Claim: contract prices for solar and wind power increasingly comparable or lower than generation cost of newly built gas and coal power plants

In the opening a new era for solar power news item discussed in previous post, there was this rather puzzling paragraph (my emphasis):

The deployment in solar PV and wind last year was accompanied by record-low auction prices, which fell as low as 3 cents per kwh (or kilowatt hour). Low announced prices for solar and wind were recorded in a variety of places, such as India, the United Arab Emirates, Mexico and Chile. These announced contract prices for solar PV and wind power purchase agreements are increasingly comparable or lower than generation cost of newly built gas and coal power plants.

There were many more questions than answers. What are those “announced auction prices”, what do they mean by “increasingly” and why aren’t there leading countries like European countries or USA on that list?

It seems to somehow suggest that the generation cost of solar PV and wind power is now “increasingly” cheaper than that of gas or coal. It is a bit odd that an energy source like wind, that in this region still depends on subsidies to survive, would be in such a position that it increasingly rivals gas and coal power. That doesn’t make much sense…

Also in practice, the cost of wind and solar PV is much higher than conventional sources, at least in the European region. This shows in the energy prices in countries that have the highest share of wind and solar PV. The highest energy prices are found in Denmark and Germany. Which are, coincidently or not, the leaders in renewables in Europe.

I have seen many graphs depicting the relationship between energy prices and installed capacity of wind & solar. I will try to recreate this here with recent figures of installed capacity of wind and solar in the BP Statistical Review Renewable energy 2017 (data from 2016). The other data comes from: 2016 energy prices in Europe (which could be found at the page Electricity price statistics of the Eurostat site) and European census data also from Eurostat. I only used those countries in the Europe/eurasia section from which all the data was available.

Finally, I get this:

It is clear that both Germany and Denmark have by far the highest energy prices. It also seems there is some relationship between energy prices and installed capacity of solar PV & wind, but not in the direction that that is suggested by the IEA.

There is also the odd placement of Belgium in that graph. It is rather high, meaning it has high energy prices compared to it its installed capacity of wind & solar. This higher energy price could be easily explained though. In 2011, our previous government has some difficulties explaining the energy transition to its citizens since it became obvious that prices were rising because of it. Therefor it was decreed that energy prices should not be raised until after the elections in 2014. Which kept the prices (artificially) low for several years.
This gave the perception that the energy transition to wind/solar/biomass was so cheap that it didn’t have an impact on the energy prices, which was the intention of the previous government. However, in the meanwhile the debts were piling up even more, yet providers (that were charged for it by the netmanager) could not include those expenses in the energy price.
Then came the elections, which were not favorable for the party of the previous Minister of Energy. The new government was not exactly keen on that party and its energy policies. They made a big fuss about the accumulated debts, so everybody knew where that debt came from and it was included it in the energy price (where it belonged in the first place). That suddenly raised the energy prices drastically. If that debt was included in the energy prices by previous government (as it should be), energy prices would be a bit lower in 2016, resulting in a point much closer to the trend line.

To me, these prices are an indication that wind and solar PV are more expensive than gas or coal, at least in this part of the world. So how could those low auction prices be explained?

Looking for “auction prices” at the IEA website, I landed on this page: Announced wind & solar PV average auction prices by commissioning date. It shows this graph:

We see the blue line (wind auction prices) which seems to go down very slowly and coming at an expected 4 cents/kWh in 2020, but the yellow line (solar PV auction prices) is dropping fast to about an expected 3 cent/kWh in 2020. Currently it is at 8 cents/kWh. So how could auction prices then drop below 3 cents/kWh in certain countries? These are “average” prices, so those 3 cents/kWh (or below) prices are most probably rare occasions in specific situations, maybe even outliers and/or prices that do not include all costs involved.

I had the impression that the IEA news item was not telling a crucial piece of information in order to understand that these auction prices are “increasingly” comparable or even lower than generation cost of gas and coal. Are these very rare occasions in a specific situation? Or did someone take a loss? Or maybe was compensated for taking that loss?

Then I found this page when looking for why the auction prices occurred in those four countries: How developing countries can manage to reduce cost of renewables. It also mentions some of the countries in the IEA article and they describe several ways how to reduce the cost of renewable energy:

  • Energy Auctions
    That a chicken-versus-egg problem. That energy is auctioned below the generation price of gas and coal, doesn’t necessarily mean that this energy is generated cheaper. As far as I know, reduced cost should be the cause of cheaper generation, not the result. It is not because energy prices are auctioned cheaper than other sources, that the generation cost is necessarily cheaper.
  • Technology innovation
    I can understand that innovation can mean lower generation costs, but then we should see such lower prices here also. I don’t see that in the graph that depicts the energy costs versus installed capacity.
  • Offshore installation
    I can understand that offshore wind mills have a better capacity factor than onshore wind mills, but the installation and maintenance costs will also increase. And again, Europe also has it share of offshore wind mills. Why is there still a need for subsidies for offshore (and onshore) wind mills over here?
  • Feed-in Tariffs
    Sure, feed-in tariffs lower the cost for the producer, but not necessarily for the consumer and/or tax payer. I understand that feed-in tariffs just “promote deployment” as is explained, yet I don’t agree with what follows:

    Competition among various players is a market factor that will finally lead to lowering final cost of energy

    As far as I know, feed-in tariffs disturb the competition among various players, not promote it.

