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Paradigm shifts in energy generation: Combined-Cycle Gas Generation Costs Fell Relative to Coal and

The annual study of levelized costs of electricity (LCOE) from Lazard Limited. provides further confirmation of how far and how fast the Electric Power business is changing.

Notably, costs have continued to decline for utility-scale renewable energy over the last year. Costs also fell for combined-cycle gas generation. The cost to generate electricity from coal is the same as it was last year, but nuclear's LCOE has risen sharply. Electricity storage costs also are coming down, although those vary widely according to technology and the specifics of each project's deployment.

Looking forward, Lazard's experts see further cost reductions for renewables and storage, but they caution those options alone will not meet the electric needs of a developed economy. The advisory and asset-management firm embraced an "all-of-the-above" approach to energy, saying, "alternative energy systems alone will not be capable of meeting the baseload generation needs of a developed economy for the foreseeable future."

"The growing cost-competitiveness of certain alternative energy technologies globally reflects a number of factors, including lower financing costs, declining capital expenditures per project, improving competencies and increased industry competition," said George Bilicic, vice chairman and global head of Lazard's Power, Energy & Infrastructure Group, in a November 2 statement. "That said, developed economies will require diverse generation fleets to meet baseload generation needs for the foreseeable future."

As LCOE values for alternative energy technologies continue to decline, in some scenarios, the full lifecycle costs of building and operating renewables-based projects have dropped below the operating costs alone of conventional generation technologies, such as coal or nuclear. This is expected to lead to ongoing and significant deployment of alternative energy capacity, the firm said.

Historical overview of LCOE as calculated by Lazard.

  • Between 2009 and 2017, Lazard found that the average unsubsidized LCOE:

  • Has risen 20% for nuclear power, to about $148 per megawatt-hour (MWh) from $123

  • Has fallen 47% for onshore wind power, to an average of roughly $45 per MWh from $85

  • Has fallen 72% for utility-scale crystalline solar power, to about $50 per MWh from $178

  • Has fallen 27% for natural gas combined-cycle generation, to approximately $60 per MWh from about $83, and

  • Has fallen 8% for coal-fired power, to about $102 per MWh from $111

Lazard cautioned that the average LCOE for each type of fuel represented a range of costs. The firm noted that while utility-scale alternative energy costs are slowing modestly, "the gap between the costs of certain alternative energy technologies (such as utility-scale solar and onshore wind) and conventional generation technologies continues to widen as the cost profiles of such conventional generation remain flat (such as coal) and, in certain instances, increase (as in nuclear)." Lazard noted nuclear power's LCOE dropped significantly from 2009 to 2010 before plateauing for several years, and rose sharply over the last year. The year-to-year spike was driven by cost overruns at nuclear plants under development, including the two-unit expansion of the Alvin W. Vogtle Nuclear Power Station by a subsidiary of Southern Company (NYSE:SO) (Atlanta, Georgia).

Turning to electricity storage, the Lazard study said lithium-ion is the most economical technology among the technologies currently commercially deployed, but a competing type of technology, flow batteries, claims to offer lower costs for certain applications.

The Lazard study noted that industry participants expect electricity storage costs to decrease significantly over the next five years, "driven by scale and related cost savings, improved standardization and technological improvements, supported in turn by increased demand because of regulatory/pricing innovation, increased renewables penetration and the needs of an aging and changing power grid in the context of a modern society."

Lazard said most of future cost declines are expected to occur as a result of manufacturing and engineering improvements in batteries. "Cost declines projected by industry participants vary widely among energy storage technologies, but lithium-ion capital costs are expected to decline as much as 36% over the next five years."

"Energy industry participants remain confident in the future of renewables, with new alternative energy projects generating electricity at costs that are now at or below the marginal costs of some conventional generation," said Jonathan Mir, head of Lazard's North American Power Group. "The next frontier is energy storage, where continued innovation and declining costs are expected to drive increased deployment of renewables, which in turn will create more demand for storage."


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