Renewable Energy Sources: Can They Really Compete Without Subsidies?

By August 4, 2019Green Energy

As the seriousness of the climate crisis and the dangers of fossil fuels become more well-known, the natural push has been towards energy sources that are clean and carbon-free. Renewable energy, including solar, wind, hydropower, geothermal, and more, are often the solution that gets touted as necessary now for the world to move away from carbon emissions. These sources receive much praise for their ability to deliver power without the emissions, but a common talking point against them is that they simply cannot compete with cheap coal and gas.

For all the moral and aspirational reasons to embrace a renewable energy future, the affordability of energy is of critical importance globally, and especially in developing countries with emerging economies. Skeptics will note that renewable energy has long been propped up by tax credits and subsidies that allow them to affordably compete, and without such assistance they would not be viable. While that may have been true at the turn of the century, which is why such subsidies were initiated in the first place to allow the market to grow, does that argument hold any water today?

Let’s dive into the data to find out for sure whether renewables are cost competitive in 2019 without government assistance.

Renewable Energy Costs Today

In the ecosystem of tax subsidies and credits for renewable energy sources, namely solar and wind, recent years have been quite advantageous towards development of technology to increase efficiencies and reduce costs. That progress and improvement in the renewable sector is critical towards how they will compete in tomorrow’s marketplace, but what are the costs today?

According to the International Renewable Energy Agency, the United States energy sector spent $0.048 per kilowatthour on onshore wind energy (over two-thirds lower than the cost 25 years ago) and $0.082 per kilowatthour on utility-scale solar energy (nearly two-thirds lower than just eight years ago). Given that the average residential U.S. customer pays $0.1289 per kilowatthour, that might sound like a deal, but cost to generate only accounts for about 61% of total end-consumer power prices.

As such, the next step to answering our question is to compare those renewable energy costs with other sources of energy generation…

Non-Renewable Energy Costs Today

Unfortunately, comparing different sources of energy generation on price can be a little bit like comparing apples and oranges. Some energy sources can operate at all hours (coal generation can but solar power cannot) and so they are adding that type of value to the grid, while other energy sources are carbon-free (here solar power wins over coal power) so they are better for the environment and may one day get a value boost if carbon prices get enacted.

To try and cut through these different factors, the U.S. Energy Information Administration tracks data on levelized cost and levelized avoided costs. While these figures end up more as generalizations and estimations, they provide a good starting point to compare different sources of generation. Looking at these figures shows that the next few years of anticipated energy builds:

In general (but not in every instance, solar and wind appear cheaper based on the left-hand side of the figure, and the results shown on the right-hand side of the figure demonstrate how that will result is much more solar and wind capacity added to the grid compared with any other energy source. Another source, the American Council for an Energy Efficiency Economy says

While it would be nice to assume utilities and other stakeholders were building these renewable energy sources out of pure concern for the planet, the truth is that profit is still what drives such decisions. And given that power capacity additions are commitments for multiple decades to come in investment, the market is in favor of renewables taking the energy crown. But is that simply due to the tax credits?

Renewable Energy Tax Credits and Subsides: Today and Moving Forward

In the U.S. market specifically, the federal government indeed offers financial incentives for solar and wind installations. The current levels of credit offered to builders of solar and wind by the U.S. government come in the form of production tax credits (PTCs) and investment tax credits (ITCs). Production tax credits are credits offered to certain renewable installations based on the amount of energy they generate while investment tax credits pay out based on the cost of the installation.

Production tax credits, which were last renewed in 2013, offer a payment of 2.3 cents per kilowatthour for the first 10 years of production for new wind capacity, geothermal capacity, and biomass. These credits are set to expire at the end of 2019 for new construction (though facilities that began construction before the end of the year will continue to receive part of the tax credits).

Investment tax credits were enacted in 2006 and offer a 30% tax credit on residential, commercial, and utility-scale solar installations, though starting in 2020 those levels will drop off until they reach 0% for residential systems in 2022 and 10% for commercial and utility systems in 2022 and beyond.

As these credits and subsidies are set to expire, the outlook still looks bright for these renewable energy sources. Even without the government incentives, projections from all major forecasters show renewable generation increasing as the prices continue to drop. While the subsidies were critical in getting the renewable technologies off the ground in their early days, those subsidies have done their job and solar and wind (and other renewable energy) is now at the topping point where newly built wind and solar is even cheaper than continuing to operate existing coal plants!

So in short, it’s fair to say that yes—renewable energy generation is at long last able to compete without the aid of subsidies.

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