Is Renewable Energy Economically Viable?
Tom Lombardo posted on February 08, 2016 | | 8580 views

A few years ago, Dr. David MacKay addressed the question of whether it’s technically feasible to power the world entirely from renewable energy. (Spoiler alert: the answer is “yes” but it will be a challenge.) Professor MacKay is a physicist, not an economist. When asked about economic factors, he simply pointed out that we spend a lot of money on various projects of dubious benefit, so if we are serious about climate change and energy security, we’ll find the money.


Researchers at the National Renewable Energy Lab (NREL) shifted the discussion from idealism to pragmatism in its 2015 report “Estimating Renewable Energy Economic Potential in the United States: Methodology and Initial Results.” Unlike Dr. MacKay’s analysis, this study isn’t looking at a grid based entirely on renewable energy; instead, it focuses on sources that can be added to the existing grid, keeping much of the baseload generation intact.


Since I’m an idealistic pragmatist (or a pragmatic idealist, depending on my mood that day), I thought I’d give you a run-down of the NREL report and its implications.


Terms for Comparison

Levelized Cost of Energy (LCOE) is a commonly used metric to compare the costs of various energy generation technologies. Put simply, LCOE is the ratio of the total cost of the power source to the total energy output over its life, expressed in dollars per kWh. The total cost takes into account the initial capital investment, interest, operations & maintenance costs, and fuel expenses.  


LCOE does not take certain important factors into account. For example, it fails to consider environmental impacts of the technologies. A coal-fired power plant may have a very low LCOE, but mining and burning coal has local and global consequences that ultimately affect the economy as well. Someone has to pay to clean up and rebuild after superstorms (likely caused by climate change) blow through a region. When citizens get lung disease due to breathing the toxic residue of fossil fuels, everyone’s health insurance rates increase. These are the hidden costs that are difficult to quantify and therefore don’t fit into the LCOE formula.


LCOE also neglects the reliability and availability of the energy source. Although the aforementioned coal plants have many negative attributes, they also provide a very reliable baseload. Wind and solar, on the other hand, are clean but variable.


Lastly, LCOE assumes that the source is generating energy constantly, and that the value of that energy is stable regardless of time of day or seasons. Although the cost of generating energy through coal is constant, the energy is more valuable during peak demand hours than it is at 3:00 AM.


Levelized Avoided Cost of Energy (LACE) is a metric that quantifies the potential revenue that can be earned by adding renewable energy sources rather than buying power from other grid sources. For example, when peak demand exceeds a local provider’s generating capacity, the utility is forced to purchase energy from another grid provider. This may only occur during certain times of the day, which is taken into account by the LACE formula.


The economic viability of an energy source is the difference between LACE and LCOE. In other words, if a utility could generate more revenue by adding a wind or solar farm to cover peak demand rather than building a natural gas peaker plant (that only runs occasionally) or purchasing energy from a neighboring utility, then it is economically feasible to build that wind or PV farm. When LACE > LCOE, it’s better to invest in the renewable source. If you think about it, it’s really the same decision that a homeowner makes when deciding whether to put a PV array on the roof. If the array costs $10,000 and lasts 25 years, will you save more than $10,000 (plus interest) on your electric bill over that 25 years? If the answer is yes, then put up the array.


Methodology

The study examined a variety of locations across the US, encompassing every state in one way or another. Each region has its own strengths and weaknesses in terms of the technical viability of each source. For example, PV farms will perform better in the southwest than in the northern US, whereas wind farms will generate more in the midwest. NREL examined measurements from thousands of individual sites across the country and used that information to create power curves for 134 regions.


The researchers evaluated three scenarios: 1) using the LACE/LCOE comparison only; 2) using LACE/LCOE and factoring in the “hidden costs” such as CO2 emissions; and 3) using LACE/LCOE plus hidden costs, and factoring in the declining value of adding renewable sources beyond a certain threshold. The declining value is sort of the “point of diminishing returns” - adding more solar power to a region that’s saturated with solar power won’t necessarily generate valuable energy, since peak demand is already accounted for with the existing solar. At high market penetrations, wind power, which is more stable throughout the day, doesn’t decline in value as much as solar power.


Results

The study showed that in all three scenarios, there are long-term economic benefits to adding renewable energy to the grid. This is true for every region of the continental US, with different renewable sources favored in certain areas. In scenario 1 (LACE/LCOE only), there’s a potential for an additional 3200 to 7100 TWh of annual generation from renewable sources. (In other words, adding that much capacity in renewables would be economically feasible.) In scenario 2 (LACE/LCOE + hidden costs), the outlook is much more optimistic for renewables: 13,000 to 42,000 TWh per year. But factoring in the declining value of renewables at high market penetration (scenario 3), a more realistic outlook shows an economic viability for 1500 to 2000 TWh per year of additional renewable capacity.


Here are a few maps that show the numbers by region and renewable source:


Distributed (e.g. Rooftop) Photovoltaics:


Utility-Scale Photovoltaics:


Utility-Scale Wind:


Hydroelectric:



Geothermal:


Sum of all renewables:


In the year 2013, the US generated around 4100 TWh of electricity. Looking at the worst case scenario above, additional renewable energy could meet about 30% of our total electricity needs and still remain economically viable.


This study has limitations that skew its results a little on the pessimistic side. First of all, it doesn’t take into account grid-level energy storage. Renewables face a declining value based on capacity, but as I pointed out earlier, that’s due to the intermittent nature of solar and wind power. Energy storage helps to smooth out those spikes, so excessive solar energy generated during the day can be used at other times. Also, the report fails to consider an enhanced grid that can more easily route electricity from one place to another, helping to balance supply and demand. Taking both of those factors into account makes the case for added renewables even stronger.



Images courtesy of NREL