To understand what is happening, consider the levelized cost of energy more deeply. Remove solar and wind from the equation and go back to a world where you can choose between oil, coal, or nuclear energy. Both fixed and variable costs vary among these options. The costs of a nuclear plant are mostly fixed because, once constructed, it’s relatively easy to generate additional energy. The opposite is true for natural gas plants, where the majority of costs are related to the actual energy production and thus more variable.
A levelized value is calculated by weighing these fixed and variable costs over the plant’s lifetime by the anticipated number of watt-hours it will produce. This provides a comparable measurement. According to the agency, the levelized cost of nuclear energy is $91 per megawatt, while natural gas costs $43. When you contrast that with the anticipated cost of energy, you can determine whether a specific energy source is economical.
However, these prices change based on how frequently a source generates energy. If a nuclear plant operates continuously, it will be the least expensive due to its high initial costs leading to higher productivity. Gas has smaller economies of scale due to its high variable fees and lower fixed costs. Renewable energy sources upset this dynamic because they depend on weather conditions and often require support from the rest of the power system. Nuclear becomes much more expensive when used only to cover periods of high demand.
As a result, wind turbines and solar panels are not as advantageous as they may initially seem. Their capacity to generate power is less important than that of a typical power plant if they cannot consistently produce energy when it is needed. It is essential to assess not only the cost of producing each megawatt-hour but also the value of that hour to make a meaningful comparison.
In an idealized market where prices fluctuate momentarily and geographically from node to node on the grid, the relative advantage of any power source would be simple to determine based on the “catch price.” This is the difference between an electric source’s market price and its average annual price. Prices may be higher when people most need electricity, increasing the attractiveness of sources that generate power during those times. Fortunately for renewable energy sources, this often occurs during the day or in cold, stormy weather. However, as more renewables enter the grid, the capture rate may decrease, leading to extremely low or even negative electricity prices during the summer.
When you consider these costs, as calculated by the EIA in America, most renewable energy sources appear less competitive. Solar’s $23 per MWh price is lower than the average wholesale price of $20 for electricity produced. Except for onshore wind, geothermal energy, and grid energy storage, solar remains competitive. However, offshore wind’s capture rate is around $30 compared to $100 per MWh; only nuclear and coal have lower ratios. Rising costs, higher interest rates, and disrupted supply chains have contributed to the struggles faced by offshore wind companies.
British Strength
Most power markets have shortcomings. Prices do not accurately reflect the true value of time and place, making them an imperfect indicator of society’s demand for each megawatt of electricity. Take Britain, for example. Retail energy prices are set in half-hour blocks, but there’s only one price for the entire nation. Despite the south of England having the highest electricity demand, Scotland has the majority of the country’s onshore wind capacity due to restrictions in England. This results in a situation where Scotland’s wind turbines may need to be turned off while gas power plants in England are activated due to grid capacity limitations.
These issues may ultimately be resolved by increasing the capacity to move and store electricity within the system. However, for now, comparing costs with the record rate would not provide an accurate picture of the comparative advantages of expanding wind power in Britain. The actual cost of solar energy is higher than it initially appears.