By Lawrence Solomon, published by Financial Post
According to Forbes, “99 per cent of U.S. coal plants are more expensive than new renewables.” Scores of other media outlets have chimed in. “It now ‘unequivocally’ costs less to build new renewable energy projects than to operate existing coal plants, according to a new analysis,” reported Bloomberg.
Except the “costs” that Bloomberg cited aren’t unequivocal. They aren’t even costs as commonly understood, but what are known as “levelized costs of energy (LCOE)” a now-dominant term in the regulated world of electric utilities that estimates the average cost of producing power over a facility’s lifetime, based on whatever assumptions energy analysts decide to make, or ignore. Using levelized-cost methodology, coal “costs” can be sent soaring while renewable energy “costs” can vanish, making coal seem uncompetitive.
In the case at hand, coal’s demise is described in Coal Cost Crossover 3.0, an analysis from Energy Innovation Policy & Technology LLC and the University of California, Berkeley. The analysis correctly reported that the cost of renewables dropped over the past decade, although the drop owed little to technological improvements and much to the Federal Reserve’s attempt to fend off recession through rock-bottom interest rates. Because wind and solar are capital intensive, they became inadvertent beneficiaries when the cost of capital plummeted.
The biggest boost to renewables’ ascendancy over coal, though, came from President Joe Biden’s Build Back Better program, which last year ushered in the Inflation Reduction Act of 2022 (IRA). “The IRA will significantly affect the relative economics of coal and clean power in the U.S.,” Coal Cost Crossover 3.0 stated in recalculating the levelized costs of coal and renewables. “In this analysis, the IRA’s extended and improved tax credits, along with a pair of refinancing programs, have the greatest effect on the cost of coal compared to renewables.”
The IRA makes coal look artificially bad by paying utilities to shut down or slow down the use of coal while doubling the taxes on a ton of coal, measures that increase the levelized cost of coal. And it makes renewables look artificially good by providing an investment tax credit that refunds half of the capital costs of wind and solar power and provides a production tax credit of 2.6 cents per kWh generated. Since the U.S. government’s Energy Information Administration pegs the levelized cost of onshore wind power as low as two cents per kWh, the combined subsidies to the capital and operating costs of wind — if the government figures are to be believed — can often exceed the cost of wind.
In their defence, levelized-cost calculations provide useful information when predicting the cost of generation over the lifetime of hydro, nuclear or fossil fuel plants, since these conventional power plants produce power when it is needed, giving value to the cost of every kilowatt produced. Not so with renewables, which produce power whether or not it is needed, and fail to produce power when it is needed. The failure of wind to blow and the sun to shine on demand requires utilities to complement renewables with expensive backups, either battery systems or, ironically, fossil fuel plants. The cost of these backups don’t show up in the levelized-cost calculations, rendering levelized-cost comparisons involving renewables meaningless.
Levelized-cost calculations represent nothing more than wishful thinking on the part of renewable proponents. Large-scale renewables, though they may often cost little on a levelized logic, have so little value in practice that even the monumental Build Back Better subsidies won’t always be able to sustain them.
As noted by Lazard, the asset management and advisory firm that annually produces the most widely quoted LCOE estimates, the cost of renewables has started to rise along with interest rates. As noted by natural resource investment firm Goehring & Rozencwajg Associates, renewables projects are starting to fall.
In January, the Commonwealth Wind project off the coast of Massachusetts announced that the project “cannot be financed and built.” In February, Duke Energy Corp. decided to sell its renewables portfolio at an impairment loss of US$1.3 billion, and Dominion Energy Inc. took a US$1.5-billion impairment charge on its solar portfolio.
Oil companies, too, are stepping back, despite their desire to atone for their climate-change culpability. Earlier this year BP and Shell both announced they would slow their transition to renewables, BP reporting that its oil and gas investments were three times as profitable as its renewable portfolio.
The renewables fantasy, abetted by levelized costs, can only be sustained for so long. In the real world, the costs of renewables will soar while coal costs eventually come down to Earth.
Lawrence Solomon is executive director of Energy Probe.