Wind power has now become the cheapest source of electricity in both Germany and the UK, even without government subsidies, marking a significant milestone in the energy transition. This finding is highlighted in a recent analysis by Bloomberg New Energy Finance (BNEF). However, it is the developments in the United States that are particularly noteworthy, as the widespread adoption of renewables is lowering the capacity factor for fossil fuel power plants. This shift not only demonstrates the rising disruptive force of renewable energy but also presents new risks for power companies investing in coal and natural gas plants.
The Changing Capacity Factor Landscape:
To understand the shift, the concept of capacity factor is crucial. It represents the percentage of a power plant’s maximum potential that is achieved over time. Fossil fuel power plants traditionally boasted high and predictable capacity factors, while renewables faced variability due to factors such as weather conditions. However, with the falling costs of solar and wind power, the capacity factors of fossil fuel plants are declining. Once renewable energy projects are operational, the marginal cost of the electricity they produce is nearly zero, making them more economically favourable compared to coal and gas plants that require additional fuel for each unit of electricity generated.
The Virtuous Cycle of Renewables:
This declining capacity factor for fossil fuel plants sets off a self-reinforcing cycle. As more renewables are deployed, coal and gas plants are utilized less frequently, leading to higher costs for generating electricity from these sources. Consequently, the economics of renewable energy improves, driving further investments in renewables. Wind and solar power, which accounted for a small fraction of U.S. electricity in the past, now have a significant influence on the operation of coal and natural gas plants, according to BNEF.
Implications and Risks:
This shift in capacity factors carries significant implications. It underscores the rising competitiveness of renewable energy and its direct competition with fossil fuels. Power companies must now consider the potential decline in utilization rates when planning to invest in coal or natural gas plants with long lifespans. Historically, high-capacity factors were a fixed input in cost calculations, but the changing energy landscape requires a reassessment of such assumptions. The decline in capacity factors is primarily driven by expensive base-load plants being used less frequently due to the growth of renewables.
The Economic Advantages and Beyond:
Wind and solar power offer economic advantages over fossil fuels, not just in terms of price but also in terms of reduced carbon emissions and greater price predictability. Wind power, even with subsidies, became the cheapest source of electricity in the United States in 2020, while solar power costs continue to decrease rapidly. Furthermore, the lifetime costs of new coal and gas projects are rising worldwide, while the costs of renewables are consistently falling.
The shift towards wind and solar power as the cheapest sources of electricity in Germany, the UK, and the United States represents a significant milestone in the transition to renewable energy. The declining capacity factors of fossil fuel power plants due to the economic competitiveness of renewables highlight the changing dynamics of the energy sector. As renewable energy continues to expand and evolve, the world is witnessing a transformative shift that will shape the future of global energy systems.
