The cost of renewable energy is continuing to fall, according to the latest analysis from Lazard, and press coverage is focused on the fear of rates slowing as technologies mature. This may come as a red flag to developers, but Lazard’s forecast does NOT fully reflect the intricacies or greatest regions of potential in the energy market.
Lazard’s annual report addressing the LCOE of various energy types was released last week, indicating that the cost of utility scale solar and onshore wind has been declining by 13% and 7% per year respectively for the last five years. Figures in the report indicate that cost-efficiency gains have slowed in recent years, particularly for onshore wind, but that new-builds are now competitive in price to non-renewable alternatives and will soon put pressure on existing coal and nuclear plants, without the need for subsidy.
The report concludes that renewable energy technologies may only be “complementary to conventional generation technologies” in the current market, without sufficient storage capacity and the dispatch characteristics of fossil-fuels and nuclear generation. That’s an expression designed clearly to put investors off renewables.
The state of the energy sector is unlike it has ever been before, and with policy changing on a global scale to support renewables, basing predictions on a solely historic basis is ignorant when considering a rapidly moving target. As we see it, the Lazard report provides only a surface view of the state of the market, with annual snapshots of the LCOE of projects installed each year, not considering current tenders and future installations. Lazard presents the range of costs within each technology and country by its upper and lower bound rather than as a box-plot distribution, neglecting the distribution of project costs within this range, which may be seriously misrepresentative. As seen in reports like the IRENA’s ‘Renewable Power Generation Costs in 2018’, the vast majority of modern renewables projects, especially those of large scale, sit at the lower region of LCOE ranges.
Other failings of the report include the exclusion of China, which has by far the largest renewables economy, and is responsible for nearly half of the world’s PV solar installations. The second largest, Europe, has also been represented as a single entity, despite LCOE values varying significantly across the continent for each technology. In onshore wind for example, varying environmental characteristics and stages of technology development means that in 2018 nations like Denmark achieved an LCOE for onshore wind of approximately $59 per MWh, according to IRENA statistics, where countries such as Italy sat nearly 50% higher on $88 per MWh. Taking an average, mean or median figure doesn’t show the true value.
Similar lack of rigor is seen within technology, with offshore wind only really considered as a side note thrown in with onshore wind, despite being almost certainly one of the sector technologies with the fastest falling LCOE.
And offshore varies with the availability of specialized ships which have cranes on them, and some regions have too few of these, so it artificially raises the costs.
There is some merit in having a snapshot of the industry in its current state, although using it as a means of predicting the future should be treated with caution for investors and analysts. This merit does however depend on the data being factually correct, where the Lazard report again seems to miss the mark. Lazard’s data regarding countries such as India and Brazil, who have some of the greatest natural resources for sunlight and cheapest manufacturing capabilities, and the stingiest utilities who always pay the least, shows a relatively high LCOE on the global scale. India’s 2019 range for PV solar is indicated as between $61 and $168 per MWh in 2019, despite widespread indicators showing it to be among the lowest globally at around $38 per MWh.
Lazard’s reasoning for representing data in this way, with the US at the forefront of cheap renewables and achieving the lowest LCOE costs for wind and solar, may be an attempt to promote investment in renewables in its home country. By suggesting that the cost of renewables is starting to stabilize, when the rate of installations is increasing, may be an attempt to pull investors in with the promise of greater profitability in the US. This would make sense alongside the exclusion of China from Lazard’s reports, where technology, especially within solar, significantly undercuts that from US manufacturers.