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What is happening to energy costs?

March 9, 2016

A recent article in Science Direct looks at a range of 53 technologies and find that their costs follow a generalized version of Moore’s law, i.e. costs tend to drop exponentially, at different rates that depend on the technology.

The authors formulate Moore’s law as a correlated geometric random walk with drift, and apply it to historical data on 53 technologies. They derive a closed form expression approximating the distribution of forecast errors as a function of time. Based on hind-casting experiments the authors show that this works well, making it possible to collapse the forecast errors for many different technologies at different time horizons onto the same universal distribution. This is valuable because it allows forecasts for any given technology with a clear understanding of the quality of the forecasts.

The practical demonstration which caught our eye was the forecasts at different time horizons for solar photovoltaic modules, which are used to estimate the probability that a given technology will outperform another technology at a given point in the future.

The prediction says that it is likely that solar PV modules will continue to drop in cost at the roughly 10% rate that they have in the past. A forecast for the full cost of solar PV electricity requires predicting the balance of system costs, for which there is a lack of consistent historical data, and unlike module costs, the full cost depends on factors such as insulation, interest rates and local installation costs. As solar PV grows to be a significant portion of the energy supply the cost of storage will become very important.

Current levelized costs for solar PV power plants in 2013 were as low as 0.078–0.142 Euro/kWh (0.09–0.16$) in Germany and in 2014 solar PV reached a new record low with an accepted bid of $0.06/kWh for a plant in Dubai. In  “Clean Disruption of Energy and Transportation” by Tony Seba, he forecasts a tariff of 3.4 US cents (2p) /KWH for solar power in California by 2020.  My current tariff is 14p/KWH.

It is useful to compare this to two competitors, coal-fired electricity and nuclear power.

An analysis of coal-fired electricity, breaking down costs into their components and examining each of the trends separately shows that while coal plant costs (which are currently roughly 40% of total cost) dropped historically, this trend reversed circa 1980. Even if the recent trend reverses and plant construction cost drops dramatically in the future, the cost of coal is likely to eventually dominate the total cost of coal-fired electricity. As mentioned before, this is because the historical cost of coal is consistent with a random walk without drift, and currently fuel is about 40% of total costs. If coal remains constant in cost (except for random fluctuations up or down) then this places a hard bound on how much the total cost of coal-fired electricity can decrease. Since typical plants have efficiencies the order of 1/3 there is not much room for making the burning of coal more efficient – even a spectacular efficiency improvement to 2/3 of the theoretical limit is only an improvement of a factor of two, corresponding to the average progress PV modules make in about 7.5 years. Similar arguments apply to oil and natural gas.

Because historical nuclear power costs have tended to increase, not just in the US but worldwide, even a forecast that they will remain constant seems optimistic. The projected cost of $0.14/kWh in 2023 for the Hinkley Point nuclear reactor, it appears that the two technologies already have roughly equal costs, though of course a direct comparison is difficult due to factors such as intermittency, waste disposal, insurance costs, etc.

As a final note, skeptics have claimed that solar PV cannot be ramped up quickly enough to play a significant role in combating global warming. A simple trend extrapolation of the growth of solar energy (PV and solar thermal) suggests that it could represent 20% of the energy consumption by 2027.this is significantly higher than the “hi-Ren” (high renewable) scenario of the International Energy Agency, which suggests that PV will generate merely 16% of total electricity in 2050, i.e. taking 25 years longer than the historical trend.

The authors conclude that the example of solar PV modules illustrates that differences in the improvement rate of competing technologies can be dramatic, and suggest that, given the urgency of limiting greenhouse gas emissions, it is fortuitous that a green technology also happens to have such a rapid improvement rate, and is likely to eventually surpass its competition within 10-20 years.

Gill Ringland, SAMI Fellow and CEO.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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