What are the Cheapest Sources of Electricity?

Context
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.

Conclusion
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