On the economics of wind and solar power — by Lion Hirth
“Many hope that wind and solar power will eventually become economically competitive on large scale, leading the way to a global low-carbon economy. Are these hopes justified?”
November’s COP22 climate summit of Marrakech gave climate policy fresh tailwind, after the blow of Donald Trump’s election. Even without a strong global treaty, national climate policies are multiplying — at least a certain type of policies. While the policy that economists often recommend — putting a price on greenhouse gas emissions — remains patchy, as a recent World Bank report shows, subsidies for renewable energy are booming: no fewer than 145 countries support renewables today. Germany’s Energiewende is a prominent, but not the only example: Obama’s Clean Power Plan features renewables as a centerpiece of climate policy, India’s National Solar Mission includes a 100 GW solar power target. In addition China is said to be considering a 200 GW target, and Morocco has announced the building of the largest solar power facility on the planet. Nearly half of all newly added electricity generation capacity was based on renewables. In ten countries, wind and sun deliver more than 10% of electricity consumed. These includes Denmark (43%), Portugal (24%) and Spain (23%).
Many hope that wind and solar power will eventually become economically competitive on large scale, leading the way to a global low-carbon economy. Are these hopes justified?
On the cost side, the economics of renewables look impressive. The costs of wind power have dropped significantly. On average, wind now generates electricity at $70–80 per Megawatt-hour (MWh) globally, as reported by the two international think tanks IRENA and IEA. Ten years ago, a roof-top solar array for a single family home cost more than $50,000 — today it sells for less than $14,000. (America’s LBNL and Germany’s Fraunhofer ISE provide more data.) Germany, which receives less solar radiation than southern Canada, now generates solar power at $90 per MWh. The United Arab Emirates have tendered a solar power station for $58 per MWh and recent auctions in Chile, Peru and South Africa have resulted in even lower prices.
In some countries, wind and solar power are now cost-competitive with coal- and natural gas-fired power plants, even when carbon emissions are not priced. However, cost structures are very country-specific, and cost-competitiveness is not universal. Renewables tend to be cheaper where it is windy or sunny, where investors have access to low-cost finance, where fossil fuels are pricey, and where emissions are priced. In many places, however, coal-fired power plants remain the cheapest option for producing electricity, driving the renaissance of coal. Still, for renewables to have caught up with fossil plants in cost terms represents a huge success for wind and solar power.
Costs are, however, only one side of the competitiveness equation. The other is value. Merely comparing electricity generation costs between different plant types is misleading, as it ignores the fact that the economic value of electricity from different power stations is not the same. This is because on wholesale markets the price of electricity fluctuates from hour to hour (or even minute to minute). Some power plants produce electricity disproportionately at times of high prices (so called “peaking” plants), while others produce constantly at low prices (“base load” plants). This little detail has striking consequences for the economics of wind and solar power. Paul Joskow and Michael Grubb observed this a while ago.
On the value side, the outlook for renewables is…
More than 600 institutions across 76 countries, representing $5 trillion in assets, have committed to divest from fossil fuels. This includes, among others, the world’s largest sovereign wealth fund Norway’s GPFG , and financial giants Allianz and AXA, the Rockefeller Brothers Fund, as well as the cities of San Francisco and Berlin, and Stanford University.
For a social movement that since 2012 has been challenging the business model of the fossil fuel industry by calling to divest — removing capital from stocks, bonds or funds invested in fossil fuel companies — this is momentous.
The Dawn of Fossil Fuel Divestment
The argument that investing in fossil fuels — oil, coal, and gas — is morally problematic started to take shape on US campuses in 2011. Motivated by previous divestment campaigns, for example those against South African Apartheid in the 1980s or the tobacco industry in the 1990s, students urged university boards to withdraw their school’s endowments from fossil fuel companies. Their argument? Investing in companies that contribute to the destruction of the earth contradicts the key mission of higher education in preparing younger generations to shape and protect that earth.
