Wind and solar are now cheaper than virtually anyone predicted, and renewable technologies have reached an inflection point: Rapid cost declines made renewable energy the cheapest available sources of new electricity, even without subsidies, in 2017.  In many locations across America, building new wind energy projects is cheaper than running existing coal-fired power plants.

Since utilities are still overwhelmingly planning for a lower-carbon more distributed grid, we must reconsider and reform the institutions impeding a high-renewables, low-cost, reliable grid.  Siting and permitting, transmission construction and planning, utility business models, wholesale markets, finance policy, and distributed energy resource planning and compensation are all areas where policy lags behind technology and institutions threaten to stymie growth.

Despite the Trump Administration’s rhetoric and policy proposals to boost fossil fuel economics, economic tailwinds are behind wind, solar, and complementary technologies like storage and demand response.  Updated levelized cost of energy data and forecasts from international energy analysts show that renewable energy costs keep falling, making changing outdated institutions more urgent than ever.

Levelized cost of electricity plummets for wind and solar

The 2017 edition of Lazard’s annual Levelized Cost of Electricity (LCOE) study showed unsubsidized onshore wind and utility-scale solar are both cheaper than new coal, and are cost-competitive with new combined-cycle natural gas. LCOE provides a basis for comparing the economics of different generation technologies by measuring the total cost (including financing) of building and operating a power plant over its assumed lifetime. Think of it as evenly comparing apples to oranges.

However, LCOE fails to capture the values of different types of energy, which change based on attributes like time of day and season, pollution, location, availability, ability to change output, and ability to provide essential reliability services.  LCOE gives a fair basis for comparing the cost of power from different sources, but it’s just a starting point to decide which resource is the best fit for a certain set of needs or services.

Lazard reports the mean unsubsidized utility-scale solar LCOE fell to $50 per megawatt-hour (MWh) in 2017, while the mean wind energy LCOE fell to $45/MWh.  In resource-rich areas like the desert Southwest or Great Plains, this gets even cheaper – Lazard reported solar as low as $43/MWh and wind as low as $30/MWh, both cheaper than the cheapest new combined cycle natural gas plant.

Of course, these prices don’t reflect the federal subsidies currently in place which make wind and solar even more affordable, yielding incredible numbers in recent solicitations.  For example, Public Service Company of Colorado’s recent request for bids from developers for 615 megawatts of generation drove astounding results – the median for wind bids was less than $20/MWh, while the median solar bid came in under $30/MWh.  Wind and solar are not only the cheapest sources of power money can buy in Colorado, they’re cheaper than keeping old coal plants running on a marginal cost basis.

Wind and solar installations drove down prices

Wind and solar prices dropped precipitously as deployment increased, validating one rationale for federal tax incentives and state-level renewable portfolio standards, which drove the majority of early deployment.  As the LCOE for utility-scale solar fell 85 percent from $350/MWh in 2009 to less than $50/MWh in 2017, cumulative installations rose from 1 gigawatt (GW) to more than 30 GW over the same period.

Onshore wind is even cheaper than solar in most of the U.S., with nearly triple the installations. Wind energy’s LCOE declined 50 percent from around $135/MWh in 2009 to less than $45/MWh in 2017, and cumulative onshore wind installations rose from around 35 GW to 84 GW in over the same period.

These declines outstripped the cost trends for natural gas-combined cycle (down 27 percent), coal (down 8 percent), and nuclear (up 20 percent) from 2009 to 2017, flipping a decades-long economic story that once favored conventional fuel-fired generation.  Now the country’s largest corporate buyers are meeting their clean energy goals while benefitting their bottom lines and utilities are dramatically revising their integrated resource plans to include more renewables.

Clean is cheap.

Renewable energy costs will keep falling

The story doesn’t end here.  Assuming utilities, power markets, transmission development, and other institutions can change, renewable deployment will continue or accelerate apace while costs continue falling.

The National Renewable Energy Laboratory’s (NREL) Annual Technology Baseline (ATB) 2017 predicts wind and solar will get even cheaper. NREL considers recently installed and anticipated near-term projects to forecast onshore wind’s most likely mid-range LCOE will be $39/MWh in 2020, $33/MWh in 2030, $31/MWh in 2040, and $28/MWh in 2050.

