Why Electricity Costs Will Soon Level Off

Or, ‘Why we do not have to fear high energy prices in the future.’

Many people, including policy makers, worry about the cost of electricity rising so high in the future that it causes a have/have not society, economic Armageddon, or at least, place a drag on economic production. This is especially true in the USA, where energy costs are still among the lowest in the world, and even a doubling of electrical prices is seen as a catastrophe. But that is not what is going to happen.

As a technical business person who has been involved in the energy fields for nearly 40 years I have seen a glimpse of the future of electricity pricing in the form of island nations and remote villages. I have come to understand and experience why electricity prices will stabilize, after rising somewhat more, and why we don’t have to fear the worst. The sooner our policy makers also see this, the sooner we will be willing to accept a short term rise in electrical prices in exchange for the longer term benefits of environmental health and climate stability. At the moment we tend to view these paths as mutually exclusive: an expensive ‘choice’ we need to make where we can either have affordable energy, or we can have a a clean, sustainable future. In reality we will have both. Here’s why:

As a renewable energy system developer I know that my company and others could be profitable producing distributed wind power at $.13 – $.16 per kWhr, or solar power at $.25 – $.28 per kWhr. Large wind farms can produce wholesale power for less than $.12 per kWhr, with no incentives at all. With prices in New England already costing about $.16 – $.19 per kWhr, we can see that renewable sources are close to attaining parity with other sources on a levelized cost of energy (LCOA) basis. If electricity from fossil fuels doubles (which means our electrical prices go up by perhaps 60-70%), then renewables will be a VERY competitive choice.

This is actually happening in many places now. Many island nations, such as in the Caribbean and Cape Verde, as well as remote villages which depend on diesel electrical generation are paying upwards of $.40 USD per kWhr. Almost all new generation being considered in these locations is from renewables because of the costs involved. Even in the more affordable USA, generation is switching to renewables. In the past two years wind energy represented the largest portion of new generation capacity. Nearly 34% of all new generation came from the wind.

But renewable energies such as wind and water, are diffuse energy sources. They are not concentrated, but rather spread all over the globe. This creates a situation where these ‘distributed’ energies need to be collected by means of special collection equipment, such as solar panels and wind turbines (or dams). That equipment is not cheap. In fact the capital acquisition of that equipment is what creates the majority of the cost in renewable energy. Once the equipment is purchased, it could collect ‘free fuel’ for decades. But the capital equipment needs to be financed in the first place. This means that the cost of renewable energy does not depend on the cost of the fuel, but rather on the cost of the capital needed to build the equipment.

(I like to tell people that my competition in the renewable energy market is NOT coal or natural gas, or nuclear power, but rather the interest rates from other investments, such as real estate. As interest rates go up, my wind projects that are financed at those rates are less profitable. My ‘cost of goods’ is the cost of capital, not the fuel.)

And that is what leads to the reason as to why energy prices will not continue to rise in the future, but will actually stabilize over the next 30 years to a point a little higher than renewables can produce now – in the $.20-30 per kWhr range. As prices of traditional power supplies continue to rise due to finite fuel supplies, our electrical generation mix will continue to shift to less expensive renewables, where the cost of goods (interest) can be fixed going into the projects. The FINITE supply of fossil fuels will reach a ‘cross over’ point – a price where they will be competing against interest rates – the result of human wealth and capital, which is rapidly INCREASING.

Renewable projects will then begin to compete against each other to produce the lowest priced power, and this will be determined primarily by who has the lowest priced capital available to them. This is already happening in the Californian electrical markets and in Brazil, where local reverse auctions for renewable energy have bid down prices. In 2013 two Request for Proposals (RFPs) issued by utilities in CA resulted in so much generation being bid in by renewable energy Independent Power Producers (IPPs) that competition drove the prices from renewables down significantly. Renewables used to be the higher priced option, but as increasing numbers of projects begin to complete against each other, the price of such power will level off to reflect the underlying cost of capital. And once the projects are built, these prices can be maintained for the lifetime of the equipment – 20 years or longer.

That time is here now in many areas. Over the next 20 years the trend will continue as renewables finally become the standard, rather than the ‘alternative’ energy source. Once we reach the financial ‘cross-over’ point, fossil fuels will be seen to have greater value as transportable fuels, rather than as electricity prime movers. That is one key benefit of these energy sources – they pack a lot of energy into a small space and can be used as a transportable fuel source. Diffuse solar or wind projects can’t do that.

So rather than fearing higher prices and delaying the inevitable, I believe we should actually bite the bullet now, and let prices rise up to where renewables will dominate, knowing that once we reach the crossover point, we will be producing sustainable amounts of environmentally friendly power at prices we can afford and that will stay stable. I believe that history will show that as a society we feared and fought against capital intensive renewable energy only until we got ‘over the hump’ of rising prices, and recognized the long term stability that only sustainable energy from the sun and wind can provide.