Is Renewable Energy Really Cheaper than Fossil Fuels?

Repeated claims that renewable energy is cheaper than fossil fuels rarely go unchallenged, and while renewable energies are certainly better for humanity, this claim is somewhat misleading. What claims are made about renewable energies, why are they actually more expensive, and what can be done to help mitigate these cost issues?

What claims are made about renewable energies?

Regardless of what side of the fence you sit on, all can agree that renewable energies are the future of energy generation. 

To start, as renewable energies utilise naturally occurring energy sources, they are not dependent on foreign nations. As such, they can provide a nation with a high degree of energy security, eliminating the ability for foreign nations to take advantage of energy crises or, worse, inflict their will upon others. 

Another major benefit to renewable energy is that it is almost always carbon and pollutant-free. This means that renewable energy sources do not pollute the environment, nor do they contribute to emissions. An added benefit to the lack of emissions is an improvement in air quality, thus having an overall positive effect on the health of millions of people.

Finally, renewable energies can easily be developed locally, thus providing a boost to economies. While it is perfectly possible to source all renewable technologies from outside nations, it is perfectly possible for even the poorest of nations to develop their own programs to develop and manufacture solutions. 

Cost-Effectiveness of Renewable Energy 

However, one claim that continues to be made regarding renewable energy is that it is cheaper compared to fossil fuels such as coal and gas. This claim is now one of the most fundamental factors in the push for renewable energy, especially since the prices of fossil fuels have continued to rise in the aftermath of the Russo-Ukraine war.

A recent analysis has highlighted that coal in the US is now economically outmatched by renewables to such an extent that it’s more expensive for 99% of the country’s coal-fired power plants to continue operations than to establish a new solar or wind energy facility nearby. The plummeting cost of renewable energy, supercharged by the Inflation Reduction Act, has made it cheaper to construct solar panels or wind turbines and integrate them into the grid than to maintain the operation of all but one of the 210 coal plants in the contiguous US.

Michelle Solomon, a policy analyst at Energy Innovation, stated the following: “Coal is unequivocally more expensive than wind and solar resources, it’s just no longer cost competitive with renewables.” She further emphasized that this report challenges the prevailing narrative that coal will remain a dominant energy source.

The study, conducted after the allocation of $370bn in tax credits and other support for clean energy by the Inflation Reduction Act, compared the fuel, operation, and maintenance costs of America’s coal fleet with the expenses of constructing new solar or wind facilities from scratch in the same utility region. On average, the marginal cost for coal plants stands at $36 per megawatt hour, whereas new solar is approximately $24 per megawatt hour, making it about a third cheaper. Only one coal plant, Dry Fork in Wyoming, remains cost-competitive with the new renewables.

The idea behind this claim is that the price of renewable systems over their lifespan will result in energy prices that are lower compared to those derived from fossil fuels over the same time. For example, it is generally estimated that solar panels will not only pay themselves back over a period of 6 to 10 years but then continue to generate electricity for an additional 10 years minimum. When all of this is taken into account, the resulting price of electricity is significantly cheaper than an equivalent fossil fuel power station. 

Other figures that substantiate this claim include the continuing drop in prices of solar panels and wind turbines, with as much as a fall of 85%, and the increasing efficiency of solar panels, meaning that the cost of land per watt generated also falls. 

Why are renewable energy sources actually more expensive than previously thought?

While renewable energy sources may appear to be cheaper, there are some hidden truths that actually make them far less financially attractive.

To start, the capital cost for establishing new power plants is far cheaper for fossil fuels than it is for renewable energy sources. What this means is that building a gas plant is significantly cheaper than building a solar or wind farm per kwh. Furthermore, the energy density offered by such plants is significantly higher than any renewable energy source, meaning that far less land is required to operate them. By contrast, solar and wind farms require massive amounts of space to generate any significant amount of energy.

