The renewables price is right

By Patrick Hearps & Dylan McConnell

Renewable energy technologies are coming down the cost curve. The cost of electricity produced by solar photovoltaic, wind, and concentrating solar thermal is expected to decline significantly over the decade ahead, driven largely by deployment. The sooner Australia gets on with the job of a large-scale roll out of these renewable energy sources, the faster the nation will benefit from the improved economics of these technologies.

In research commissioned by the government’s chief climate change advisor Ross Garnaut, we reviewed the current and future costs of photovoltaics (PV), wind, and concentrating solar thermal power. Comparing data from a range of international and Australian-specific studies using consistent financial assumptions and resource quality, evidence suggests Australia’s current modelling on the cost of renewable energy technologies is out-of-date and overly conservative. Renewable technologies will achieve more optimistic cost reductions than the Australian models predict.

In the case of both PV and wind turbines, a large proportion of cost reductions have come from the learnings and economies of scale associated with large-scale global deployment. This is apparent when the cost of energy from these technologies is displayed as a function of cumulative installed capacity, rather than time.

When considering scenarios for new energy technology deployment, especially in the context of shifting away from greenhouse gas-emitting sources, initial higher costs of renewable energy should not be considered a barrier to deployment. Rather, the focus should be on deploying technologies to achieve the desired cost reductions within an acceptable time frame and understanding how much the rate of deployment is expected to change the rate of costs reduction.

The installed photovoltaic capacity has grown at rate of 40 per cent per year over the last decade. As the industry has grown, module prices have declined along a well-established learning curve, which has seen cost reductions of 22 per cent for each doubling of cumulative capacity. Over the past decade, deviations from this rate have occurred, however, the learning curve has remained true to the historic trajectory. In 2010, the global installation capacity is now 10 Gigawatt-peak (GWp)/annum.

Several factors are putting downward pressure on prices. Increased production of PV modules, key components (including modules and inverters), and materials (silicon) has alleviated supply constraints and delivered ‘economies of scale’ cost reductions. China alone expanded its PV production capacity 20-fold in four years. Further cost reduction opportunities can be achieved by improvements in the efficiency of different cell types. Based on these drivers, the International Energy Agency and European Photovoltaic Industry Association have made cost projections using learning rates of 18 per cent, slightly lower than the historical average of 22 per cent.

While it is a more mature renewable energy technology, wind is following similar cost-reduction curves. Wind energy generation expanded rapidly in the last decade, with installed capacity growing at 28 per cent per annum and doubling every three years. As the cumulative capacity has grown, the costs have correspondingly decreased, albeit at a slower rate than PV. European wind projects are already cheaper than in Australia, partly because they have achieved scales that allow more efficient supply chains and manufacturing. At just under 2000MW of installed wind capacity, Australia’s wind industry is yet to reach this level.

Key commodity constraints and supply chain bottlenecks have led to cost increases for wind in the past few years. Larger-scale manufacturing is now alleviating these constraints. The IEA and the Global Wind Energy Council (GWEC) expect cost reductions to continue, driven by economies of scale (as a result of continuing industry expansion, and Chinese manufacturing), stronger supply chains and technological improvements. The major technical cost reduction opportunities will be driven by turbine size, hub height, and the elimination gearbox losses via the use of direct drive turbines.

We also reviewed the more nascent, but promising, renewable technology – concentrating solar thermal (CST). Although less mature than wind and solar PV, a range of sources indicate that CST has significant cost-reduction potential, similar to the observed learning rates of wind and PV. The mass-manufacture of mirror components, implementation of higher-temperature steam cycles and storage, scale-up of plant sizes, and industry experience will deliver substantial cost improvements.

The United States Depatment of Energy expects that around 50 per cent of the potential cost reductions will be a driven by the industry scale and learning-by-doing – factors that are contingent on deployment. Spain and the US are performing this role at present. CST now feeds over 700MW of renewable electricity to the Spanish grid. According to the Spanish Solar Thermal Industry Association the total installed capacity will reach 2440MW by 2013, and the entire sector within Spain stands to exceed 10 000MW by 2020.

In the US, construction of commercial plants has resumed after a decade or so of inaction. Last month, Internet giant Google announced a $170 million investment in the massive 390 MW Ivanpah solar-thermal project in California. The US DoE has just offered their 20th loan guarantee under their ‘1705’ program to SolarReserve’s Crescent Dunes solar thermal power tower project, a 110MW plant with 10 hours of molten salt storage.

Increasingly, the Gillard government’s push for a carbon price is seen as a way to shift Australia’s stationary energy sector towards gas. "For baseload electricity generation," says climate change minister Greg Combet, "it will be gas-fired electricity that we see emerge, and for that investment to be committed, we need a carbon price in the economy."

Proponents of gas often argue that because the fuel is less carbon-intensive than coal it is a better option for generating electricity. Unfortunately, gas extraction results in fugitive emissions of methane – a potent greenhouse gas that has a global warming potential 72 times that of carbon dioxide over a 20 year horizon. Incorporating fugitive and other lifecycle emissions diminishes the apparent advantage of gas over coal. Gas is only able to make partial headway into decarbonising the electricity sector. Rather than gamble on gas, policymakers must aim to increase the amount of renewable energy in the electricity generation mix.

In terms of the current climate and energy policy debate in Australia, rather than gamble on gas and risk billions of dollars worth of stranded assets in the electricity sector, policymakers should look at the evidence showing renewable energy technologies travelling quickly and predictably down cost curves.

With Australia’s unparalleled renewable resources, the government would be wise to help directly accelerate the development of renewable energy, so they can achieve the economies of scale that will help lead to mass rollout. The decisions made on the carbon price will have long-term ramifications for the Australian energy mix.

Patrick Hearps and Dylan McConnell are Zero Carbon Australia Fellows at the University of Melbourne Energy Research Institute

The University of Melbourne Energy Research Institute will launch the paper "Renewable Energy Technology Cost Review," on Wednesday May 25 with a Seminar: Renewable Energy at What Cost?