Higher Renewable Energy Costs, Uncertainty Show Need for Diverse Energy Sources: Lazard Report

Brief description of the dive:

• Average levelized energy costs for new U.S. wind and solar projects showed little change from 2023 to 2024 but rose significantly from 2021 due to higher interest rates and other cost pressures, the data showed. report released this month by Lazard.
• Lazard’s June 2024 Levelized Cost of Energy+ report found that the average cost of electricity (LCOE) for standalone onshore wind farms rose from $38/MWh in 2021 to $50/MWh in 2023 and 2024, while the average cost of electricity for standalone utility-scale PV plants rose from $36/MWh in 2021 to $60/MWh in 2023 and $61/MWh in 2024. The average cost of electricity for combined-cycle gas turbines — the next cheapest energy source examined in the report — rose from $60/MWh in 2021 to $70/MWh in 2023 and $76/MWh in 2024.
• The continued higher LCOE readings suggest that “large and well-capitalized companies that can leverage supply chain and other economies of scale… will continue to lead the buildout of new renewable energy assets,” the report said.

Diving Insights:

According to Lazard, the LCOE for new renewable energy projects with attached energy storage remains higher than for stand-alone renewable energy projects.

Lazard found that the LCOE for utility-scale PV deployments with attached storage ranged from $60 to $210/MWh in 2024, compared with $29 to $92/MWh for standalone utility-scale PV projects. The LCOE for onshore wind deployments with attached storage ranged from $45 to $133/MWh, compared with $27 to $73/MWh for standalone deployments.

These numbers indicate “the increasing price competitiveness of existing gas-fired power generation systems compared to newly constructed renewable energy technologies,” Lazard said.

According to the report, prices for energy storage systems have become more volatile recently. Decreasing battery cell costs and increasing economies of scale have helped lower Lazard’s estimates of low storage costs – but rising demand, skilled labor shortages and prevailing wage requirements are putting upward pressure on overall levelized costs, the report said.

Excluding federal tax subsidies, utility-scale stand-alone storage system average costs ranged from $222/MWh to $352/MWh for 1-hour discharge periods, $188/MWh to $322/MWh for 2-hour periods and $170/MWh to $296/MWh for 4-hour periods. Including subsidies, utility-scale stand-alone system average costs ranged from $156/MWh to $265/MWh for 1-hour periods, $141/MWh to $248/MWh for 2-hour periods and $124/MWh to $226/MWh for 4-hour periods, Lazard said.

Levelised costs for peak demand gas facilities borne by utilities and network operators we are increasingly looking for ways to replace from zero-emission energy storage facilities, according to the report, ranged from $110/MWh to $228/MWh.

“The results of our 2024 analysis once again confirm the continued need for a diversity of energy resources, including fossil fuels, given the intermittent nature of renewable energy and energy storage technologies currently available on the market,” Lazard Vice President of Investment Banking and Global Head Global Power, Energy & Infrastructure, George Bilicic, said in a statement.

However, the prospects for energy storage are promising thanks to the tax relief for investments resulting from the Inflation Reduction Act, which compensates up to 50% of project costs for eligible implementations.

“ITC, along with lower cell prices and technological improvements, is leading to

the growing trend to over-increase battery capacity to compensate for future degradation and service life considerations, which not only extends expected service life but also “increasing the residual value and overall profits of the project,” the report says.

The Lazard report also discusses the levelized cost of hydrogen, which has recently fallen as the industry matures. However, hydrogen produced in zero-emission electrolyzers remains more expensive than gas-based or renewable-based generation combined with storage, which, coupled with uncertainty about IRA 45V Tax Relief in the field of hydrogen production hinders market expansion – we read in the report.

Unsubsidized costs for green hydrogen ranged from $4.33/kg to $6.05/kg, while subsidized costs for green hydrogen ranged from $2.36/kg to $4.08/kg, according to the report. Unsubsidized costs for pink hydrogen, which is produced using electricity from nuclear generators, ranged from $3.07/kg to $4.33/kg. Subsidized costs for pink hydrogen ranged from $1.11/kg to $2.36/kg.

This Department of Energy Hydrogen Injection Program aims to reduce the cost of clean hydrogen to $1/kg by 2031, an 80% reduction compared to the 2021 average.