2023 is when Solar Energy beat all others
Has Solar PV become the king of energy generation? On Green Premiums, Grid Parity and LCOE
Written by Uri Sadot & Ido Ginodi
The year 2023 is turning out to be a happy one for solar energy watchers. As the global race towards renewable energy continues, recent reports show that solar energy has boldly emerged as frontrunner. Is this uptick in solar adoption an “artificial” result of regulator intervention? Or is it about bottom-up economic decisions driven by technological development? The short answer is both. And the good news are that PV plants are on track to become one of the cheapest energy generation technologies mankind has ever developed.
How to compare costs between sources of energy
A situation in which the cost of energy generated using an alternative source, and in particular a renewable source, equals that of energy generated from fossil fuels is dubbed Grid Parity. But how can one compare the cost of energy generation using megawatt-scale gas-powered turbines to that of a residential or commercial scale solar system, which operates intermittently? Moreover, the former cost is in the order of magnitude of millions of USDs, and the latter’s cost is in the order of magnitude of 10–30K$. How do we avoid comparing apples and oranges?
The common term that the industry uses to compare apples to apples is the Levelized Cost of Energy, or LCOE. This metric assigns a monetary value to every kWh of energy that is generated by an installed plant, including both CAPEX and OPEX considerations. We’ll delve deeper into these terms shortly.
The Green Premium
But before that, let’s quickly review an intuitive concept suggested by Bill Gates’ Breakthrough Energy, called The Green Premium. It is hard to outdo Gates, so we will begin by the definition in his own words:
What is the Green Premium?
The Green Premium is the additional cost of choosing a clean technology over one that emits more greenhouse gases.
Right now, clean solutions are usually more expensive than high-emissions ones, in part because we don’t factor the true economic and environmental costs of existing options like fossil fuels into the price we pay for them.
For instance: The average retail price of ground beef is $3.79 per pound, while a plant-based burger is $5.76 per pound. The Green Premium for a zero-carbon burger is the difference in cost between the two, or $1.97. But the regular burger doesn’t reflect the true cost of emissions generated in its production (usually in the form of methane released by livestock.)
Moving our immense energy economy to net-zero solutions will cost something — but with the right policies and focus, we can lower the Green Premium. Ultimately, we need that premium to be so low that everyone everywhere can choose the clean alternative. It’s crucial to understand what getting there will cost.
The concept is simple: to every GHG-emitting activity, there’s an analogous one that can create the same result/resource/outcome cleanly, albeit in a higher cost structure. The delta between the Net-Zero way of getting things done and the “traditional” way of achieving the same goal is called the “Green Premium.”
The higher the Green Premium is, the more acute is the need for the invention of breakthrough technologies to enable a better cost-structure that will bring the Green Premium to an acceptable level (subsidies and government driven-incentives can also play a role minimizing the Green Premium, but this is a less sustainable form of closing the gap). And vice versa, in those cases where the Green Premium is low, efforts should be diverted to widely deploying it. The source is extremely worth reading.
Per Breakthrough Energy, the Green Premium on clean energy is very low, and it is estimated by them that getting to 100% non-GHG emitting generation will increase the retail price for electricity in the US by only 15%, which equals to an average addition of 18 USD to residential monthly electricity bills.
While there are many details and data behind the analysis that can be found here at Energy Breakthrough’s website, below is their estimation of the least-cost path that will take the US to 100% clean generation by 2050, which they used as the basis of the analysis.
To round off this chapter and to further drive your curiosity to pay Energy Breakthrough a visit, below are some examples of Green Premiums for other goods, demonstrating that there is a larger gap to close in non-electricity sectors. The source contains a few more examples and much more data.
Let’s take a look now at the common metric used to compare the cost of generating electricity.
Levelized Cost of Electricity (LCOE)
LCOE captures the per-unit cost (typically per megawatt-hour) of building and operating a generating plant over an assumed financial lifetime of the system. Simplistically, when building a generation asset, an investment goes in both in the form of capital expenditure needed to construct the plant, and in the form of operational expenditure needed to sustain the plant’s performance over time. By dividing the “overall cost” discounted to Net Present Value (NPV) by the total amount of energy the plant will generate (discounted as well), one gets a measurement of the effective cost of each energy unit that is produced, in terms of USD/MWh or USD/kWh:
Now, for those interested in the underlying mechanics, the technical definition which is usually used (and that we use in our internal evaluations) is the following:
Where
- The usable lifetime of the system is N years
- C_i is the capital expenditure (CAPEX) in year i, which generally includes the balance of System/Plant (BOS/BOP), electrical infrastructure, installation costs, etc.
- M_i is the operation cost (OPEX) in year i, capturing the O&M costs, including maintenance costs, consumables, replacement components, service agreements, overhead costs (administration, project management), etc.