Similarly, NREL forecasts utility-scale solar’s most likely mid-range LCOE will be $51/MWh in 2020, $45/MWh in 2030, $41/MWh in 2040, and $37/MWh in 2050. By comparison, NREL forecasts the LCOE of conventional fuel-fired generation will hold steady or even increase.

Utility CEOs are even more bullish.  On a Q4 2017 earnings call the CEO of NextEra, one of America’s largest independent power producers and utility companies, predicted that by the early 2020s building unsubsidized new renewables will be cheaper than continuing to run existing coal and nuclear plants.

Xcel’s Ben Fowke is also embracing renewables, announcing the company will reduce carbon emissions 80 percent below 2005 levels by 2030, with 60 percent renewable energy.  Fowke says the plan’s main goal is affordability; it’s intended to keep customer bills at or below the consumer price index.

These trends could double installed U.S. renewable energy capacity by 2020. The Federal Energy Regulatory Commission’s most recent Energy Infrastructure Update expects 116 GW of proposed utility-scale solar and wind net additions will come online by December 2020, roughly twice the current total installed generation capacity of 115.5 GW.

Wind would add 72.5 GW (with only 68 MW of retirements) while utility-scale solar would add 43.5 GW new capacity (with just 2 MW of retirements). The same scenario sees significant coal retirements, an unchanging nuclear fleet, and much more natural gas build, putting solar and wind at a combined 16.7 percent of total capacity.

Reaffirming the need to reform institutions and promote complementary technologies

U.S. grid operators are already integrating higher penetrations of wind and solar energy without risking reliable power supplies, but fully capitalizing on cheaper renewable energy relies upon regulators and utilities collaborating on four important policy actions.

First, wholesale electricity markets, which cover over two-thirds of U.S. sales, should create value streams for resources that shift supply and demand from times of renewable excess to times of deficit, a service called grid flexibility.  Markets can reward flexibility by moving money out of capacity markets that only reward peak capacity and keep unneeded inflexible capacity online, and instead modify rules in energy and ancillary services markets to raise revenues for resources that can adjust rapidly.

Markets should also provide access to all resources able to provide flexibility, not just conventional generators.  FERC’s landmark Order 841, which requires wholesale markets to create a “participation model” for electric storage resources, is an important milestone. Future rules concerning distributed energy resource aggregation should provide points of entry for demand-side resources to provide the same services in energy and ancillary services markets.

Second, utilities need strategies to retire older unprofitable generation while dedicating funds to assist communities affected by closures.  Even when replacing existing coal with new renewables would save customers money, vertically integrated utility balance sheets may nevertheless have hundreds of millions in undepreciated balances for those now-stranded assets.

Third, aligning utility financial incentives with a more efficient, clean system can encourage customers to provide much-needed flexibility and invest in clean distributed generation.  Demonstrations in California and New York show that demand-side alternatives to gas-fired peakers and bulky distribution upgrades can be cost-effective, and we’re only scratching the surface. Systematic changes to how utilities make money, such as performance-based regulation (PBR), can create new revenue streams for utilities to maximize efficiency, reduce customer bills, and find innovative solutions to integrate renewables. Nearly 80 percent of utility professionals said PBR is the most appropriate regulatory model in Utility Dive’s recent State of The Utility Survey, showing utilities agree this is a productive path forward.

Finally, streamlined siting and transmission planning and access are keys to keeping costs and risk low for renewables development, which are often far from electricity-hungry cities and factories.  Siting wind and solar can require large tracts of land, and requisite transmission can criss-cross between environmentally sensitive ranges including federal, state, and private lands.

But development doesn’t have to come at the expense of our natural resources.  Early consultation, landowner-friendly compensation structures, and pre-screened development areas such as renewable energy zones in the Western Interconnection, Texas, or offshore, can dramatically reduce risks to developers while protecting natural areas and other rights of way.

By focusing on policies that work with changing U.S. energy economics, utilities can tap the cheapest form of electricity to improve their bottom line, while regulators reduce consumer costs and accelerate the clean energy transition.