2.1 The Falling Costs of Renewables

Solar PV and onshore wind power have undergone an industry-wide revolution in just a few years, and are at or approaching grid parity – where electricity is equal to the price of power from the grid – in a wide variety of settings.

Between 2009 and 2013, prices for solar PV modules declined by 65%-70%, despite module prices stabilising in 2013.2 The technology reached new levels of competitiveness at both distributed and utility scale. The cost of residential solar PV systems in Germany declined by 53% during the same period, and commercial solar power reached grid parity in countries including Germany, Italy and Spain, with France and Mexico due to attain parity soon (IRENA, 2014b and Eclareon, 2014).

Onshore wind is increasingly the least-cost option for new grid supply. The levelised cost of onshore wind electricity has fallen 18% since 2009 on the strength of cheaper construction costs and higher efficiency levels, with turbine costs falling nearly 30% since 2008.

When coupled with maturing market structures, falling costs have stimulated rapid year-on-year growth in both the scale and the scope of renewable energy deployment. IRENA's analysis of more than 9,000 utility-scale renewable projects, 150,000 small-scale PV projects and a range of literature sources confirms that the rapid deployment of renewables , along with the high learning rates 3 for some technologies, has produced a virtuous cycle that will continue to drive down costs (IRENA Costing Alliance, n.d; see Box 3).

BOX 3: IRENA'S COSTING ALLIANCE

The IRENA Renewable Costing Alliance (www.irena.org/costing) was launched in early 2014. Alliance members recognise that a lack of accurate, transparent and reliable data on the cost and performance of renewable technologies is a significant barrier to accelerated uptake. To this end, they agree to share with IRENA, confidentially, real-world project cost and performance data, facilitating analysis based on the latest and best possible information.

Local environmental conditions and their impact on power generation continue to affect renewable energy capacity factors. However, improvements in technology mean that the amount of wind or solar radiation needed to generate power is falling. Meanwhile, significant investments in electricity storage technologies mean these are likely to become more widely available soon. Increased penetration of renewables has also created a wider geographic spread, meaning less favourable resource conditions in one area can be offset by more favourable conditions in another. Further interconnections and grid development will help tap into renewable resources across larger geographical areas.

Renewable energy technologies have significant potential for further improvement, depending on their maturity. Delivered costs of renewable energy decline significantly as markets grow, learning accumulates and economies of scale are achieved. These dynamics are more prominent in the case of solar PV, as indicated in Figure 9, and onshore wind. This is in contrast to less mature technologies, such as ocean energy, that are still approaching the commercialisation stage (see Box 4).

Figure 9: Projected solar PV system deployment cost (2010-2020)

Source: IRENA (2014c)

Solar PV

Solar PV systems are the most accessible renewable energy technology, as their modularity means that they are within reach of individuals, co-operatives and small-scale businesses. With recent cost decreases and innovative business models, they represent the economic off-grid solution for the more than 1.3 billion people worldwide without access to electricity.

BOX 4: LESS MATURE RENEWABLE TECHNOLOGIES

Beyond hydro, geothermal, solar and wind power, there are noteworthy emerging technologies that are only just beginning to be exploited at commercial scale. These either offer greater efficiency than their more mature predecessors or present opportunities to exploit new renewable resources.

Enhanced geothermal systems adapt existing technologies for use in a wider range of locations, using deeper drilling to target hotter temperatures closer to the earth's core. As technical and economic challenges are overcome, these could greatly expand the use of geothermal energy to provide baseload heat and power.

Ocean energy technologies are advancing quickly and the outlook for commercialisation is good. Five main wave power technologies and 5-10 tidal current power technologies are close to market readiness, while numerous concepts are in earlier development stages. However, tidal energy is among the least deployed of renewable energy sources, with around 500 MW installed worldwide, of which more than 90% comes from two tidal barrages.

Recent cost reductions have meant that at least a third of new, small to mid-size solar energy projects in Europe are being developed without direct subsidies (Parkinson, 2014). In Chile, a new 70 MW solar farm under construction is anticipated to sell on the national spot market, competing directly with electricity from fossil fuel-based sources. Technology cost reductions have been driven by:

» Efficiency improvements: The efficiency of solar PV modules in converting sunlight into electricity has improved by around 3%-4.5% per year for the last 10 years; 4

» Economies of scale: Integrated factories are scaling up processes, providing competitive equipment prices and amortising fixed costs over larger output;

» Production optimisation: More efficient production processes and improvements in supply chain management continue to provide cost reduction opportunities.