- F_i is the expenditure on fuel (which is sometimes included under consumables in M_i but for clarity we designate it separately)
- E_i is the usable energy generated in year i (heat dissipation and other losses are of course not included)
- d is the discount rate
For a deeper explanation review NREL’s definitions, for examples.
So, what is the LCOE of solar energy?
The bottom line: it’s around 4.8-5 c/kWh as of the end of 2022, but that’s subject to a few assumptions. In this section we’ll review and compare different LCOE analysis frameworks. If you are only interested in the bottom line, go ahead and skim through the figures and read the closing paragraph on ‘Grid Parity’. If you are a renewables professional, the following paragraphs will introduce a couple of data repositories which are worth knowing.
The International Renewable Energy Agency (IRENA) publishes periodic studies on the LCOE of various renewable energy sources. Interestingly, the cost reduction forecasts published in 2019–2020 (first figure) were indeed met in the market data published on 2021–2022. And in their 2022–2023 forecasts, the cost reductions trends continued.
Noteworthy, the drop in the LCOE of PV is outstanding when benchmarking against other renewable technologies. A standard way to explore this is through the concept of “Learning Curves,” built on the premise that technologies see deep cost reduction as they mature. The figure below adds another dimension to the time maturity dimension we covered in the previous two figures. Indeed, it is evident that while fossil-based technologies hit the 1TW mark much before, they have already plateaued in terms of tech and cost improvements.
To wrap up this section, let’s review that data published by the National Renewable Energy Laboratory (NREL) in their Annual Technology Baseline (ATB) dataset for 2023.
Here we can better understand that while Utility-scale PV already hit cost-performance which is favorable relatively to that of natural-gas combined-cycle plants, Commercial and Residential PV plants still see some room for improvement. Fortunately, several parallel trends are expected to continue and drive down costs of PV installations in these segments.
Namely, the production costs of existing solar panel technology continues to go down, as was experiences during 2023. While in parallel there is continued advancement in panel efficiency, production automation and ease of installation. Similarly, both the power electronics and storage components involved with typical PV installations are on a continuous downwards cost slope. Another indirect factor are the growing market participations options for PV system owners to monetize their energy assets’ value for the grid (as parts of VPP programs, for example) which are steadily growing across the United States and Europe.
Let’s tackle two central arguments against Solar Energy. First is that Solar Generation is propped on government subsidies, and cannot compete with fossil fuels on its own. Indeed, governments are undoubtedly supporting the deployment of solar Energy with direct tax incentives as well as indirect cost reductions such as state-funded “solar installer” training programs, or via subsidized electricity given by the Chinese state for PV factories, etc. The second argument is that while Solar energy makes sense in some places, it cannot compete with fossil fuels or wind generation in geographies that aren’t blessed with high solar irradiance.
A simple way of overturning these arguments is by looking at the fast adoption of Solar PV in many parts of the world, from Northern countries such as Germany and the UK, to developing regions such as Puerto Rico, South Africa and Brazil.
A more rigorous way to tackle these arguments is by taking a deeper look and separating the intrinsic cost of solar from the exogenous incentives. Lazard’s LCOE report provides exactly this type of data. Through detailed analysis of all the components and inputs required to build and operate a solar PV system (e.g. labor, panels, mounting structures, inverters, wiring, and other equipment), and the subtraction of all forms of subsidies available, Lazard determines the LCOE associated with each form of energy generation technology over its lifetime. The bottom line is straightforward, and suggest Solar PV is on the fast-track to become the dominant energy technology.
Are renewables on track to Grid Parity with the incumbent energy generation infrastructure?
Grid parity is achieved when the cost of renewable energy matches or falls below the cost of conventional energy from the grid. Grid Parity is different when looking from the retail customer point of view — in which is already achieved, and the point of view of the Utility. This is because the Utility has additional overheads associated with transitioning the existing infrastructure from legacy, centralized fossil generation to a grid of decentralized, renewable energy resources. These investments are very significant, and include energy storage to overcome intermittency and, smart management of digital energy assets, all with high standards of security and resilience. And while many of these investments will be “one-time” infrastructure investments, achieving them is no small feat for the Utilities.
So, are we on track to Grid Parity? The short answer is yes, and the reason is Unit Economics. As time goes by, the costs associated with Solar PV installations are sloping down such that they become economic in more and more areas of the planet. This will drive retail customers and developers to introduce more Solar into grids, and Utilities to follow suit.
The importance of Grid Parity as a significant milestone cannot be stressed enough, as it is the point where the “baton” passes from Government design to the nimble feet of free markets. With many countries including Germany, Chile and parts of the U.S., reaching or surpassing the point of Grid Parity, Solar has proven not just an environmentally sound choice, but alsonthe best financial choice..
