Comparing the costs of renewable and conventional energy sources

21 Apr, 2015

Print this article Font size -16+

You can’t get too far in a discussion about the nation’s electric power sector without running into the question of costs.

How do renewable sources, such as solar and wind, stack up against fossil fuels, such as coal and natural gas?

How much will it cost utilities and ratepayers to build—and operate—a new power plant?

To illustrate how the various energy technologies compare, we’ve created a set of interactive dashboards that summarize how much it costs to generate power. The data show that utility-scale solar and wind installations are now competitive with conventional coal- and gas-fired power plants. Moreover, wind and solar costs are projected to steeply decline in the years ahead.

Before delving into the data, it’s worth noting that the number of dollars it takes to build and operate a power plant is a somewhat narrow definition of costs. It doesn’t, for example, include what economists call externalities, such as the cost of air pollution or climate change impacts. With a broader definition of costs, low-carbon technologies would perform even better than fossil fuels.

Components of levelized cost of energy

Our dashboards present data on what’s known as the levelized cost of energy. In essence, this analysis offers an apples-to-apples comparison of the costs of financing, building, operating, and maintaining a power plant. The values are expressed in dollars per megawatt-hour.

One of the most widely used levelized cost studies is conducted by Lazard, an international financial advisory and asset management firm. Their latest version of the study, version 8, was released in late 2014. The graphic below summarizes the cost components of 16 different energy technologies evaluated by Lazard: 10 of them are alternative (which includes mainly low-carbon, renewable technologies), and six are conventional (which includes fossil fuel sources and nuclear).