  • Lower Costs, More Clean Energy
    Again a chicken-versus-egg problem. Sure, lower cost could attract more wind/solar installations, but as far as I know it is the result, not the cause of lower energy costs. Strange to find this argument in an article that explains how developing countries can manage to reduce cost of renewables, yet only focus on what the result of those lower prices will be.

None of them is convincing or gives an explanation for why those auction prices where lower there. I wanted to know why those costs are cheaper in those countries, not what the result of cheaper costs is.

I had somewhat more success searching for information on the auction prices in the United Arab Emirates. I found this article titled UAE Leading The Charge For Cheap Solar. It explains those auction prices in some more detail. The story starts in 2015 when 5.84 cents/kWh was agreed in a 25-year power purchase agreement for a 200 MW installation (that came online March 2017). In June 2016, it was announced that another photovoltaic plant of 800 MW was to be build and it would receive 2.99 cents/kWh for the electricity it would produce. Finally, it was announced that a contract was awarded to a consortium led by the Chinese company JinkoSolar for a 1.2 GW plant projected to be operating by early 2019. They would receive 2.42 cents/kWh.

That explains the “announced” part (the prices were announced beforehand) and confirms the lower than 3 cents/kWh auction prices.

I am not really sure whether the contracts were all without subsidies. Only the first contract of the 200 MW was said to not receive “tax credits or other subsidies”. It was not mentioned for the other two, so it is not really clear whether the author forgot to mention that they didn’t get subsidies or whether the author just didn’t mention that they did receive some kind of support.

But even when the UAE didn’t give tax credits or other subsidies for those two big contracts, the last contract was awarded to a consortium led by a Chinese company, which makes me doubt that no subsidies were involved. The EU had some negative experiences with Chinese solar panels in the past. Super cheap panels were dumped at below-market prices because of Chinese subsidies, bankrupting the European solar panel industry. So while UAE might not give subsidies, it is not sure whether the Chinese sold those two big installation without subsidies being involved (for example in order for the Chinese to become market leaders).

The article also explained how those low auction prices were possible:

  • the cost savings from greater scale (probably for the 800 MW and 1.2 GW installations compared to the 200 MW installation)
  • the bidding approach adopted by the utilities (“setting a capacity and inviting bidding on price” in stead of “setting a tariff and inviting participants”)
  • solar energy developers in UAE enjoy some of the lowest capital costs in the world

The author recognizes this and admits that:

these favorable conditions make the UAE a unique case

It surely is. Besides those three reasons, there is also plenty of space, there is plenty of sun and at that latitude there is not a big difference in the length of days between seasons (the day lasts roughly 10,5 hours in winter to almost 14 hours in summer). I assume energy consumption is also highest when energy production of solar is highest (cooling when it is hottest). So I surely can image that solar PV can work there.

My guess is that those other countries (India, Mexico and Chile) also have some exceptional circumstances that make it possible to have such cheap auction prices, maybe even with the help of subsidies or feed-in prices as it is suggested in the cleanleap article above.

How relevant is this for other countries/regions and specifically the country I live in (Belgium). Could we see such a decrease in auction prices as UAE? Belgium is one of the most densely populated areas in Europe. There are no big open spaces here and land prices are therefor incredibly high. Cost savings for greater scale of solar would be quite difficult. We don’t have a desert with huge free space. We also don’t have the synchronization of solar with our energy needs (our consumption is the highest when solar energy generation is at its lowest and vice versa). Neither do we have a favorable financial climate nor the cheap Chinese panels (the EU protects its own solar panel industry).

Concluding, I totally understand that UAE has lower auction prices for solar energy. Solar PV works there for several reasons. However, the IEA article is rather misleading. It only focuses on the seemingly positive side that wind and solar auction prices are increasingly below generation prices of gas and coal, suggesting that wind and solar is getting more competitive with fossil fuels. While not bringing the nuance that these are very specific situations.

Which is common in alternative energy reporting, yet I didn’t expected such a one-sided, unnuanced story from an organization like IEA.

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12 thoughts on “Claim: contract prices for solar and wind power increasingly comparable or lower than generation cost of newly built gas and coal power plants

  1. vuurklip

    I’ve been told that the high cost of electricity in Germany and Denmark is the result of tax on electricity and not due to renewables. Do you have a take on this? I have no way to verify.

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    1. trustyetverify Post author

      That’s correct. The share of taxes in the energy price in Denmark and Germany is high, but that doesn’t necessarily mean that it is unrelated to the energy transition.

      For example, Belgium also has a high share of taxes in the energy price. The increase of our energy price in 2016 (that I explained above) was caused by a tax, but this tax was in fact directly related to the transition towards offshore wind/solar/biomass.

