The “age of renewables” has arrived in the United States, the world’s biggest electricity market, Citigroup says, and solar and wind energy are becoming competitive with natural gas peaking and baseload plants. Citi says the big decision-makers within the U.S. power industry are focused on securing low-cost power, fuel diversity and stable cash flows. As gas prices are rising and becoming more volatile, wind, solar and other renewable energy sources are more attractive. Citi says solar is already becoming more attractive than gas-fired peaking plants, both from a cost perspective and a fuel diversity perspective. And in baseload generation, wind, biomass, geothermal, and hydro are becoming more economically attractive than baseload gas. Nuclear and coal are structurally disadvantaged because both technologies are viewed as uncompetitive on cost. Environmental regulations are making coal even pricier, and the aging nuclear fleet in the U.S. is facing plant shutdowns due to the challenging economics.
The key metric in comparing power sources is levelized cost of energy (LCOE). Citi defines LCOE as the average cost of producing a unit of electricity over the lifetime of the generating source. It takes into account the amount produced by the source, the costs that went into establishing the source over its lifetime, including the original capital expenditure, ongoing maintenance costs, the cost of fuel and any carbon costs. It also includes financing costs and ensuring that the project generates a reasonable internal rate of return (IRR) for the equity providers. At a natural gas price of $4.00/mmbtu, the LCOE of a gas peaker is $0.10/kWh and that of a CCGT (combined cycle or baseload plant) is $0.06/kWh. If Citi’s commodities team’s long-term gas price forecast of $5.50 is used, the implied LCOE is $0.12/kWh for natural gas peaker or $0.07/kWh for a CCGT plant. “These numbers,” Citi says, “set the bar for alternative energy.” Citi says the base-case LCOE for solar is 13 cents/kWh, the near-term upside is 11 cents/kWh and the long-term upside (2016) is 10 cents/kWh. (This is despite the fact that some power purchase contracts are being written as low as 4 cents/kWh or 5 cents/kWh, but those figures are helped by various tax rebates.)