The combination of reductions in PV module prices and balance of systems (BoS) costs has allowed the LCOE to fall rapidly. Assuming a weighted average cost of capital of 10%, LCOE for solar PV has declined to as low as USD 0.11/kWh and is typically in the range of USD 0.15 to 0.35/kWh for utility-scale projects (Fraunhofer ISE, 2013). The cost of deployment and the LCOE, however, differ from market to market. Figure 10 demonstrates these differences for installed costs of PV systems in certain key markets. The primary reason for such differentials is that BoS costs include soft or non-hardware costs, which are highly market-specific.

BoS costs now make up a larger proportion of project costs, alongside the capital costs. Improving the competiveness of PV will therefore increasingly depend on the extent that BoS costs can be reduced. While the trend in BoS costs is downwards at present, this is a diverse area with significant national variance. It is much cheaper to install the same solar panel in Germany than in the United States or Japan, for instance – as indicated in Figure 11. This can be a function of regulation, the availability of skilled installation professionals and other factors. More analysis is required to examine the reasons behind cost differentials, identify future cost reduction opportunities and formulate policy recommendations to enable success in different countries.

Figure 10: Solar PV system costs by country (2010-2014)

Source: IRENA Costing Alliance (n.d.)

Figure 11: Residential solar PV cost breakdown in Germany and the United States

Source: IRENA Costing Alliance (n.d.)

Onshore wind power

Solar PV has not been the only beneficiary of falling technology costs. Onshore wind power is also fast approaching grid parity in purely financial terms. Technical innovation and cost reductions are combining to make onshore wind the cheapest source of new electricity in a wide and growing range of markets. The LCOE for wind power is approaching wholesale electricity prices in China, Germany, Italy, Spain and the United Kingdom and has already attained parity in Brazil and Denmark. Developers of Brazilian wind farms have won 55% of contracts in electricity auctions since 2011, as prices for wind energy have fallen 41% to BRL 88 (USD 45) per megawatt-hour (IRENA, 2014c). Electricity from wind is already cheaper than nuclear power and would also be cost competitive with natural gas and coal globally if health and environmental costs were included in prices.

The range of levelised costs of wind-generated electricity is wide, but wind is increasingly the most competitive source of new generation capacity for the grid. Energias de Portugal (EDP) now reports that the LCOE for onshore wind across Europe is 20% cheaper than for natural gas and one-third cheaper than for coal (EDP, 2014). Figure 12 demonstrates the range of LCOE for wind farms in non-OECD countries.

Most of wind's competitiveness has been driven by the incredible pace of technological evolution among the world's largest turbine manufacturers. Growth in the scale of the wind market has encouraged competition, driving down costs. The capital costs of wind turbines have also declined since 2008/2009. The turbine is the single largest cost component of a wind farm (64%-84% of total cost), so this has had a material impact on total project costs. Innovations allow today's turbines to harvest significantly more wind at a given site. Higher hub heights, larger swept areas and improvements in blade design and wind turbine operation have increased the capacity factors of new installations. Data for the United States and Denmark shows that the capacity factors for wind turbines (at a given wind speed) have increased by 20% or more in a decade (Islam et. al., 2013)

Figure 12: LCOE for recently commissioned and proposed onshore wind farms in non-OECD countries

Source: IRENA Costing Alliance (n.d.)

Offshore wind

Offshore wind is an emerging field which is expected to grow rapidly as costs fall. Unlike onshore wind farms, which can be as small as a single turbine, offshore wind farms tend to be as large as possible. The average size of offshore wind farms is currently around 200 MW. At the end of 2013, over 7 GW of world wind power capacity was installed offshore, with the largest market in the United Kingdom.

The offshore sector is interesting as it benefits from higher social acceptance, has less visual or noise impact and can reach significantly higher capacity factors (40%-50%) than onshore due to stronger and more consistent winds, enhancing the ability of offshore wind to provide baseload reliability. Where densely populated areas border the sea, the proximity of load centres can make offshore wind especially attractive.

While capital costs are higher than those of a comparable onshore wind project, the investment cost for offshore wind turbines with fixed-bed foundations is projected to decline 17%-27% by 2023 (Fichtner and Prognos, 2013).5 The expectation is that this will result in a fall in the LCOE from approximately USD 0.17-0.20 per kWh in 2013 to USD 0.10-0.13 per kWh in 2023.

Offshore wind farms are more complicated than onshore, as grids need to be expanded further. The average distance from shore to turbine is projected to increase to 100 kilometres by 2020 (Roland Berger, 2013). As a result, the search for sites with great wind resources may provide a cheaper kilowatt-hour on site only to entail higher transmission costs. Commercial offshore turbines available today have a capacity of 5-7 MW, and turbines with a capacity up to 10 MW are being developed, which reduce overall LCOE.

