(Bloomberg) -- The economics of generating electricity from fossil fuels are deteriorating rapidly as renewable energy technology plunges in costs.
That’s the conclusion of a Bloomberg New Energy Finance report on the levelized cost of energy, a measure that takes into account the expenses from buying equipment, servicing debt and operating power plants using each technology. In most places, wind and solar will work cheaper than coal by 2023, the research group said Wednesday.
“Some existing coal and gas power stations, with sunk capital costs, will continue to have a role for many years, doing a combination of bulk generation and balancing,” said Elena Giannakopoulou, head of energy economics at BNEF. “But the economic case for building new coal and gas capacity is crumbling.”
The findings put in context the many factors upending the calculations about the best way to generate electricity in the coming years. In a 104-page report, BNEF examined the economics of the industry in key jurisdictions from China and the U.S. to India and Australia, assessing the main renewable technologies.
One new factor: lithium-ion batteries have enjoyed a 79 percent drop in costs since 2010, making the idea of storing energy a possibility the coming years. The price per megawatt-hour for generating from wind farms built on land fell 18 percent in the first half of 2018 to $55 while photovoltaics dropped 18 percent to $70.
The chart below shows BNEF’s calculations for energy costs in China projected out to 2040. It compares generating costs for combined-cycle gas turbines (CCGT), coal, wind farms and photovoltaics, suggesting that coal falls behind the main forms of renewables early in the next decade.
The cheapest solar and wind costs can now be found in China and India, which are also among the worst polluters. The tumbling costs will continue until at least until 2040 for both renewable energy sources worldwide and they’ll become cheaper than coal and gas within five years, the report showed.
Coal and gas generate more than a third of the world’s electricity. For now, they remain the cheapest sources of electricity even after the sharp drops in the cost of wind and solar power. The chart below shows the economics changing rapidly in the U.S.
Battery costs are also starting to change the way power utilities think about how they generate. At the moment, electricity is costly to bottle up at scale, with most storage done through pumped hydro projects. Those raise water into a reservoir when power prices are cheap then allow it to flow over a turbine when the electricity is needed.
Cheaper batteries could allow utilities to store up electricity that was generated during the day by solar farms and use it at night. They could preserve power from windy days for times when it’s calm.
Adding a battery to an existing wind or solar plant can give it access to high-value hours. By 2025, four-hour battery energy storage will start to compete with gas plants, even in countries with cheap gas generation like the U.S., BNEF said.
Coal-fired generation makes up almost 40 percent of the world’s energy mix, according to the International Energy Agency. That market share will fall to 33 percent by 2040, the IEA said in central forecast in 2017.
“We are seeing record low prices being set for wind and solar,” said Seb Henbest, head of Europe, the Middle East and Africa for BNEF. “This is having a powerful effect. It’s changing perceptions.”
©2018 Bloomberg L.P.