Renewable Energy Costs Have Dropped Much Faster Than Expected, But There’s A Catch

Amid the energy crises that have rippled out from beyond the Russian invasion of Ukraine, there’s a spot of good news: the costs of renewable energy continue to decline dramatically.

Prices of large-scale solar photovoltaics decreased by 89% between 2009 and 2019, according to the latest edition of the UN’s Human Development Report (which makes for largely bleak reading otherwise). Similarly, lithium-ion batteries are 97% cheaper than they were in 1991.

These precipitous falls in prices were far different to what was expected. As the Human Development Report notes, “Contrary to the projected average annual cost reduction of 2.6 percent between 2010 and 2020, solar photovoltaics costs declined by 15 percent a year over the same period.”

The naysayers continue to be proven wrong in 2022. According to the International Energy Agency, “Renewables’ growth so far this year is much faster than initially expected, driven by strong policy support in China, the European Union and Latin America.”

Notably missing from that list is the US. Yet the expansion of renewable capacity and lowering of costs are likely to be boosted there by the recently passed Inflation Reduction Act, which is targeting major decarbonization in the power sector.

Why was renewable energy so expensive initially, and why were estimates of future costs so pessimistic? To some extent, conventional economic tools just weren’t a match for the trajectory of renewables, according to the Economics of Energy Innovation Systems Transition (EEIST) research project.

As described in the EEIST report The New Economics of Innovation and Transition: Evaluating Opportunities and Risk, “the policies that played the most critical role were neither public R&D, nor not the instruments that economists typically recommend as the ‘most efficient’. Instead, they were policies that targeted resources directly at the deployment of these technologies – through subsidies, cheap finance and public procurement…In general, these policies were implemented despite, not because of, the predominant economic analysis and advice.”

Michael Grubb, a co-author of this report and a professor of energy and climate change at University College London, says that early on, renewable energy was relatively expensive due to a combination of early-stage technology, a lack of scale, limited supply chains, barriers to efficient finance, and organizational obstacles.

The reasons for the steep drop in prices were also multifaceted: “sustained government policies, maturation and internationalization have brought the cost down hugely over the past decade,” Grubb explains.

Scale-up brought with it an element of social contagion, among governments and households alike. When it came to updating energy systems, a number of countries copied each other, while many residents did the same. That kind of exponential growth can be hard to project.

The picture isn’t all rosy, though. The International Energy Agency, which is predicting a plateau in growth of renewables next year, notes that the situation is volatile. And even with the decarbonization push of the Inflation Reduction Act, the US is off-target to reach the goal of a 50% reduction in greenhouse gas emissions by 2030 (based on 2005 levels).

And just as traditional economics was out-of-touch with the pace of the expanding renewables market, existing energy pricing systems don’t always accurately reflect the unprecedentedly low costs of actually producing renewables.

In the UK, residents have been paying far more for their renewable energy than the actual cost of producing it, due to an antiquated wholesale pricing system where, Grubb has written, “the most expensive generator sets the price.” Specifically, the price of natural gas is generally used as a reference point for the entire energy market – despite the increasing popularity and decreasing costs of renewable energy, and the fact that wind and solar energy costs less than a third of what gas-fired power does in the UK.

This kind of wholesale pricing exists in the EU, some US states, and other places as well. So short-term assistance recently announced by the UK government to tackle the high price of household energy doesn’t address more fundamental problems with energy pricing, Grubb believes.

How could the pricing system better reflect the actual mix of energy, and simultaneously bring down prices for consumers? Possible alternatives include location-based prices and average prices.

What Grubb and his colleagues have been proposing to make the pricing system more fit-for-purpose is a “green power pool.” Essentially, this would be split off from the traditional energy market based on fossil fuels, with prices set based on the actual investment costs of renewable energy generators. Grubb says that while a green power pool has yet to be introduced anywhere, “the basic principles of an electricity pool arrangement were how we ran the UK electricity system overall in the 1990s.”

With ordinary people staring down skyrocketing energy bills, and with disaster after disaster showing the devastating impacts of fossil fuel dependence, some sort of reform of outdated energy pricing is clearly overdue.