What are the Cheapest Sources of Electricity?
By Michelle Bloodworth, America’s Power
What are the cheapest sources of electricity? The answer might surprise you.
Nationally, coal retirements total some 40 percent of the coal fleet – 126,000 megawatts (MW) – that operated less than a decade ago. These retiring coal plants are being replaced by new natural gas-fired generation, new wind and new solar. Does it really make sense economically to continue replacing coal with new gas and new renewables?
Not necessarily and here’s why. If you only read newspaper headlines, you might assume that building new sources of electricity (natural gas, wind and solar) must be cheaper than relying on existing coal-fired power plants. However, a lot of these stories confuse the cost of new power plants with the cost of existing ones. This confusion means that decision-makers might not be getting accurate information.
To help clear up this confusion, America’s Power and the Institute for Energy Research (IER) recently put out a study that analyzes the levelized cost of electricity (LCOE) for coal, natural gas, nuclear, wind, solar and hydroelectric power. Levelized cost is a measure that takes all of the costs associated with an electricity source over its lifetime and divides those costs by the amount of electricity the power source is expected to generate. In general, power providers and their customers benefit most when using the electricity source with the lowest LCOE.
LCOE allows an apples-to-apples cost comparison of different types of electricity sources and can be a useful way to compare new power sources to existing ones. LCOE is also useful when determining whether to replace an existing power plant with a new one. This is similar to deciding whether to buy a new car or continue driving the car you have. If you buy a new car, you have to pay for the car and for expenses like gasoline, insurance and maintenance. If you’ve already paid off your existing car, your only expenses are gasoline, insurance and maintenance. That same decision-making process plays a role in generation decisions made by power providers, and for them LCOE is a useful tool.
While levelized costs will be different for each existing plant and each new one, the analysis commissioned by America’s Power and IER looked at national averages derived from publicly available data to highlight fundamental differences in costs among different generating technologies. Results found that existing nuclear, coal-fired and natural gas combined cycle (NGCC) power plants have lower levelized costs, on average, than new NGCC, new wind, and new solar (see graphic below). From this analysis, it is clear that we shouldn’t overlook the value for ratepayers in continuing to rely on our nation’s fleet of coal power plants.
The analysis uses data from the Energy Information Administration’s (EIA) Annual Energy Outlook for 2019, EIA Form 860 and Federal Energy Regulatory Commission Form 1. The analysis shows that, on average, existing power plants have lower fixed costs, but similar variable costs, compared to the electricity sources that might replace them. According to the analysis, “the reason new plants have higher fixed costs is that they begin their operational lives with a full burden of construction cost to recover. Since existing power plants have already paid for some or all of those costs, their ongoing fixed costs are lower, making their LCOE lower.”
Wind and solar, which are intermittent sources of electricity, have to depend on dispatchable sources in order to provide the same reliable electricity output as coal, NGCC and nuclear. Therefore, the study’s LCOE for new wind and new solar includes an added “imposed cost” for NGCC and natural gas peaker plants to serve as backup for wind and solar. These imposed costs allow for an apples-to-apples comparison of the levelized costs of intermittent sources and dispatchable sources. It is important to note that even without an imposed cost, the levelized cost for existing coal is less than the levelized cost for new NGCC, new wind and new solar. Coal wins the head-to-head comparison either way.
This analysis represents an approach for comparing existing and new generating resources on equal terms at a national level through average resource costs. This does not mean that local conditions will never find that it is cost-effective to build new resources of one type or another or that a decision to retire specific resources could never be an economic one. What it does mean is that utility planners and state regulators should carefully study their own systems before committing to coal retirements.
It is well understood that different sources of electricity generation have different attributes. Wind and solar power, in particular, are difficult to compare directly to dispatchable power plants that run on coal or natural gas. Both of these renewable resources generate power only when weather permits and can’t provide the full range of services the grid needs to deliver reliable power to consumers. Instead, renewables rely on existing resources to supply the “installed capacity”, ramping flexibility and voltage and frequency support required. As more renewables are added to a system, more of these reliability services are required from other generators. In order to compare these forms of electricity head-to-head, our analysis determines the value of these very real costs “imposed” on the system by renewables and accounts for them in the LCOE calculations. That’s the only way to make an accurate comparison.
While these imposed costs may be low when small levels of wind or solar are introduced on a system that has sufficient capacity and ramping resources already in place to support them, they always increase as the share of renewables on the system increases. Some studies are only attempting a basic comparison of the cost of generation, not the full cost of resources that can provide comparable services to the grid and consumers as our analysis does. This analysis was not intended to address small amounts of renewable generation. Rather, the study intends to address recent claims that renewables should replace dispatchable generation on a widespread basis.
The critics who note that the wind and solar LCOEs are higher than results reportedly achieved by many recent wind and solar projects tend to ignore factors that understate the true costs of renewables. These include:
- Recent wind projects benefit from the federal production tax credit that artificially lowers the cost of wind constructed in 2016 by $23.75/MWh ($19/MWh in 2017 and $14.25 in 2018). These subsidies amount to roughly half the cost of operating a dispatchable coal or natural gas unit.
- Solar generation is eligible for a federal investment tax credit, which amounts to a 30-percent reduction in the cost of solar installations. This lowers the cost of solar power by an amount comparable to the wind investment tax credit.
- Reported costs also do not internalize reliability costs imposed on the system. In some cases, utilities may be willing to absorb these costs. That will not be the case, however, if renewables are replacing traditional baseload generation (existing and new) that would be used to support them.
Levelized costs should be an important consideration in plant retirement decisions. There are also several other factors that could affect decisions to retire and replace existing facilities. For example, future environmental regulations would likely increase levelized costs. Power plants that are not fully depreciated at the time of retirement would also lead to stranded costs, which could be problematic for ratepayers and investors. Finally, it is worth noting that this analysis does not take into account the cost of transmission upgrades that are often necessary to connect new wind and solar to the grid or gas pipeline infrastructure to satisfy an increasing demand for natural gas by the electric power sector.
Combined, the data from this analysis paint a clear picture that decisions about replacing existing coal-fired power plants with other sources are not as simple as newspaper headlines make them seem. Policymakers should pay careful attention to the levelized costs of existing power plants, especially when evaluating proposals to retire or replace existing coal units.
Michelle Bloodworth is the President and CEO of America’s Power