For renewable energy to ever compete with fossil fuels, the industry has to be able to lower costs to below that of building fossil-fuel power plants. Subsidies or mandates can't drive widespread adoption; it's the cost curve that matters for wind and solar.
The good news is that renewable energy costs are coming down and becoming competitive with that of fossil fuels. Each year the investment bank Lazard puts together an analysis of the cost to build new electricity capacity from multiple energy sources and calculates the levelized cost of energy, or LCOE, an approximation for cost per kWh. What's interesting is that in recent years Lazard is making the case that renewables are becoming the cheapest energy option for new power plants.
What does it cost to build new power plants?
What Lazard does each year is analyze how much electricity would cost from a variety of energy sources across the country. In each case there's a range of costs depending on location and a variety of other factors, but the analysis gives us an idea of what an energy plant costs. Below is a chart of the estimated range of LCOE associated with coal and natural gas plants.
You can see that between 2009 and 2014 there's been little change in the LCOE of a natural gas or coal plant. This analysis doesn't include fuel sensitivity, but Lazard's report also covers the sensitivity of fuel costs, which can help or hurt the cost of energy.
Below you'll see a similar LCOE analysis done for wind and solar power plants. You can see that both are quickly lowering costs, with solar energy now beating the cost of wind in some instances.
It's important to note that the figures above are inclusive of federal renewable incentives, in part because the data for non-incentive LCOE doesn't exist for this analysis. But what's key here is to notice how quickly costs are falling and where they are today.
Why wind and solar will upend fossil fuels
Remember that I started this discussion with how wind and solar need to be cost-competitive to be able to grow long-term? What's incredible is that even today they're both cost-competitive compared to fossil fuels, based on Lazard's analysis. Below I've charted the LCOE of solar versus natural gas, and as you can see, it's becoming increasingly competitive.
Based on this analysis, coal plants are generally more expensive than natural gas, and wind is generally less costly than solar. So, wind beats coal hands down.
A flood of renewable energy is coming
As utilities and independent power producers replace aging coal plants with new energy sources, what they'll be looking for is the lowest cost of energy possible. That's increasingly wind and solar, which is why solar accounted for 53% of the new electricity generation built in the first half of this year, and wind was 14%.
For investors, this will lead to a flood of renewable energy demand, and the demand curve is just starting to increase. Fossil fuels, on the other hand, are seeing costs rise slowly because of regulation and increasingly costly resources.
Economics is now on the side of renewable energy, and there's nothing fossil fuels can do to stop that.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.