Inspired by these ideas, in 2012 Bill McKibben, founder of environmental NGO 350.org and one of the leading figures-to-be of the global fossil fuel divestment moment, published a landmark article in Rolling Stone magazine. Therein, McKibben addressed three numbers:
- 2 degrees Celsius: The maximum amount of temperature rise the planet can bear before dangerous climate change occurs
- 565 gigatons of carbon dioxide: The amount of emissions that can be released before that point is reached (the so-called global carbon budget)
- 2,795 gigatons of carbon dioxide: The amount of emissions that would be released from burning all reserves currently listed in fossil fuel companies.
These figures, according to McKibben, meant that the unexploited reserves of oil, coal, and gas identified by the global fossil fuel industry equated to five times more carbon than can be emitted before the planet’s temperature would rise by more than two degrees. In other words, if fossil fuel companies eventually extracted and sold every reserve listed in their balance sheets, catastrophic climate change is bound to occur.
To address this mismatch between burnable and to-be-burned carbon, 350.org launched its first divestment campaign in 2012. Building on the students’ ideas, the activists called upon any organization that serves the public good — mostly governments, educational and religious institutions — to cut their ties to the fossil fuel industry. They also urged society to view the fossil fuel industry in a new light and to distance itself from this “rogue industry, reckless like no other force on earth. It is ‘Public Enemy Number One’ to the survival of our planetary civilization.”
Since then, a number of universities, faith-based organizations, foundations, and cities have, to varying degrees, committed to divest from fossil fuels. The movement particularly picked up momentum through divestment announcements by a number of symbolic institutions and endorsements by opinion leaders. In 2014, the World Council of Churches, representing half a billion Christians, ruled out all fossil fuel investments. The Guardian Media Group divested its funds, following its subsidiary newspaper’s “Keep it in the Ground” campaign.
In 2015, the UNFCCC — the UN Secretariat overseeing climate change — backed divestment as “it sends a signal to companies, […] that the age of ‘burn what you like, when you like’ cannot continue.” That same year, the G7 called for a complete decarbonization of the world’s economy. And Leonardo DiCaprio, during an address at Davos’ World Economic Forum in 2016, urged to stop allowing “the corporate greed of the coal, oil and gas industries to determine the future of humanity,” and to “leave fossil fuels in the ground where they belong.”
Fossil Fuel Divestment in the Financial sector
While sparked by a moral imperative — “If it’s wrong to wreck the planet, then it’s also wrong to profit from that wreckage” — moral concerns, over time, became supplemented with concerns about economic risks from stranded assets, and legal attention about fiduciary duty.
Whilst climate-associated risks were certainly present before the campaign, as the movement progressed, the financial sector started to recognize the economic risks of remaining invested in fossil fuels. In particular, the notion of stranded assets, introduced by financial think-tank Carbon Tracker in 2012, signaled a turning point: if the world’s governments fulfill their pledges to tackle climate change by cutting carbon emissions (exacerbated by Paris’ push toward a 1.5 degree future), close to 80% of global fossil fuel reserves would have to be kept in the ground, creating the so called carbon bubble and making investments in them worthless, or stranded.
Today, financial institutions increasingly recognize this risk. In 2014, Bank of England Governor Mark Carney publicly stated that “the vast majority of reserves are unburnable,” while calling for investors to consider the long-term impacts of their decisions. In 2015, the International Monetary Fund and the World Bank called to cut “harmful” fossil fuel subsidies. And a recently launched report by the G20-Financial Stability Board — incorporating the world’s most powerful central bankers and finance ministers — urged companies to disclose climate-related risks of their operations.
In addition to regulative bodies, climate concerns also entered the for-profit financial mainstream — including large insurers, pension funds, and banks — with companies such as AXA and Allianz divesting, and Goldman Sachs, HSBC, and Blackrock, for instance, issuing climate change warnings and calling on investors to incorporate climate risk screenings for new investment decisions.
