…Misleading Costs for Wind and Solar?…
Recently the media has reported that wind and solar were competitive with coal and natural gas for generating electricity.
The Wall Street Journal, for example, published an article with a headline, Economic impact of wind farms is changing the political dynamics of renewable energy.
These media reports could lead people to believe that wind and solar were competitive with coal-fired and natural gas power plants, which is not the case. Electricity generated by coal-fired power and natural gas combined cycle power plants remain the lowest cost methods for generating electricity, especially when the unreliability of wind and solar are taken into consideration.
In trying to determine the source of the media claims, two sources became apparent.
- Contract purchase agreements
- Studies performed by financial firms such as Lazard
In the first instance, the lower contract prices were the result of subsidies. The lower prices did not accurately reflect the true costs for wind and solar: The subsidies resulted in low prices and low LCOEs.
In the second, some assumptions in the studies performed by financial groups resulted in low LCOEs (Levelized Cost of Energy).
Furthermore, equating LCOEs of wind and solar with those of coal and natural gas power plants is fallacious. Beyond a certain point, it’s impossible to replace coal and natural gas with wind and solar on a one for one basis, interchanging them as though they were LEGO pieces.
A review of the Lazard study established why the study produced very low LCOEs for wind and solar: LCOEs that were atypical of previously determined LCOEs.
Lazard study is for New Construction
It’s important to point out that the LCOEs determined by Lazard were for new power plants, something not mentioned in their report.
Existing coal-fired and natural gas power plants have LCOEs of around three cents per kWh because their construction and financing costs have already been amortized.
It makes no economic sense to deliberately replace existing coal-fired and natural gas power plants with wind and solar units even if the LCOEs of new wind and solar power plants are below six cents per kWh.
Lazard held financial costs, such as the cost of debt and equity, constant when making calculations for each type of facility.
This was an effort to ensure that calculations between facility types were fair. However, there were at least two instances where this assumption was misleading.
- Natural gas combined cycle (NGCC) plants were assumed to have a life of twenty years, which is half the life that should have been used. Financial costs should have been amortized over 40, not 20 years.
- The investment cost for a coal-fired power plant was assumed to be $3,000 per KW. This is higher than actual historical costs for supercritical plants and slightly higher than for ultra-supercritical plants. This imposed a financial penalty for coal-fired power plants.
There were two important assumptions in the Lazard study that were either questionable or that slanted conclusions unfairly to the benefit of wind and solar. These are addressed in a and b. A third factor was omitted from the study and is addressed in c.
a) Capacity Factor
Capacity factor (CF) is defined as the amount of electricity produced over a year by an installation, compared with the amount that could theoretically be produced based on the facility’s nameplate rating.
The Lazard study refers to “resource availability”, and it is unclear whether the CFs used in the study are true CFs or ersatz CFs based on some undefined resource availability calculation.
Because this is unclear, both possibilities are addressed for wind.
Alt 1: Traditionally Defined CFs
The capacity factor (CF) for wind used in the Lazard study was significantly higher than experience from existing installations. The study used 55% in one instance and 38% in another.
Actual CFs, as reported by DOE in its 2015 Wind Technology Report, averaged 32.8%, between 2011 and 2015; 31.8% between 2006 and 2010; and 30.3% between 2000 and 2005.
New, taller units with longer blades will probably have higher CFs, but not anywhere near 55%.
Wind installations in high wind areas, such as Montana where CFs could be higher, require long and expensive transmission lines, the costs of which are not included in the Lazard or many other studies.
The use of higher CFs and lower capital costs in the Lazard study, skewed the LCOEs for wind, making them unreasonably low.
Alt 2: Ersatz CFs
The Lazard study may have used a specially designed “capacity factor as a proxy for resource availability”.
Why this would be done is unclear since actual wind resources have been carefully mapped across the United States for heights of 30 meters, 80 meters and 100 meters above ground level.
The best winds for generating electricity are predominantly in the upper plains states such as Montana, and across the front range of the Rocky Mountains.
The regional factors used in the Lazard study do not appear to align with the wind maps available from NREL, though these regional factors were apparently used to represent wind availability across the country.
The Lazard study did not explain how these ersatz capacity factors were determined, so there is no way to determine their appropriateness or accuracy.
For this reason, the LCOEs developed by Lazard using ersatz CFs for wind are suspect, and not comparable to traditionally determined LCOEs.
The Lazard study seems to have used a specially designed “capacity factor as a proxy for resource availability” when determining LCOEs for solar.
Presumably “resource availability” refers, in some manner, to insolation levels.
“Resource availability” was apparently used to establish, what can best be described as ersatz capacity factors for solar installations.
Insolation levels are readily available for all areas of the world, so it begs the question of why Lazard chose to create a “resource availability” factor for solar.
Insolation levels for the Southwestern United States are twice those for the Midwestern United States, yet the LCOEs arrived at for solar by the Lazard study did not reflect these substantial differences.
For this reason, the solar LCOEs developed by Lazard are suspect, and not comparable to traditionally determined LCOEs.
Again, The Lazard study did not explain how these ersatz capacity factors were determined, so there is no way to determine their appropriateness or accuracy.
The report did confirm that rooftop PV solar is uncompetitive. As demonstrated in Nothing to Fear, PV rooftop solar is uneconomic in every state except possibly Hawaii.
Both wind and solar are intermittent, and in some respects unreliable.
Beyond small amounts, it’s impossible to replace coal and natural gas power plants with wind and solar on a one for one basis. As mentioned earlier, these are not interchangeable LEGO pieces.
The CAISO Duck curve demonstrates this very clearly.
CAISO Duck Curve with Effect of Extended Renewables
For example, wind and solar must also include expensive storage if the evening ramp-up is to be minimized. Coal and natural gas power plants must be retained to provide power at night and for when the sun stops shining or the wind stops blowing.
These limitations become increasingly worse as greater amounts of wind and solar are placed on the grid.
At the very least, LCOEs for wind and solar are misleading because wind and solar require the use of costly storage. More about the CAISO Duck curve is found in Nothing to Fear.
If an undefined “resource availability” is used to calculate LCOEs, the resulting LCOEs can’t be compared with a traditionally derived levelized cost of electricity (LCOE): It’s like comparing cashews with apples.
Pawning these LCOEs off as equivalent to traditionally calculated LCOEs is misleading at best, and at worst, could be considered deceptive.
In addition, wind and solar are unreliable, and LCOEs do not reflect the extra costs associated with having to compensate for their intermittency and unreliability.
The Lazard report and virtually all media articles attempting to compare LCOEs between wind and solar and coal and natural gas are fallacious and meaningless.
Wind and solar cannot replace coal and natural gas on a one for one basis … They are not interchangeable LEGO pieces.
Coal-fired and natural gas combined cycle power plants continue to be the least costly methods for generating electricity, notwithstanding the latest Lazard study.