The cost of wind and solar power will continue to fall massively over the next 25 years, bringing about a fundamental transformation of the global electricity sector, according to new reports from Bloomberg New Energy Finance (BNEF) and the International Renewable Energy Agency (IRENA). Electric cars will boom, cheap batteries will be everywhere and there will no Golden Age of Gas, despite continued low gas prices, BNEF predicts.
“Low prices for coal and gas are likely to persist, but will fail to prevent a fundamental transformation of the world electricity system over coming decades towards renewable sources such as wind and solar, and towards balancing options such as batteries.”
This is one of the key conclusions of the latest edition of the New Energy Outlook 2016 from BNEF, which was published on 13 June. The new report assumes significantly lower prices for coal, gas and oil than the previous edition, but shows an even steeper decline for wind and solar costs. As a result of this competitive advantage, renewable energy will overtake fossil fuels in the electricity sector by 2040:
However, according to the report, the growth in renewable energy capacity will still not be enough to keep global warming within 2 degrees Celsius. “Some $7.8 trillion will be invested globally in renewables between 2016 and 2040, two thirds of the investment in all power generating capacity, but it would require trillions more to bring world emissions onto a track compatible with the United Nations 2°C climate target”, said Seb Henbest, head of Europe, Middle East and Africa for BNEF, and lead author of NEO 2016.
“One conclusion that may surprise is that our forecast shows no golden age for gas, except in North America”
In particular, rising coal-fired generation in India and other Asian countries will lead to CO2 levels still being 5% higher in 2040 than in 2015.
Here are 10 major conclusions from the report:
- Coal and gas prices to stay low. Bloomberg New Energy Finance has reduced its long-term forecasts for coal and gas prices by 33% and 30% respectively, reflecting a projected supply glut for both commodities. This cuts the cost of generating power by burning coal or gas.
- Wind and solar costs fall sharply. The levelised costs of generation per MWh for onshore wind will fall 41% by 2040, and solar photovoltaics by 60%, making these two technologies the cheapest ways of producing electricity in many countries during the 2020s and in most of the world in the 2030s.
- Fossil fuel power attracts $2.1 trillion. Investment in coal and gas generation will continue, predominantly in emerging economies. Some $1.2 trillion will go into new coal-burning capacity, and $892 billion into new gas-fired plants.
- But renewables take lion’s share. Some $7.8 trillion will be invested in green power, with onshore and offshore wind attracting $3.1 trillion, utility-scale, rooftop and other small-scale solar $3.4 trillion, and hydro-electric $911 billion.
- The 2⁰C scenario would require much more money. On top of the $7.8 trillion, the world would need to invest another $5.3 trillion in zero-carbon power by 2040 to prevent CO2 in the atmosphere rising above the Intergovernmental Panel on Climate Change’s ‘safe’ limit of 450 parts per million.
- Electric car boom supports electricity demand. EVs will add 2,701TWh, or 8%, to global electricity demand in 2040 – reflecting BNEF’s forecast that they will represent 35% of worldwide new light-duty vehicle sales in that year, equivalent to 41m cars, some 90 times the 2015 figure.
- Small-scale battery storage, a $250bn market. The rise of EVs will drive down the cost of lithium-ion batteries, making them increasingly attractive to be deployed alongside residential and commercial solar systems. We expect total behind-the-meter energy storage to rise dramatically from around 400MWh in today to nearly 760GWh in 2040.
- China coal-fired generation will follow weaker trend than previously projected.Changes in the Chinese economy, and a move to renewables, mean that coal-fired generation there in 10 years’ time will be 1,000TWh, or 21% below, the figure predicted in BNEF in last year’s NEO.
- That makes India the key to the future global emissions trend. Its electricity demand is forecast to grow 3.8 times between 2016 and 2040. Despite investing $611bn in renewables in the next 24 years, and $115 billion in nuclear, it will continue to rely heavily on coal power stations to meet rising demand. This is forecast to result in a trebling of its annual power sector emissions by 2040.