Besides asset risks, divestment also ignited a debate among legal scholars warning that trustees and investors who fail to consider climate risks may jeopardize their legal duty as fiduciaries. UNFCCC Executive Secretary Christiana Figueres, for instance, while linking the dangerous rise in greenhouse gases in large part to “past investments in […] fossil fuels,” warns that “institutional investors who ignore climate risk face being increasingly seen as blatantly in breach of their fiduciary duty.”
Taken together, fossil fuel divestment today has grown into a truly global movement, with institutions divesting on every continent and permeating every sector of society — from purpose-driven organizations, to cities and faith groups, even mainstreaming into the financial sector. The movement has become the fastest growing divestment campaign in history and, in fact, “one of the great movements of the 21st century,” as heralded by Hans Joachim Schellnhuber, one of the world’s most influential climate scientists.
U.S. Department of Energy report (PDF)
Why Energy Efficiency?
Energy is often one of the largest variable costs that companies can actively reduce.
Today, many, but certainly not all, large manufacturing companies in the United States have adopted some sort of internal energy efficiency (EE) program.
The main reason is for cost reduction, although reputation concerns are gaining in prominence as the public pays a greater degree of attention to issues such as climate change. In the most energy-intensive companies, where energy costs are more than 10% of total costs, the cost-cutting rationale for pursuing energy efficiency is most important.
However, the case for pursuing energy cost reduction is often still compelling when energy is a smaller percentage of total costs, as it may be easier to reduce than labor or raw material costs. The net financial benefits of such operating-cost-saving projects directly impact the bottom-line profitability of companies.
This contrasts with revenue-generating initiatives, such as growth projects, which contribute only to the gross revenue top line.
About This Report
This report examines primary factors that produce successful EE programs at large industrial companies. It also examines the role that ratepayer-funded EE programs can play in supporting energy efficiency at such companies. The report examines four large industrial companies with robust EE programs who have interacted with many different ratepayer-funded EE programs across a variety of states.
Full case studies, including factory visits, were completed with;
(1) J.R. Simplot Company, a large, privately held agri-business and food processing company;
(2) General Motors, the second-largest automobile manufacturer in the world; and
(3) General Mills, one of the largest grain, cereal, and other food processors in North America.
(4) A case study was also completed with Intel, the world’s largest semiconductor manufacturer, through telephone interviews.
The report concludes by (1) defining three requirements for successful EE programs in large companies; (2) providing suggestions for other companies based on the experience of the case study companies; (3) examining how the case study companies view ratepayer-funded EE programs; and (4) providing considerations for ratepayer-funded program administrators on how participation in their offerings for large companies might be increased.
To read or download the full report please click the image below, or click here.
Saving Energy in Industrial Companies: Case Studies of Energy Efficiency Programs in Large U.S. Industrial Corporations and the Role of Ratepayer-Funded Support was developed as a product of the State and Local Energy Efficiency Action Network (SEE Action), facilitated by the U.S. Department of Energy/U.S. Environmental Protection Agency.
Content does not imply an endorsement by the individuals or organizations that are part of SEE Action working groups, or reflect the views, policies, or otherwise of the federal government.
This document was final as of March 8, 2017.
If this document is referenced, it should be cited as: State and Local Energy Efficiency Action Network. (2015). Saving Energy in Industrial Companies: Case Studies of Energy Efficiency Programs in Large U.S. Industrial Corporations and the Role of Ratepayer-Funded Support.
Prepared by: Robert P. Taylor, President, Energy Pathways LLC; Colin Taylor, Partner, CGT Research & Consulting; Bruce Hedman, Entropy Research, LLC.
- Energy Efficiency Policy and Program Resources
The State and Local Energy Efficiency Action Network (SEE Action) provides resources for the design and implementation of policies and programs that can drive investment in energy efficiency, create jobs, and reduce consumer costs. These policies and programs can also strengthen the economic competitiveness of state and local entities by lowering the cost of living and doing business. Learn more about SEE Action activities related to the following policies and programs.