Investment banking giant Citigroup has hailed the start of the “age of renewables” in the United States, the world’s biggest electricity market, saying that solar and wind energy are getting competitive with natural gas peaking and baseload plants.
In a major new analysis released last week, Citi says the big decision-makers within the U.S. power industry are focused on securing low-cost power, fuel diversity and stable cash flows, and this is drawing them to the increasingly attractive economics of solar and wind.
Citi’s report notes that gas prices are rising and becoming more volatile. This has made wind, solar and other renewable energy sources more attractive because they are not sensitive to fuel price volatility.
Citi says solar is already becoming more attractive than gas-fired peaking plants, both from a cost perspective and a fuel diversity perspective. And in baseload generation, wind, biomass, geothermal, and hydro are becoming more economically attractive than baseload gas.
The report notes that nuclear and coal are structurally disadvantaged because both technologies are viewed as uncompetitive on cost. Environmental regulations are making coal even pricier, and the aging nuclear fleet in the U.S. is facing plant shutdowns due to the challenging economics.
“We predict that solar, wind, and biomass continue to gain market share from coal and nuclear into the future,” the Citi analysts write.
Citi says the key metric in comparing power sources will be the levelized cost of energy (LCOE). “As solar, wind, biomass, and other power sources gain market share from coal, nukes, and gas, the LCOE metric increasingly becomes important to the new build power generation decision-making,” it says.
Citi defines LCOE as the average cost of producing a unit of electricity over the lifetime of the generating source. It takes into account the amount produced by the source, the costs that went into establishing the source over its lifetime, including the original capital expenditure, ongoing maintenance costs, the cost of fuel and any carbon costs. It also includes financing costs and ensuring that the project generates a reasonable internal rate of return (IRR) for the equity providers.
Below is the key graph on the current state of play, with baseload generation and its renewable competitors to the left, and peaking gas and solar to the right.
On baseload, all renewables except marine beat coal and nuclear. Combined cycle gas just hangs on.
As for peaking plants, it depends on the gas prices, but these are rising, and in some regions, prices are now back above their pre-GFC and fracking boom levels. The move to export LNG will likely cause a further increase in prices.
The following charts provide more details on those gas prices. As can be seen, natural gas prices have nearly doubled in the past two years, and these have a direct correlation to the price of gas-fired electricity.
At a natural gas price of $4.00/mmbtu, the LCOE of a gas peaker is $0.10/kWh and that of a CCGT (combined cycle or baseload plant) is $0.06/kWh. If Citi’s commodities team’s long-term gas price forecast of $5.50 is used, the implied LCOE is $0.12/kWh for natural gas peaker or $0.07/kWh for a CCGT plant.
“These numbers,” Citi says, “set the bar for alternative energy.