Another dimension to consider is the Levelized Cost of Storage (LCOS) for renewable energy. Given the intermittent nature of sources like solar and wind, energy storage solutions, such as batteries, become crucial. LCOS provides a measure of the cost of storing electricity. While the initial costs of renewable installations might seem competitive, the associated storage costs can be significant, especially when we factor in the lifespan and efficiency of current battery technologies. This is particularly relevant when comparing the continuous power generation capabilities of fossil fuel plants to the on-and-off nature of renewables. 

Challenges and Considerations in Renewable Energy Implementation 

On the topic of space, many believe that the solution to this is to put wind farms out at sea. While there is more than enough space in the ocean, the cost of installing such wind farms is monumental, making such projects difficult to fund. Some figures put the cost of offshore wind farms at around 20% more than onshore, while others float figures of around 300% (after installation and operation).  

Another major factor in energy pricing is that renewables often get tax credits and subsidies, which artificially reduce their price, while fossil fuels can see levies (such as carbon taxes) that make them more expensive. As taxpayers, who are also the consumers of energy, pay this tax, the net result is that the true cost of renewables is being paid for by the taxpayer. 

For example, some solar installations can see tax credits as much as 30% for their installation. Another example is how the US has recently doubled the number of tax credits for renewable technologies to $15.6 billion. However, it should also be noted that fossil fuels do also receive tax subsidies when locally sourced (for the purpose of energy security), but these are being reduced by renewable energy movements.

Beyond the direct costs, it's essential to consider the Levelized Avoided Cost of Energy (LACE) when evaluating the economic viability of energy sources. LACE provides a perspective on the economic value an energy source brings to the grid by comparing the cost of existing energy sources to that of a potential new source without needing subsidies. For renewables, this means assessing how much value they bring in terms of reducing the need for more expensive energy sources or infrastructure upgrades. While renewables might seem cost-effective on the surface, their true value to the grid, especially during peak demand times or in specific regions, can vary. 

But a new factor has now come into play in the renewable energy market that very few have considered: interest rates. Simply put, as the capital cost for renewable energies is significantly higher than fossil fuel plants, a large upfront amount of cash is needed, and such cash is rarely given out by a single entity interest-free. This means that as a renewable plant operates, it needs to pay back such loans with interest, and these loans are almost always tied to factors such as inflation and national interest rates. 

With all the market instability that the global economy has seen over the past two years, new data has shown that investors are now pulling out of renewable energy sources due to high-interest rates. Even though fossil fuel plants require upfront capital, as this capital is significantly less compared to renewables, and such plants can provide a consistent amount of energy at a cheap rate (making them reliable), they are far more desirable to investors in the long term.

Regardless of what one wants to believe about renewables being cheap, money talks, and it is being pulled out of renewables for a reason.

It's also essential to consider the Levelized Cost of Electricity (LCOE) when comparing energy sources. LCOE provides a consistent measure of the costs of different electricity generation methods, factoring in initial capital, operations & maintenance, transmission, and decommissioning costs. Moreover, the Levelized Cost of Storage (LCOS) and Levelized Avoided Cost of Energy (LACE) offer deeper insights into the costs associated with energy storage and the economic value provided to the grid, respectively. 

What can be done to help mitigate against these cost issues?

Unfortunately, there is very little that can be done to help renewables become economically viable without creating artificial demand or trying to force low prices via government mandates. Fundamentally, if the market sees renewables as a losing game for the next decade, it is better to let the free market decide its fate. While this could result in higher solar and wind prices, it could also provide incentives to make direct carbon capture cheaper. 

If fossil fuel plants can be installed with capture mechanisms, not only would their contribution to global climate change be significantly reduced, but they could also help to provide cheap energy that isn’t being charged on the side via tax increases. Furthermore, such technology could potentially be miniaturised into vehicles and other sources of carbon, thereby helping other industries.

Finally, the installation of carbon capture systems would buy the world another few more decades to get renewables cheap and reliable so that when fossil fuel reserves start to falter, renewables can step in and provide society with the ultimate energy source. Who knows, maybe fusion will finally become viable in that time!