Unpacking the cost of renewables
Wind and solar utility PV costs are expected to consistently decline as technology continues to improve and local project development experience builds globally.
As more and more countries are channeling their support to renewable capacity buildup through tenders, fierce competitive bidding has led contract prices for renewable power generation to fall dramatically in recent years, with record prices being announced every year. Bid prices have ranged between $20/MWh and $85/MWh for wind and between $18/MWh and $77/MWh for solar for projects expected to be online through 2022.
The ability to deliver on low costs has helped the credibility of renewable projects and their potential to displace traditional power, yet how durable will this trend be as technological and economic drivers evolve?
IHS Markit forecasts that utility-scale PV, onshore wind, and offshore wind prices will fall by 55%, 34%, and 51%, respectively, by 2050, making the cost of the technologies converge globally and increasing competition between technologies.
The main driver behind these price drops is technology. Cost reductions will be fastest in countries moving away from fixed subsidies and into tenders through competition and the convergence of best practices. Despite such convergence, country differences will remain, driven by local factors including resources, the regulatory environment, labor costs, exchange rate fluctuation, competition, and the level of supply chain and market maturity.
Wind and solar PV will become competitive with marginal fuel costs of gas- and coal-fired plants by 2040 in many markets.
Renewables have already emerged as the most cost-competitive source of new generation in numerous markets across Latin America, the Middle East, Europe, and Australia. Upward pressure on the cost of conventional fuels will continue to drive the cost competitiveness of renewables.
Even with no further cost improvements, onshore wind is already competitive with marginal fuel costs of gas-fired generation in most of the markets analyzed in this report, except Japan, the United States, and Jordan. However, renewables will struggle to displace coal-fired generation in markets such as Japan and China, where coal will remain the most cost-competitive technology until the mid-2030s (Figure 1).
Driven by accelerated cost declines, offshore wind could start to displace gas-fired generation in Germany and China in the coming years.
Figure 1: Wind and solar PV will be competitive with marginal fuel costs of gas and coal-fired plants by 2040 in most of the markets analyzed in this report
Francesco D'Avack is a Senior Research Analyst for IHS Markit
Posted 2nd October 2018
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