Records were smashed in the energy sector last year, with the dramatic drop in solar and wind prices driving a transformation in the global electricity sector.
Installations of wind and solar totalled almost 155 gigawatts (GW) around the planet last year (more than the entire installed power capacity in the UK), meaning renewables continue to far outpace coal-fired power plant development.
The good news for consumers is that the lowest bids for solar dropped a remarkable 50% compared to those witnessed in 2014 and 2015.
So why is this happening?
A major engine for the transition is the rapid shift away from fossil fuels by large utilities such as ENGIE in France, NTPC of India and NextEra in the US.
Italy’s ENEL, which only founded its green power division in 2008, now derives half of its generating capacity from its 39.4 GW of renewable assets globally.
And as capacity increases, economies of scale kick in and prices fall further, compounded by technological improvements, availability of cheaper financing, and ambitious targets by governments with clear energy policies.
Records tumble, one after the other
Last year saw the record for lowest solar costs broken not once, but on four separate occasions, and it’s not unrealistic to expect this remarkable trend to continue in the coming year.
This momentum is not just affecting a few sun-drenched markets like Saudi Arabia; today there is a technology-driven worldwide transition. A record 75 GW of solar power capacity was added by the three largest thermal power-consuming nations – China 53 GW, the US 12GW and India 10GW in 2017.
These are big numbers. To put them in perspective, 75GW is greater than the total of all electricity power capacity of Australia or Indonesia.
Wind is the cheapest new energy in the world
While solar increasingly grabs global headlines, the title of the world’s cheapest energy in 2017 goes to wind.
In November 2017, Italy’s Enel Green Power made the lowest ever bid for electricity generation in a Mexican wind auction.
While wind’s recent cost decline has not been as universally stellar as solar, largely as it is a more mature sector, the downtrend between 2016 and 2017 has still been precipitous, particularly in countries with favourable conditions and / or policies.
In the latest wind auction in India, the winning bid came slightly below the lowest solar power bid of $38.45/MWh for the Bhadla Solar park in December 2017. Even though it is just a 6% decline from the previous lowest wind tariff, the deflation since the introduction of transparent reverse auctions in 2017 is in the order of 50% (Rs2.43/kWh vs Rs4.5-5.00/kWh).
The largest and the most unexpected decline of 60% was reported at the end of 2017 in Alberta, Canada at US$37/MWh. Likewise Xcel Energy’s December 2017 auction saw wind power in Colorado hit a new US record low of just US$18.10/MWh, down 50%.
One of the most forward looking and successful utilities globally is Nextera Energy US. Reporting yet another successive record annual result for the 2017 year, and installing a world record 2.15GW of renewables in 2017 alone, Nextera CEO Jim Robo stated: “over the past year, we’ve seen an approximate 30% reduction in turbine costs. Through the end of the decade, we expect another 10% decline per year on average.”
Nextera projects by the mid-2020s renewables will be lower cost than existing thermal power plants in America.
The Institute for Energy Economics and Financial Analysis (IEEFA) forecasts India will get there by 2020.
Offshore wind now joining the race
Pricing trends in the offshore wind markets of Germany and the UK surprised everyone in 2017, with a series of outstanding auction results highlighting cost deflation trends in just 1-2 years that were expected to take a decade to materialise.
The scale of offshore wind has moved from below 3MW per turbine at the start of this decade to a planned 12-15MW per turbine proposed for installation by 2024/25, a fivefold increase in a single decade
The scale of offshore wind has moved from below 3MW per turbine at the start of this decade to a planned 12-15MW per turbine proposed for installation by 2024/25, a fivefold increase in a single decade. Investor required rates of return have likewise decreased materially as the technology involved becomes more widely accepted and construction procedures de-risked.
IEEFA notes Japan, India, South Korea, Taiwan, France and the US. are all now implementing plans for a rapid scaling up of this new technology after a decade of pre-commercial viability investment by Germany, Denmark and the UK.
An increasing number of governments have decided to diverge from the legacy fossil fuel power generation and this rampant, deflationary trend will give increasing economic credence to this decision. New investment decisions favour renewables based on commercial merit, reducing externalities and improving grid diversity of supply, but also as a way to avoid stranded asset risks for thermal power plants which, once built, generally have a 40-50 year lifespan.
Leadership in this trend is becoming more geographically widespread, with India, Mexico, Chile, Argentina, Australia, Canada and the UAE joining the more traditional global frontrunners of China, America, Germany, Denmark and the UK.
For countries still considering the choice of their future electricity generation needs, in terms of cost, rapidly deploying renewables increasingly offers the best option. Even in mature economies, replacing fossil fuel imports with renewables is increasingly the answer being recorded – with Taiwan, South Korea and others starting the shift in 2017.
Renewables are not yet the least costly option in every market, but the pace of change demonstrates this tipping point is coming, and fast.