Renewable energy is still cheaper than fossil fuels

Insights — August 2022

Renewable energy has become more expensive in 2022 but is still cheaper than fossil fuels for nine-tenths of global electricity generation in countries comprising two-thirds of the world’s population

In July, Bloomberg New Energy Finance (BNEF) published its latest estimates on the relative economics of renewables vs fossil-fuel based new electricity generation on a levelized lifecycle cost of electricity (LCOE) basis.

BNEF estimates the cost of new-build utility-scale solar and onshore wind has increased to US$45 and US$46 per MWh on a LCOE basis in he first half of 2022 or an increase of 14% and 7% respectively. Costs in these terms had been in a downward trend for the last decade and the increase put them back at 2019 levels.

Battery storage (which remains at an earlier stage of its lifecycle) increased to US$153/MWh or 8.4% higher year-over-year. The price of lithium which is one of the key raw material inputs has been a key driver of the increase.

The root causes behind the increases more broadly are the costs of materials, freight, fuel and labour.

We reflect that the majority of these inputs are cyclical or temporary in nature:

  • materials – with the exception of lithium, industrial metals prices such as copper have dropped on a year-to-date basis but remain above longer term levels in real terms
  • freight – shipping costs have moderated from their peak in September 2021 but remain roughly five times higher than they were in 2019
  • fuel – driven by the global energy crisis
  • labour – in the United States labour costs have increased 16% over the last 18 months according to BNEF

The longer-term structural trend on costs remains downward driven by manufacturing scale and improving technology.

Does this mean fossil fuels are more attractive?

Notwithstanding higher costs for renewables, the gap between fossil fuels and renewables continues to widen driven by elevated oil, gas and coal prices. Renewables remain more economically attractive which is supportive of the outlook for growth, margins and company valuations.

At US$74 and US$81 per MWh of capacity, for coal and gas-fired electricity generation capacity, new-build renewable energy capacity is still roughly 40% cheaper than fossil fuels. According to BNEF, this is reality for nine-tenths of global electricity generation in countries comprising two-thirds of the world’s population.