Wind power is now the cheapest electricity to produce in both Germany and the U.K., even without government subsidies, claims a new analysis by Bloomberg New Energy Finance (BNEF). This is the first time that threshold has been crossed by a G7 economy.
Much of this is due to wind and solar power’s improving capacity factor, or the percentage of a power plant's maximum potential that's achieved over time.
Historically, fossil fuel plants have had higher and more predictable capacity factors than solar and wind. That’s because the sun isn’t always shining and the wind isn’t always blowing, which reduces the capacity factors of solar and wind.
But for the first time, widespread adoption of renewables is effectively lowering the capacity factor for fossil fuels, BNEF says. Once a solar or wind project is built, the marginal cost of the electricity it produces is nearly zero, while coal and gas plants require more fuel for every new watt produced. When it comes to costs, zero is always better for business.
The cycle reinforces itself as more renewables are installed and coal and natural gas plants are used less, which causes the cost of using them to generate electricity to go up. As the cost of coal and gas power rises, more renewables will be installed.
Although wind and solar have made up only a small fraction of U.S. electricity — about 5 percent in 2014 — production has been rising at an exponential rate, and those two energy sources are now big enough to influence when coal and natural gas plants are kept running, BNEF says.
One reason for the shift in capacity factors comes from the fact that renewables are becoming cost-competitive, and are competing directly with fossil fuels. Renewable energy and energy efficiency are competitive resources in today’s marketplace that should also be expected to grow strictly on the basis of cost, according to a July report by the Advanced Energy Economy (AEE) Institute.
Another reason for the shift is the increased risk for power companies planning to invest in coal or natural-gas plants. In the past, a high capacity factor has been a fixed input in the cost calculation, but now anyone contemplating a billion-dollar power plant with an anticipated lifespan of decades must consider the possibility that as time goes on, the plant will be used less than when its doors first open, according to BNEF.
Most of the decline in capacity factors is due to expensive base-load plants that are being turned on less because of renewables, BNEF says. Coal-fired and gas-fired electricity is becoming more expensive and the profits less predictable. Peaker plants also could soon be replaced by new battery systems paired with renewables. In homes and businesses, better battery systems such as Tesla’s Powerwall could store renewable energy that reduces overall demand on the grid, and the need for fossil fuel plants.