The Limits to Green Energy: A renewable grid faces severe obstacles.

• Author: Bonifas, Paul

The renewable energy mantra heard around the world is a steady one: Renewables are getting cheaper every year. We must transition to a renewable future.

The best narratives are ones based on a true story. Start from a kernel of truth, one that is verifiable, and the rest of the story will be accepted as gospel. But what if that initial thought-kernel--the proverbial mustard seed from which the rest of the narrative grew--is misleading?

Wind and solar power are not as cost competitive as mainstream narratives suggest. Though the levelized cost (explained below) of electricity from renewable sources is comparable with dispatchable sources of power like combined cycle natural gas, this comparison is highly misleading. Variable renewable energy (VRE) sources like wind and solar are resource-constrained and dependent on such factors as weather and the time of day, generating power only 25% to 34% of the year. While dispatchable sources of power (which include nuclear and coal as well as gas) produce electricity on demand, VRE sources do not. This allows operators to vary dispatchable energy sources based on the needs of the grid, while VREs vary depending on the weather, season, and clock.

As VRE penetration levels rise, their value to the system declines. Developed countries like the United States require power night and day, all year round. Because VRE sources depend on weather and time of day, they do not have the ability to dispatch their power on demand. Instead, they depend on dispatchable power plants on the grid to function as a de facto battery, balancing electricity supply and demand when the VREs fall short. When the sun is shining and the wind is blowing, dispatchable power plants reduce their electricity output to keep supply and demand in balance. During times of no sun and low wind, dispatchable power plants increase their output to cover for the lack of VRE power. Therefore, as VRE penetration levels rise, the dispatchable plants sit increasingly idle, yet they must still be available to provide 24/7 power. This "double building" of VREs is a main reason why electricity costs increase with VRE penetration levels.

THE MISLEADING CULPRIT: LEVELIZED COST OF ELECTRICITY

The levelized cost of electricity (LCOE) is the cost of electricity for a particular energy source. Put more carefully, it is the average revenue per unit of electricity generated that would be required to recover the costs of building and operating a generating plant during an assumed financial life and duty cycle. LCOE is usually given in terms of dollars per megawatt hour (MWh).

LCOE is often used to quantify the general competitiveness of different generating technologies. For instance, data from the financial consulting and asset management firm Lazard indicate that the LCOE for utility-scale solar decreased from a midpoint of $358 per MWh in 2009 to just $35 in 2021, and onshore wind generation fell from $ 134 to $38. As a result, new construction of solar and wind projects has lower LCOE than new construction of natural gas combined cycle, coal, and nuclear power. Hence the popular narrative: "Renewables have lower LCOE, therefore they're cheaper and should be built everywhere."

But this "kernel of truth" is misleading. LCOE provides a cost of electricity from a particular power source, but only when that power source is generating electricity. That's an important caveat for energy sources that usually aren't operating. As noted, in the case ofVRE like wind and solar, power typically is only generated 25% to 34% of the time over the course of a year. Therefore, VREs are only able to take advantage of their "cheap" LCOE when the sun is shining or the wind is blowing.

Capacity factor is an important measure of how "productive" an energy source is. It is the percentage of output an energy source actually produces compared to how much it could produce if it were operational 24/7. For example, if a nuclear power plant could produce 1,000 gigawatt hours (GWh) of electricity over a full year but only produces 900 GWh over that time, then its capacity factor for the year would be 90%.

Figure 1 shows the average capacity factor of dispatchable and VRE sources in the United States in 2021. In the United States, solar farms have an average capacity factor of 24.6%, wind farms 34.6%, while dispatchable energy capacity factors range between 49% and 92%. Keep in mind that dispatchable energy sources vary their power production in part based on the needs of the grid so as to keep supply and demand in balance, while VRE sources are inextricably tied to weather and daylight. As an example, while the average 2021 capacity factor of coal was 49.3%, it jumped to 65.9% in August because of high summer-time energy demands. Similarly, natural gas combined cycle averaged a year-long 2021 capacity factor of 54.4%, but it increased its power output to 67.4% in August 2021. Wind and solar are incapable of doing the same.

LCOE is, therefore, not a good metric for comparing VREs to dispatchable sources of power. In their 2022 Annual Energy Outlook report, the U.S. Energy Information Administration (ELA) said so explicitly:

We list the LCOE values for dispatchable and resource-constrained technologies [VREs] separately because they require a careful comparison. LCOE by itself does not capture all of the factors that contribute to actual investment decisions, making direct comparisons of LCOE across technologies problematic and misleading as a method to assess the economic competitiveness of various generation alternatives. In its future modeling outlook, the EIA points out that though photovoltaic solar LCOE is lower than natural gas combined cycle LCOE, more combined cycle generation is expected to be installed than solar. They forecast this because "the relative value of adding [combined cycle] to the system is greater than for [photovoltaic solar], which LCOE does not capture."

A different metric is needed, one that more correctly identifies not the cost but the value of adding a particular source of energy to the grid.

LEVELIZED AVOIDED COST OF ELECTRICITY

A better comparison of economic competitiveness between generation technologies is the Levelized Avoided Cost of Electricity (LACE). This reflects the value of the generation technology in serving the electric grid. LACE "provides a proxy measure for potential revenues from the sale of...