For the last two decades, the costs of wind and solar energy have been dropping like a rock, driving adoption around the world. In the early 2000s, neither energy source was competitive with fossil fuel power generators without massive subsidies, something that's changed today.
But there's no denying that the pace of cost reductions in renewable energy is falling. That might be a sign that the industry is maturing, which could be good long-term.
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Wind and solar energy cost trajectory
The charts below are from Lazard's Levelized Cost of Energy Analysis-Version 11.0, published in November 2017. The first shows the cost per MWh of wind energy between 2009 and 2017.
Source: Lazard's Levelized Cost of Energy Analysis-Version 11.0.
The levelized cost of energy has fallen 67%, but the low-cost solution has been stuck around 3 cents per kWh for the last three years.
Solar costs are coming down slowly in the utility sector, but are falling less than 10% per year. In residential solar, the high end of the cost range hasn't changed much since 2012, and the average cost has only dropped a few percentage points in the past three years.
Source: Lazard's Levelized Cost of Energy Analysis-Version 11.0.
The trends actually show a level of maturity for wind and solar systems. The easy cost reductions have been exploited, and now these more mature energy sources have to compete on their own merits against fossil fuels.
Wind and solar win against other sources of energy
Falling costs are good for renewables, but costs don't really need to fall to be competitive. Another part of Lazard's report shows that wind and solar energy are actually lower cost than coal, nuclear, diesel, and in some cases natural gas power plants. As a result, a slower pace of cost reductions may not matter for the wind and solar energy industries. They've already won the most important factor: cost per MWh.
What may change adoption in the future is energy storage, which can make wind and solar energy 24/7 energy sources. According to Lazard, solar plus storage is already competitive at 8.2 cents per kWh ($82 per MWh) for utility-scale projects, so a future with even more renewable energy may not be far off.
Technology will become more important
As cost reductions become harder to come by, we'll see technology play a bigger role in wind and solar energy. Squeezing even a few extra kWh per year from a solar panel or wind turbine will be key for manufacturers.
First Solar (FSLR 1.04%) and SunPower (SPWR +0.00%) are leaders in solar technology, making the highest performing solar panels for utility-scale and small-scale projects respectively. Both are investing in technology like higher voltage solar panels, integrated micro-inverters, bifacial solar panels, higher efficiency solar panels, and better tracking technology. These investments are intended to lower cost per kWh by squeezing more out of each installation, even if the cost per watt to install a system is higher.
Similar investments are taking place in wind. I recently highlighted that wind energy is booming in the U.S. largely because manufacturers are squeezing more power from each wind turbine, not just lowering the cost of each turbine. Those investments will continue, and the next phase of growth will likely be offshore wind projects.
What's clear for investors is that there are tailwinds behind wind energy and solar energy, and all fossil fuel related businesses need to be concerned about the disruptive effect on their businesses.