      I didn’t look into the composition of the European energy prices, so I don’t know how this works out for Denmark and Germany. If I have some time and find the data, I will write a follow-up on this post later.

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    2. poitsplace

      The markets in Europe are being seriously distorted by a massive subsidies on wind/solar which produce near worthless energy. Immense effort is needed to filter out the terrible spikes or surge to meet demand as the wind/solar. So costs go up even as energy prices increase. But at the same time, the energy produced has almost no value…even though they are required by law to take it. But at the same time, the wholesale prices on this worthless energy are obviously going to be lower.

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      1. trustyetverify Post author

        Those wholesale prices are an interesting subject. Today, I read a newspaper article about gas power plants getting it difficult as a result of the “low electricity prices” because of renewables. The journalist didn’t explain what these low prices exactly are (certainly not the household electricity prices) and sold it as some kind of a success story. Forgetting to tell that these low prices are the result of the intermittency and not necessarily a good thing for the market or the household consumer. Leading to the need for also subsidizing the other providers. Not because because these are not competitive, but because of the (negative) effects of the injection of intermittent energy in a continuous working grid.

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  2. oldbrew

    vuurklip is correct about the high taxes, but the taxes alone don’t explain the steep rise in electricity prices in Germany at least in recent years.

    If renewables really were ‘competitive’ with coal and gas they wouldn’t need any subsidies. So if that’s what the claim is, why not stop the subsidies?

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  3. daveburton

    I’d bet money that your suspicion is correct, that those UAE solar installations are subsidized.

    However, there’s another factor to consider: Price comparisons between conventional and wind/solar power are inherently deceptive, because solar and wind power is worth much less than conventionally generated power. That’s because fossil fuel power plants generate power when it is needed, but wind and solar facilities generate power without regard to when or whether it is needed.

    Since there’s no storage capacity in the grid, electrical power only has value when it is needed. That means electric power from fossil fuel plants is inherently more valuable than electric power from wind and solar.

    My guess is that when wind & solar exceed an average of about 5% of generated power on the grid, the additional wind & solar have negative value. The threshold is probably higher than that in places like the UAE, where peak demand (air conditioning) usually coincides with peak solar availability, but even there the intermittency of wind & solar makes its generated power less valuable than power which can be generated on demand, as needed.

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    1. trustyetverify Post author

      There are surely more factors in play that were not considered in this post. You are certainly right that the price comparison between conventional sources and wind/solar are inherently deceptive. That is a good remark.

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  4. poitsplace

    Let me just add how ironic the complaint by the greens is…that “big oil” (or big coal, or whatever) is suppressing (expensive) wind/solar plants to protect their profits. Built into this accusation is the assumption that wind/solar are not remotely as profitable.

    …then off they go blabbering about how wind/solar are actually CHEAPER and how its only “big oil” that are stopping your average Joe from going out to the local dollar store or magical renewable energy outlet to pick up a $1.5 million, 3mw wind turbine to harvest all that “Free” energy

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  5. ducdorleansblog

    imho, there is nothing really spectacular going on … though some people might report that differently …

    1. UAE, Chili (Atacama et al. – see e.g. the Valhalla project), India are sunny countries … some statistics will give you the load factor, and thereby the amount of MWh these installations will normally produce .. These will be at least double as decent as our own numbers.

    2. given the total cost of the investment, and the expected electricity production, producers can calculate their unit price cost, and their profitable wholesale selling price

    3. but now comes the twist: whatever happens, whether their produced electricity is wanted or not, needed or not, the distributors HAVE to take on, have to buy their electricity at the contracted price. Moreover, they most probably don’t have any obligation whatsoever to ensure grid stability, or to have some delivery assurance, or any other task needed to ensure our electricity 24/7/365 …

    cost is X … selling price is X + x% … you bring your product to the client at the time and in the amount you want, and your product HAS to be bought by clients, whether they like it or not … I don’t know of an easier way of doing business …

    thereby totally bypassing a free market .. therefore, producers of a lesser quality electricity can make a profit without any risk ..

    as to the absolute price itself, I would first point to the completely different way of doing business in those countries, comparing it to ours.

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    1. trustyetverify Post author

      UAE, India, Mexico and Chile (northern part) have more potential for solar than Belgium (UAE 2x, the others between 1.7x and 1.9x). These countries are also closer to the equator, meaning not that much seasonal variation as we have here. UAE has 10,5 hours sun in winter and almost 14 hours sun in summer. Compare this to Belgium with roughly 16 hours of sun in summer and 8 hours sun in winter. Leaving us with the least production in a period when we need the most energy and vice versa. This will be no/less of an issue in UAE, India, Mexico,…
      That is correct.
      I didn’t touch grid stability in my post. Solar capacity of UAE is rather low (it is not even mentioned in the 2016 BP data, the installations to be build will put it in de BP data list in one of the next years). My take is that the effect on grid stability will therefor still be neglectable.
      Combined with more sun, more space, a better correlation of energy need with production, more favorable climate for businesses, plenty of fossil fuels, and so on, solar can certainly work there.

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