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OWOE - Electrical Power Generation - What is the cheapest method for generating electricity today in the US?
  Figure 1 - Unsubsidized Cost of Energy - Wind / Solar PV (Lazard)
Figure 1 - Unsubsidized Cost of Energy - Wind / Solar PV (Lazard)
Figure 2 - Unsubsidized Levelized Cost of Energy Comparison (Lazard)
Figure 3 - Levelized Cost of Electricity for New Generating Assets (Institute for Energy Resources)
Figure 4 - Wind All-in Costs vs Coal Operating Costs (Moody's Investor Services)
What is the cheapest method for generating electricity today in the US?
Topic updated: 2017-11-13

Electrical power comes from a wide variety of sources, each of which has its own set of pros and cons, and each of which has its own cost of generation. As discussed in OWOE: What sources provide electrical power in the United States?, the primary sources of electrical power are natural gas, coal, nuclear, hydroelectric, wind, and solar. Within these sources are a number of sub-sources; for example, natural gas can be burned to produce electricity in a traditional combustion turbine (CT) power plant or a more modern and efficient combined cycle (CC) power plant. Coal can be burned via a variety of different technologies, but coal power plants are generally categorized as conventional, i.e., coal is burned to heat water in a traditional boiler, or conventional with carbon capture and sequestration (CCS). Each source or sub-source costs a different amount depending upon initial construction costs (see OWOE: How much does it cost to build a new power plant?), fuel costs, routine maintenance costs, etc. The most common way to put all generation sources on a common basis for comparison is to use the concept of Levelized Cost of Electricity (LCOE - see OWOE: What are LCOE and LACE?).

The dramatic decreases in the price of wind and solar power generation facilities has made headlines in recent years. Some sources have claimed that wind power is now cheaper than CC natural gas power in some parts of the US without any subsides. Figure 1 from the latest Lazard study shows that over the past 7 years, the LCOE of wind power has decreased 66% while the LCOE of solar photovoltaic power has decreased 85%. These decreases have been driven by advances in technology and improvements in manufacturing processes.

Figure 2 (from the same Lazard study shows LCOE for different generation technologies for new installations. It can be seen that in 2017 wind power is the least expensive source of new electrical power generation, with a LCOE of $32-$48 / KWh. The next is solar PV at $46-$61 / KWh, followed closely by CC gas at $48-$78 / KWh.

However, the key word here is new. Lazard is comparing LCoE for power generation facilities that would be built in 2017, which means that a significant component of these costs is the capital cost and associated financing cost to build the new plant. In contrast, the cost for producing electricity from an already existing plant is significantly less as these capital costs can be considered "sunk costs". A recent Institute for Energy Research (IER) report based on data from the Energy Information Administration (EIA) summarizes the primary existing generation costs as follows (fleet average LCOE in 2012 dollars):

  • $29.6 / MWh - Nuclear
  • $34.2 / MWh - Hydro (seasonal)
  • $38.4 / MWh - Coal (conventional)
  • $48.9 / MWh - Combined Cycle Natural Gas
  • $142.8 / MWh - Combustion Turbine Natural Gas
Figure 3 shows the IER plot for new power plants with existing LCoE values. Although both IER and Lazard use the same fundamental data from the EIA, each interprets that data somewhat differently. For example, IER includes an "imposed cost" on intermittent resources, such as wind, for the impact they have on conventional power resources. The issue is that a natural gas plant that has generation reduced while the wind is blowing must still be available to the grid when the wind doesn't blow, and its fixed costs must be accounted for. IER estimates this as high as $30 / MWh. The IER concludes that new generation costs more than existing generation that would be replaced with at least a $30 / MWh premium on replacing existing coal power with the cheapest new power, CC gas. Based on these conclusions, in the US where electricity demand has been relatively flat over the last decade, normal market forces in a stable regulatory regime would lead to very little new generation being built for the next 10 years or so. Growth in new generation, and, in particular, renewable power generation, could only be driven by regulatory or socio-economic pressures that would force early retirement of existing plants. These would include such things as regulations to reduce air emissions, implementation of a carbon tax, environmental activism by companies with large enough electricity usage to influence the market (e.g. Google), etc.

However, there are two critical dynamics that will invalidate the IER conclusion: 1) In the 18 months between reports (the IER report was published in June 2015 and the Lazard report in December 2016), the cost of wind power has continued to drop. In fact, Moody's, in a March 2017 report, showed that the average variable cost of coal power generation among all the plants examined is higher than the curren all-in cost for a new wind power development (see Figure 4). And 2) the "imposed cost" should drop as new control technology is introduced to wind farms and improved wind forecasting models are developed, both of which will make it easier for electrical grid operators to integrate wind energy without impact on conventional sources of power.

Excluding these imposed costs, new wind and solar power are the least expensive sources for new electrical power generation in regions of the US with good wind and solar resources, respectively, edging out new combined cycle natural gas plants. It is also comparable in power cost with existing coal plants, and the combination of economics and socio-economic pressure should lead to continued, and possibly accelerated, early retirement of these coal plants.

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