overtakes fossil-fuel-generated power.
In Australia, the world’s number two exporter of coal, meanwhile, similar trends are emerging. The U.S. Energy Information Administration (EIA) is forecasting that production in the coal-rich Western Australia region will have declined next year by 19 percent from 2018 levels and will also have dropped by 42 percent from 2010 levels. With renewables now cheaper than coal, moreover, a similar rate of production shuttering in the coming decade would see all mines in the area shut down altogether. And the increasingly packed pipeline of renewables projects that will roll out over the next five years or so is further leading some analysts, such as Rystad Energy, to predict the coming extinction of coal-fired power generation in Australia by 2040.
Even research from the likes of BP (formerly The British Petroleum Company) is showing just how rapid the rate of adoption has become. The oil-and-gas major recently published research that found that global renewable-energy power generation has grown by double-digits annually over the last few years, with a 14-percent expansion from 2017 to 2018. And the company’s chief executive officer, Bob Dudley, is even supportive of a taxation policy for non-renewable energy. “We do need a world that pays for carbon (…) because you (consumers) don’t change your behaviours unless you actually put a price on something,” Dudley recently said, “and it can’t be just producers, it has to be people at home that hit the switch for electricity. They also have to pay, and that means they’ll use less electricity.”
Should countries and regions begin to adopt renewable energy more liberally, moreover, massive cost savings are expected to materialise. The Gulf Cooperation Council (GCC), for instance, has been rapidly adopting renewable energy for electricity generation in the last few years, whilst also reducing its carbon emissions. Led by the UAE (United Arab Emirates), which hosts more than two-thirds of the region’s installed renewable-energy capacity and which is aiming to generate half of its power from renewables by 2050, IRENA estimates that the GCC could end up saving a hefty $76 billion in costs by 2030 if it sticks to its sustainable plans.
There’s also the inescapable cost to bear of not switching to renewable energy that can’t be ignored. IRENA’s September 2019 report “Transforming the Energy System – And Holding the Line on the Rise of Global Temperatures”, reveals that in order to prevent exceeding the 1.5 degrees Celsius recommended by the Intergovernmental Panel on Climate Change (IPCC), $18.6 trillion of the world’s cumulative energy investments must switch from fossil fuels to low-carbon technologies between now and 2050. To achieve this, an additional $15 trillion worth of investment in the energy sector, on top of the currently planned $95 trillion, will be required. The report cites several examples of viable transitions that need to occur to get there, including more than a billion electric vehicles worldwide by 2050; at least 300 million highly efficient heat pumps, which would be 10 times today’s number; the use of renewable hydrogen to meet the nearly 19 exajoules of global energy demand; and a near-tripling of investment in renewable heating, fuels and direct uses from 2018 levels.
Indeed, renewable energy by itself is unlikely to be enough to sufficiently reduce carbon-emission levels. There will also have to be improvements in energy efficiency and more electrification of end-use sectors, IRENA notes. But with the cost of renewable power coming down, at least there will be a faster rate of substitution from fossil-fuel-based systems. This is also the view of the Paris-based International Energy Agency (IEA), which predicted in October that renewable-energy sources’ share of global electricity will climb from 26 percent today to 30 percent by 2024. The agency’s executive director, Fatih Birol, however, recently warned that this growth rate would need to be even faster if the world intends to achieve its climate targets. Nevertheless, the IEA’s latest report shows that solar, wind and hydropower projects are now rolling out at their fastest rate in four years, and it predicts that by 2024, renewable electricity will have grown by 1,200 gigawatts (GW), which is equivalent to the total electricity capacity of the United States.
Solar energy should be the biggest growth driver for renewables during this time, with costs being projected to fall by 15 percent. The resulting surge in demand for cheap solar power might then see the world’s solar capacity grow by 600 GW, equivalent to twice Japan’s current total electricity capacity. According to Birol, technologies such as solar photovoltaics (PV) and wind are “at the heart of transformations taking place across the global energy system”. Their increasing deployment, Birol added, is “crucial for efforts to tackle greenhouse gas emissions, reduce air pollution, and expand energy access”.
The report also notes that while the European Union’s (EU’s) and United States’ climate ambitions will drive much of this growth, it will be China that leads the way in rolling out renewables projects. Indeed, China has clearly taken the mantle as the global leader of renewables proliferation, not just within its borders but all around the world. Today, the country is the world’s top producer of solar panels, wind turbines, batteries and electric vehicles. It has also been the biggest investor in renewable energy for nine out of the last ten years. And it is rapidly boosting its financing of green-energy projects worldwide, meaning that despite its well-publicised domestic issues surrounding pollution, it is still doing more than any other country to champion the creation of clean-energy systems.
One area in which the renewables sector will look for cost improvements over the coming years, however, is ensuring that it can generate power continuously (for example, when it is neither sunny nor windy), rather than intermittently. To date, most companies have tried to solve this problem by either pairing renewables with battery storage or supplementing power generation with natural-gas plants. But with the cost of battery storage also improving in recent years—the price of lithium-ion battery storage has fallen by more than three-quarters since 2012—this should continue to pose less of a problem. The likes of Abu Dhabi have been particularly supportive of such a solution; earlier in the year, it started what was reportedly the world’s largest virtual battery plant, which was able to supply the city for up to six hours in the event of an outage.
IRENA expects global power supply to double by 2050. Of the new power demand during this period, 86 percent is being forecast to be met by renewables, especially solar, wind and hydroelectric power and to a lesser extent, bioenergy and geothermal. The organisation also projects that renewables adoption could boost global gross domestic product (GDP) by 2.5 percent during this time. All of this positive data for renewables means, therefore, that the argument for transitioning away from fossil fuels is not solely an environmental one. There is now a compelling economic case for making the switch. And that means that as costs continue to fall, and the economic case continues to strengthen, thermal-power generation may well begin to suffer from an existential crisis. Or at the very least, it may end up proving useful only as a stopgap solution when it’s not sunny or windy.