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Extraordinary cost declines mean wind and solar now often boast
the lowest levelized cost of energy (LCOE) among power supply
resources in many parts of the world. This position is helping
drive record levels of growth in wind and solar in many markets.
However, as the energy transition deepens, there will be an
increasing focus on resource attributes beyond energy—notably
capacity and flexibility.
The United States (US) embodies a power system in just such a
transition as wind and solar are expanding rapidly while
conventional generation resources such as coal and nuclear face
retirements, and thus can provide a good perspective on how
shifting value streams will impact the competitiveness of different
generation resources.
Utilities in the US increasingly find it cheaper to build new
wind and solar than to run existing coal plants or to build new gas
plants. LCOE comparisons are often used to explain these decisions,
even if the decisions are underpinned by more complex power system
analyses. While LCOE can be a useful high-level indicator of
relative energy costs, the metric overlooks other relevant
attributes such as capacity—generation during times of peak
system need—and flexibility—the ability to quickly balance
variations in net load.
Figure 1: From cost to value: Investment decisions increasingly
shaped by capacity and flexibility value rather than energy
cost.
However, as power systems transition to a lower carbon
generation mix, changes in the relative value of energy, capacity
and flexibility will diminish the utility of LCOE as a predictor of
investment decisions. The growth of zero-marginal cost renewables
will steadily erode energy prices, particularly in the hours when
wind and solar generation is most concentrated. A parallel trend of
retiring base-load resources in the US—our latest outlook
foresees 130 GW of coal and nuclear retirements over the next
decade—will reduce the amount of firm capacity in the system,
raising the value of resources that can reliably generate on peak.
Wind and solar contribute some on-peak generation, but as
penetrations rise the hours of greatest system need will shift to
times when renewable production is lowest, effectively eroding
their already limited capacity value. Finally, rising penetrations
of renewables will also increase the value of
flexibility—dispatchable and fast-responding resources that can
balance the increasing variations in net load.
As the least-cost source of energy, wind and solar will continue
to dominate resource additions for the foreseeable future. But
eventually these changes in the relative value of resource
attributes will favor different types of resources.
In the US, natural gas plants could be a winner with relatively
low capital and fuel costs, and the ability to quickly ramp up and
down. If not for their greenhouse gas emissions, they make an
otherwise perfect complement to wind and solar—though
low-carbon hydrogen and biomethane could alleviate this
concern.
Regions averse to new fossil fuel investments may opt for hybrid
solar-plus-storage plants—leveraging ever-improving battery
technology to capture the value of flexibility and capacity. Less
sunny regions may turn to geothermal, hydroelectric or offshore
wind. Nascent technologies such as carbon capture and storage,
hydrogen and small modular nuclear reactors could also emerge as
viable options.
IHS Markit closely monitors the global energy transition,
publishing data, key insights and market analysis.
Learn more about our research.
Sam Huntington is an associate director at IHS
Markit.
