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This is How Wind and Solar Energy Will Crush Fossil Fuels

By Travis Hoium - Jan 9, 2018 at 8:17AM

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Wind and solar energy can't make fossil fuels obsolete by themselves, but they can with the help of cheap energy storage.

Wind and solar energy have long been marginal players compared to fossil fuels, but that's beginning to change. In the last few years the costs to build both wind and solar power plants have fallen far enough that on a per unit of energy basis they can compete with any fossil fuel. And they beat oil, coal, and nuclear in most locations.

Newly leaked bids for energy contracts for Xcel Energy's (XEL -0.54%) 2017 All-Source Solicitation show that wind and solar are not only competitive, they're dominant when combined with energy storage. Adding storage to renewable energy plants allows the utility to control when energy is dispatched to the grid, reducing or eliminating the variability that's inherent with wind and solar energy. This is a game-changer for utilities, renewable energy companies, and investors worldwide, and could begin to spell the end for fossil fuels. 

Solar farm with green mountains in the background.

Image source: Getty Images.

The shocking Colorado bids

Shayle Kann, advisor at Wood Mackenzie's Greentech Media, broke the news of Colorado's ultra-low energy bids. Below is his tweet with the table of bids. 

A few numbers pop out from this table. One is that a whopping 17.38 GW of wind projects were bid at a median price of 1.81 cents per kWh. More shocking is that wind with battery storage was just 2.10 cents per kWh, which would beat every fossil fuel option. 

On the solar side, the 13.44 GW of solar bids is a huge number, and bids of 2.95 cents per kWh would be among the lowest bids ever in the U.S. But 3.6 cents per kWh for solar plus storage is incredible given the fact that it'll beat most energy sources besides wind. 

What we don't know about these bids right now is the size of the storage component, which will impact cost and the flexibility of the asset. But the fact that wind and solar can be combined with energy storage for 2.1 cents/kWh and 3.6 cents/kWh respectively is astonishing because it makes fossil fuels obsolete as a form of new electricity generation. 

Wind, solar, and energy storage estimates can't keep up

Estimates of the cost of wind, solar, and energy storage have been falling fast, but maybe not fast enough. The latest Levelized Cost of Energy Analysis by investment bank Lazard estimates that the cost of unsubsidized solar is 4.3-5.3 cents per kWh, and wind is 3.0-6.0 cents per kWh. Solar plus storage was estimated to be 8.2 cents per kWh (assuming a 400 MWh battery for a 200 MW solar system). 

Based on these recent bids the market is already well below that, at least for future bids. The Xcel projects aren't due to be online until 2023, and we don't know final details of storage size or what the low-cost bids are -- but still you can see the rapid cost reductions taking place, and just how competitive solar and wind plus storage are today.

Who wins in wind, solar, and energy storage

There are two companies already building solar plus storage projects in the U.S. Tesla (TSLA -6.80%) is a leading energy storage company, and its SolarCity subsidiary has built solar plus storage projects in Hawaii. SunPower (SPWR -1.20%) is building a solar plus storage project in Hawaii, and is a leader in commercial solar plus storage systems.

Utilities could also be big beneficiaries of wind and solar plus storage. For example, AES (AES -2.55%) is the utility developing the power plant using SunPower's solar panels and energy storage system. It'll generate a return for decades on the development, something other utilities can replicate in their territories. 

The death of fossil fuels

Energy storage has always been the last technology advance needed to end the debate around wind or solar's inability to be the primary energy sources for the grid. As the cost of storage comes down and states like Hawaii prove you can make a goal of a 100% renewable energy grid a reality, the future for renewables gets brighter -- and for fossil fuels, it gets dimmer. 

Economics are what drives energy investment, and Colorado's bids show that the economics of wind, solar, and energy storage can beat fossil fuels today. Investors in all forms of energy should take notice. 

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Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
$709.81 (-6.80%) $-51.80
SunPower Corporation Stock Quote
SunPower Corporation
$15.71 (-1.20%) $0.19
The AES Corporation Stock Quote
The AES Corporation
$20.23 (-2.55%) $0.53
Xcel Energy Inc. Stock Quote
Xcel Energy Inc.
$74.89 (-0.54%) $0.41

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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