The economics of providing electricity to consumers using wind and solar power have changed over the past year as natural gas prices have risen. This piece was inspired by a Facebook post from the Sierra Club that pointed me to the NextEra Investor Conference a few weeks ago. Much has been written about the need to accelerate the transition of the electricity generation grid from fossil fuels to renewable energy. Much has been written about the various subsidies for both renewable energy and fossil fuels. Statutes, mandates, laws and claims. All these discussions are important. But that is not the topic of this article. This article discusses how market pricing changes the economics of electricity generation. I will cover a high-level brief history of solar and wind generation in America. When wind and solar arrived on the scene about 20 years ago, they were only used as experimental electricity generation for three reasons.
- Some were given large subsidies.
- Some were because the utility only wanted to do it for the environmental benefits or off-grid benefits because it knew the cost would be higher.
- Some, like Germany, knew it didn’t make economic sense, but they wanted to reduce costs for future customers and were willing to pay increased cost for small environmental benefits now in the hope of significant future environmental and economic benefits. . It seems the investment is now paying off.
Then a few years ago, sharp declines in the cost of electricity generation, both wind and solar, made renewables as cheap or cheaper in many places than fossil generation. This has worked well to promote some limited renewable projects. But utilities still had to deal with the significant drawbacks that wind power can operate intermittently where the sun only works during the day and where wind supplies vary from day to day. When renewable energy is a small percentage of the grid, these intermittent problems don’t have a big impact, but as the percentage increases, it becomes more of a problem. Now, on to current news – the price of natural gas, a very popular energy source to replace coal for electricity generation, has nearly tripled.
As a result of looking at current and future costs, NextEra agreed to go to net zero for emissions one and two by 2045. Why do they make this commitment? Certainly one reason is to help the environment, they want good publicity and they want to respond to the pressure to produce an electric cleaner. But as they explain in the chart above, the main reason is that the economy has changed dramatically over the past year.
Inflation in Florida has unfortunately increased the cost of generating electricity under all alternatives. However, this did not affect all forms of electricity generation equally. Natural gas production has been affected more by inflation than by solar and wind. What does it mean? For an economist, MBA or decision-maker trying to find the most cost-effective way to generate electricity in an environment of increasing demand, this means funding more growth in wind, solar and batteries.
Until recently, it didn’t make sense to decommission well-functioning power plants that had reached their end of life (perhaps for environmental reasons rather than economic ones), even if it meant investing more in newly built renewable power plants. Since many plants are designed to last 30 years, this means that you are replacing about 3% of your power plants every year. Add to that the fact that you have another 2% population increase and an additional 2% demand for electric vehicles and home electrification. That’s about 7% per year, even with 100% renewables for new power.
It is now cheaper to build wind and solar than to run existing power plants
But looking at the prices they analyzed above last year and assuming those numbers are reasonable prices in the future (which may or may not be a valid assumption) what has changed that now it might make sense to substitute perfectly good prices. natural gas plants you built a year ago with renewable energy. I wouldn’t now knocking them down — You can just trust them and let them work 10 days a year if needed.
Much research is being done by NextEra and others to convert these plants to use hydrogen instead of natural gas. First as a mixture, but later 100% green hydrogen made from solar energy and water. I learned in microeconomics class over the years that it has to do with marginal cost. If people and natural gas plant fuel exceeds the costs of wind and solar with battery backup, it makes sense to shut down the natural gas plant and ignore the sunk costs.
I think we all know that wind, solar and battery backup have very low operating costs. Why? Because they have no fuel costs. And people’s costs are relatively low because they have nothing to do with solar other than sometimes washing the panels. What is very expensive about wind, solar and batteries is buying and installing them. Once installed, they are very cheap to run. One possible fly in the ointment is that assets such as wind, solar and batteries with high initial capital costs but low operating and maintenance costs are more attractive in a low interest rate environment. It is clear that interest rates are rising this year and are expected to rise significantly. If you increase interest rates by a few percentage points, that adds about 10% to the cost of wind and solar, but they’re still ahead when wind and solar costs are 53% and 48% lower, respectively.
Lazard conducted a similar analysis nine months ago and found that while costs vary widely based on many factors, in many cases it is cost-effective to shut down coal and nuclear plants, and in some cases it even makes sense to shut down combined-cycle gas power. plants. Not much has changed for coal and nuclear in 9 months, but natural gas prices are up nearly 80%, making a faster transition from gas power plants to solar generation economically viable.
There were still some new gas plants being built before this price change occurred, but if utilities act rationally and see how profitable NextEra is in leading the renewable energy transition, higher natural gas prices will not only drive all new natural gas electric equipment. should not stop. plant construction – this should greatly accelerate the replacement of existing coal, natural gas and nuclear plants based on cost alone.
It depends on whether people are confident that natural gas prices will remain high or if the high prices are temporary. In my view, drilling activity is still fairly low, so prices are likely to remain fairly high for quite some time. Of course, even if you wanted to replace all those old plants with wind and solar power, it would take many years to do so. Nevertheless, today marks an important milestone in the transition to renewable energy. It’s one of the first industry acknowledgments that wind and solar aren’t cheap enough to outpace new power plants; they can start disrupting recently built modern plants in good repair!
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