- Renewables to dominate in Europe, to overtake gas in the US. Wind, solar, hydro and other renewable energy plants will generate 70% of Europe’s power in 2040, up from 32% in 2015. In the US, their share will jump from 14% in 2015 to 44% in 2040, as that from gas slips from 33% to 31%.
Elena Giannakopoulou, senior energy economist on the project, noted that “One conclusion that may surprise is that our forecast shows no golden age for gas, except in North America. As a global generation source, gas will be overtaken by renewables in 2027. It will be 2037 before renewables overtake coal.”
The New Energy Outlook 2016 is based on “a combination of the project pipeline in each country, current policies, plus modelled paths for future electricity demand, power system dynamics and technology costs. It does not assume any further policy measures post-2020, to speed up decarbonisation.”
Intense competition in auctions
IRENA in a new report, “The Power to Change: Solar and Wind Cost Reduction Potential to 2025”, predicts similar (in some cases even steeper ) cost reductions in solar and wind in the coming years.
According to IRENA, solar PV will be 59% cheaper by 2025, concentrated solar power (CSP) 43%, onshore wind 26% and offshore wind 35%.
Cost reductions “will be driven by increasing economies of scale, more competitive supply chains and technology improvements that will raise capacity factors and/or reduce installed costs. All of this will take place against a backdrop of increasing competitive pressures that will drive innovation”, notes the report.
“From Germany to Morocco, from Dubai to Peru and from Mexico to South Africa, intense competition in auctions and tenders focuses project developers on applying best practices. As a result, even in new markets competitive pressures are driving down costs rapidly to efficient levels ensuring solar and wind power technologies offer increasing value.”
However, IRENA notes that “the cost reduction potential identified in this report will not happen without the right policy and regulatory frameworks in place.” Unlike for fossil-fuel-based electricity, generation costs for renewables are very “site specific”. This is partly because of different weather conditions, but also “the quality and availability of local infrastructure, or the distance of the project from existing transmission lines, can have an important impact on overall project development costs.”
“Average residential solar PV installed costs in Germany were around 37% of those in California in Q1 2016”
In addition, there are “non-structural factors” that contribute to the large variation in costs”: “For solar PV in particular, in some markets, shifting to today’s most efficient cost structures can offer much larger cost reduction potentials than technological innovation or economies of scale, relative to best practice cost levels. As an example, average residential solar PV installed costs in Germany were around 37% of those in California in Q1 2016. For utility-scale solar PV projects in 2015, Germany was estimated to have half the average installed costs of California. Some of these differences reflect structural cost differences that cannot be bridged, but analysis suggests that there are significant opportunities to reduce the gap between these extreme examples, if the right policies are put in place.”
Correct policy settings
Thus, “the correct policy settings will be essential to unlock ongoing technological improvements and cost reductions. In some markets, changes to existing policy settings will also be essential in addressing the challenging issues surrounding persistent cost premiums. In many cases, this goes significantly beyond the national level, with local municipal regulations also sometimes imposing additional costs. Similarly, governments need to be proactive in terms of setting the policy framework in such a way as to minimise transaction costs.”
Looking forward, the report notes that “as equipment costs for solar and wind power continue to fall, balance of system costs, operations and maintenance (O&M) and the cost of capital will rise in importance as cost reduction drivers.” It is already common for O&M costs to account for one-fifth to one-quarter of the total LCOE (levellised cost of electricity).
At the same time, IRENA notes that “the risk profile of the renewable power generation market and individual projects has a large impact on the cost of capital and therefore the LCOE. To avoid these two factors slowing LCOE reductions, increased policy and industry focus on driving down these costs could become increasingly important. For solar PV and, to a lesser extent, CSP and wind power, the wide variation in balance of system (BoS) costs today now often represents the largest source of cost reduction opportunities.”