There is major growth potential in the offshore wind market. In Europe alone, offshore wind capacity is projected to grow to 40 GW by 2020. Power generation giants, such as General Electric (GE) and Siemens, entering the market around 2000, introduced innovation and intense industry rivalry, resulting in advancements that few experts had thought feasible so quickly. All offshore turbines currently built have fixed-bed foundations, although floating platforms are being tested in Denmark, Japan, Norway and the Republic of Korea.

Concentrated Solar Power

CSP uses a series of mirrors to concentrate solar energy onto a heat transfer medium, which is then used to drive a traditional turbine. Global installed capacity is nearly 3.4 GW worldwide. The LCOE of utility-scale PV is now around two-thirds that of CSP, but CSP's storage capacity is often not properly valued. Thermal storage in the form of heat, for example as molten salt, can be used to generate steam which in turn can be used to generate electricity. Today such storage is cheaper than battery storage, but it is only applicable on utility scale (IRENA and IEA-ETSAP, 2013).

CSP still faces challenges. CSP plants need capacities over 50 MW to achieve efficiencies of scale, hence the amount of land needed can be a limitation, whereas PV is evidently more scalable. CSP will therefore only be appropriate for utility–scale deployment and will likely miss out on the democratisation that has driven PV uptake. Adopting a hybrid approach by coupling fossil-fuel plants with CSP is increasingly being seen as an opportunity to overcome limitations associated with CSP development and improve efficiencies of fossil-fuel plants (see Box 5).

Developments in grid technology and energy storage

The temporal and spatial divergence of supply and demand is one of the biggest challenges facing the transformation of the energy sector.

Controllable energy storage at scale would allow renewable energy generated at one moment to be used later and greatly increase the level of penetration of variable renewables at least cost. Intelligent, utility-scale storage would significantly reduce the need for peaking provision and backup by conventional power plants, along with their impact on the environment. From a technical and economic point of view, however, the number of available grid-scale storage options remain limited. Pumped storage constitutes almost 99% of global energy storage capacity, in the range of 135-140 GW (REN21, 2014; USAID and MNRE, 2014). Battery storage technologies have developed over the last couple of years, and the industry can deliver operational solutions for a variety of grid and off-grid applications (IRENA, 2014d). Technical developments are expected to transform the market for energy storage from approximately USD 200 million last year to USD 19 billion by 2017 (IMS Research, 2013).

BOX 5: PARTNERING NEW AND OLD: HYBRID APPLICATIONS USING CSP

Hybrid CSP plants are a promising, reliable power generating technology. Hybrid plants using heat generated in CSP systems to increase the efficiency of fossil-fuel generating technologies could allow for 24-hour lower-carbon co-generation. A coal plant retrofit is being installed in Australia, and various natural gas hybrid plants are operating in North Africa, all of which incorporate CSP to improve steam cycles. Algeria's first solar-tower power plant will also be solar-gas hybrid, with a total capacity of up to 7 MW, and there are hopes to replicate this elsewhere in North Africa. CSP steam production can also supplement enhanced oil recovery operations, with CSP facilities being considered or in operation in the United States and Oman. Retrofit hybrids create many new opportunities in countries with the right climatic conditions.

Grid upgrades will mean that low carbon generation at a decentralised level can be collected and redistributed among demand centres. Investments to do this are likely to include long-distance technical upgrades and reinforced local cables, energy imbalance markets (allowing for the trading of imbalances), technologies that increase dispatch speeds (to match the variability of renewables) and integrated forecasting tools.

Upgrading grid and storage used to cost more than generating electricity in a peaking plant. Since around 2005 though, technologies have been developed that can provide utility scale load-levelling and frequency regulation capabilities at a tolerable cost – and prices are falling fast. The benefits can include wind/solar curtailment avoidance, grid congestion avoidance, price arbitrage and carbon free energy delivery.

2 PV module prices were stable in 2013 as manufacturers consolidated and in many cases, returned to positive margins, after a period of manufacturing overcapacity and severe competitive pressures.

3 The learning rate is the percentage reduction in costs for a technology that occurs with every doubling of cumulative installed capacity. For solar PV modules, the rate is between 18% and 22%, while for wind turbines it is around 10%.

4 Silicon input costs have been falling, and the amount of silicon required for a panel has fallen by 30% to just 6 grams per watt-peak in 2013 on average. These help reduce capital costs.

5 At the same time, operation and maintenance costs are projected to decline 19%-33%, the nominal weighted average cost of capital (WACC) will decline from 9.9% to 7.7%, and electricity generation per kilowatt installed will increase by around 10%.