Is Renewable Energy Really Affordable?

Yes, but it depends on the project

Tune in to a discussion of the merits of renewable energy versus fossil fuels and chances are you’ll hear someone mention the term “Levelized Cost of Energy” or “LCOE.”

LCOE is a common standard on which to compare the cost of various energy sources. And it’s all-inclusive, adding up the expense of siting, permitting, financing, constructing, operating and ultimately shutting down a particular source over an assumed lifetime.

With emotion and politics dominating the current energy debate, LCOE would seem to be an impartial arbiter of what particular resources make the most economic sense, from natural gas and coal to solar, wind and nuclear. And all else equal, lower numbers will indicate more efficient power sources.

Unfortunately, there’s a big problem with relying on LCOE to make such assumptions, let alone real world decisions. Mainly, the myriad factors that go into that single number are constantly in flux. And unless a developer can lock enough of them in, it will be subject to some crazy revisions.

Take offshore wind as an example. US project cancellations in 2023 have now reached 3.2 gigawatts of capacity. That’s equivalent to a staggering 18 percent of all signed offshore wind power sales contracts to date. And as many as 9 GW of additional cancellations could be on the way: New York has refused to allow developers like ORSTED A/S (Denmark: ORSTED, OTC: DNNGY) to recover added costs, instead insisting they abide by the terms of contracts signed prior to the last couple years.

Why is that important? Because according to Bloomberg New Energy Finance (BNEF) data, the LCOE of US offshore wind projects has increased by “almost 50 percent from 2021 levels in nominal terms.” In fact, the most recent estimate of $114.20 per megawatt hour makes it one of the most expensive energy sources on the planet.

Breaking it down, interest rate increases alone have boosted the cost of US offshore wind by $27.20 per megawatt hour since 2021, and certain CAPEX and operating expenses added another $16.90. That far and away offset the beneficial impact of $7.20 per MWH from an additional 10 percent of Investment Tax Credits, which are now 40 percent under the Inflation Reduction Act.

Not every US offshore wind project has been so affected. In stark contrast, Avangrid Inc’s (NYSE: AGR) 800-megawatt capacity Vineyard 1 offshore wind facility off the Massachusetts coast is on track to begin generating very competitive electricity for the New England grid starting in 2024. And Dominion Energy’s (NYSE: D) 2.6-gigawatt Coastal Virginia Offshore Wind facility will do the same for the commonwealth in 2026, with the project’s final construction permit on track for later this year.

But that’s only because these projects had been in the works for some time. And management teams were farsighted enough to lock in as much of the costs as they could as quickly as they could, before inflation and interest rates began rising in earnest in early 2022. Their LCOE has remained relatively stable while that of other projects’ soared.

BNEF’s projection issued last week is just 16.4 GW of cumulative offshore wind capacity will be operating in the US by 2030. That’s down from a prediction of 23.1 GW in June and 42 GW at the end of 2022. BNEF still expects 44 GW of cumulative US offshore wind by 2035. But that’s down from 53.2 GW at the end of Q2 and still ripe for more cuts.

Needless to say, forecasts with that much volatility aren’t worth a whole lot. But equally it would be a serious mistake to conflate offshore wind’s at least temporary demise with a doomsday scenario for renewable energy investment overall, as the dramatic collapse in sector stocks this year would seem to indicate.

For one thing, wind and solar accounted for 80 percent of the 424 GW of generating capacity that entered service globally last year. And in the first half of 2023, the US Federal Energy Regulatory Commission reports that of the 17 GW entering service in the US, 34.5 percent was solar and 16.2 percent was wind.

BNEF also reports deals between renewable energy producers and corporations through the first nine months of the year are actually running ahead of 2022’s record pace. Major technology companies have been particularly eager buyers. And 2023’s leading purchasers include Microsoft (NSDQ: MSFT), Meta Platforms (NSDQ: META), Amazon.com (NSDQ: AMZN) and Alphabet Inc’s (NSDQ: GOOG) Google.

These companies will publicly claim social responsibility is their primary reason for buying renewable energy. But there’s no doubt the opportunity to lock in energy costs is a massive incentive. And it will only grow larger as they increasingly rely on energy intensive data centers augmented with artificial intelligence, a notorious extreme power hog.

It’s also worth pointing out that offshore wind is indeed thriving in some parts of the world, Super oil TotalEnergies (Paris: TTE, NYSE: TTE) last week brought a 1,075 megawatt facility into service off the Scottish Coast. And earlier this month, Canadian developer Northland Power (TSX: NPI, OTC: NPIFF) arranged more than $10 billion in low cost financing to complete two 1 GW plus projects off the coasts of Poland and Taiwan.

Clearly, the LCOE of these projects still makes economic sense, as do the record private deals between producers and corporate buyers in the first nine months of 2023. And there are other unmistakable bright spots for renewable energy economics, including a -57 percent drop in polysilicon prices since the beginning of the year, and drops this month of -10 percent in global module prices along with -20 percent in spot prices for cells.

Solar components prices are expected to drop further over the next few years as new production capacity comes on line in both the US and Europe, thanks to generous subsidy. Indian exports to the US are also booming, while the massive ramp up in Chinese solar production capacity is covering the country’s voracious demand and then some.

At this point, the high cost of borrowing has clearly undermined rooftop solar companies’ business model, which was rarely profitable even when it was easy to extend low cost credit to homeowners. That caused SolarEdge Technologies (NSDQ: SEDG) last week to warn on Q3 revenue, setting off a crash in related stocks.

But falling demand from rooftop companies means less competition for utility companies that have had big plans to build solar, such as NextEra Energy (NYSE: NEE). That company announces Q3 results and updates guidance next week and there’s every reason to expect good news.