September 23, 2014

The Growing Economic Case for Renewable Energy

Renewable energy is increasingly cost-competitive with fossil fuels, inviting investment based purely on its economic, rather than environmental, virtues.

The economic case for renewables continues to become stronger. Solar and wind energy facilities are simultaneously becoming more efficient and less costly. Today, in terms of levelized cost of energy (a problematic measurement), wind energy is less costly than coal or than natural gas with carbon-sequestration technology. Meanwhile, the cost of solar power has been declining precipitously, and trends suggest that the U.S. Department of Energy’s goal of cost-competitive, $1/W solar power should be attainable. As the costs of renewable energy continue to decline, the purely economic case for developing renewable energy becomes more robust.


Renewables Deliver More Bang for the Buck

A recent analysis from Mark Lewis at the French investment bank Kepler Chevreux notes that over 20 years, renewable energy will generate more net energy per amount of capital investment than oil. Under this analysis, which takes into account the efficiencies at which both oil and renewables are capable of generating electricity, solar and wind energy each generate many times more energy per dollar invested than oil. According to the study’s author, these renewables will be quite competitive with oil by 2020, and will definitively outcompete oil by 2035: “it is almost impolite to compare the net [energy return on capital invested] with that of renewables by 2035.” This analysis gauges the increasing economic virtues of electric cars, but is of limited relevance for the U.S. electricity sector because the United States does not generally burn oil for electricity.

However, other recent work does suggest that renewables are also becoming increasingly competitive with fossil fuels that the U.S. does burn for electricity. The most recent calculation of the levelized costs of different energy sources from Lazard, a financial advisory firm, reveals that even without any subsidies, wind and utility-scale solar power are cost-competitive with all forms of fossil fuels. The same study reveals that over the last five years, the levelized cost of wind energy has decreased 58%, while over the same period the levelized cost of solar energy has decreased a whopping 78%. Meanwhile, another study from Carbon Tracker suggests that coal is no longer a safe economic bet, in part because of competition from renewable energy. That study notes that as coal prices plunge due to oversupply and a lack of demand, “coal producers are gambling on survival in the hope that prices will somehow recover.” These reports reveal that investing in renewable energy is increasingly a prudent economic choice, even without regard to any environmental benefits.


Sustainable Investment in Renewable Energy

Investing in renewable energy does not need to be costly for ratepayers or taxpayers. Galen Barbose of the Lawrence Berkeley National Laboratory reports that rate increases from renewable portfolio standards have been only “modest,” with the largest increase at 4% and most at less than 2%. In Kansas, where there is an ongoing controversy regarding the state’s renewable portfolio standard, the Kansas Corporation Commission reports that “renewable  generation requires less than 2.2% of the revenue requirement of the utilities while renewable generation supplies about 15% of the peak demand in the state.” In California, which features one of the most ambitious renewable portfolio standards of any U.S. state, a utility representative forecasts rate increases of only 1-2% by 2020. More generally, Paul Krugman draws on similar to argue against “climate despair” by noting that “strong measures to limit carbon emissions would have hardly any negative effect on economic growth, and might actually lead to faster growth.”


The Changing Face of Investment

Increasingly, the investment community is growing to recognize that investing in renewable energy is a sensible economic idea in its own right, regardless of environmental benefits. For example, Goldman Sachs finds the renewable energy market “incredibly compelling” and has committed to invest $40 billion toward renewable energy projects. Similarly, J.P. Morgan has invested upwards of $3 billion, while UBS Bank anticipates directing significant financing toward distributed solar generation in the near future.

Meanwhile, the Rockefeller Brothers Foundation, a charity worth $860 million, recently announced that it will re-align its investments from fossil fuels toward renewable energy. The Foundation has already ceased investing in coal and tar sands, and is moving toward divestment from all fossil fuels. The New York Times cites Foundation trustee Steven Rockefeller as noting that the move has “both a moral and economic dimension.” Although many organizations, particularly institutions of higher education, have been divesting from fossil fuels, the move by the Rockefeller Brothers Foundation is particularly noteworthy because the Rockefeller family initially made its fortune from oil.

These economic trends suggest that renewable energy will increasingly be able to compete with fossil fuels on purely economic grounds. Regulators of the energy market should pay attention to these developments as they consider the energy mix for the next generation.