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.

Levelized costs
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.