The Virtuous Cycle Has Begun
October 7, 2015
Bloomberg Business: It has never made less sense to build fossil fuel power plants
Wind power is now the cheapest electricity to produce in both Germany and the U.K., even without government subsidies, according to a new analysis by Bloomberg New Energy Finance (BNEF).
But that's less interesting than what just happened in the U.S.
One of the major strengths of fossil fuel power plants is that they can command very high and predictable capacity factors. The average U.S. natural gas plant, for example, might produce about 70 percent of its potential (falling short of 100 percent because of seasonal demand and maintenance). But that's what's changing, and it's a big deal.
For the first time, widespread adoption of renewables is effectively lowering the capacity factor for fossil fuels. That's because once a solar or wind project is built, the marginal cost of the electricity it produces is pretty much zero—free electricity—while coal and gas plants require more fuel for every new watt produced. If you're a power company with a choice, [or a regulator in California,] you choose the free stuff every time.
It’s a self-reinforcing cycle. As more renewables are installed, coal and natural gas plants are used less. As coal and gas are used less, the cost of using them to generate electricity goes up. As the cost of coal and gas power rises, more renewables will be installed.
"Renewables are really becoming cost-competitive, and they're competing more directly with fossil fuels," said BNEF analyst Luke Mills. "We're seeing the utilization rate of fossil fuels wear away."
The shift illustrates a serious new risk for power companies planning to invest in coal or natural-gas plants. Historically, a high capacity factor has been a fixed input in the cost calculation. But now anyone contemplating a billion-dollar power plant with an anticipated lifespan of decades must consider the possibility that as time goes on, the plant will be used less than when its doors first open.
"...onshore wind and solar PV are both now much more competitive against the established generation technologies than would have seemed possible only five or 10 years ago," said Luke Mills, analyst at BNEF.