Markets

Tipping point just reached in renewables v fossil fired power generation will also change the generation equipment markets, including services, probably faster than expected

According to analysis by Bloomberg New Energy Finance competition between renewable (wind, solar) and fossil fuel power, in particular coal, is or already has reached a tipping point where renewables, especially wind, are more economical than coal even without subsidies in Germany and UK and are fast approaching that level in the US. Apart from the fall in prices and the cost of carbon the main reason is the impact of renewables on the capacity factor in fossil fuel fired plants.

The capacity factor indicates usage / utilization of plant over time and that is declining in coal and gas fired plants for the first time. Conventionally the capacity factor was considered to be essentially constant over time for plants providing base load power -the main/only reason for plant downtime being maintenance or failures. However as renewables have zero marginal generation costs, while fossil fuel plants must pay for fuel, it seems that incremental decisions are being made to shut down fossil plants in favor of renewables when a choice is to be made. This decline in utilization is of course increasing costs per produced kWh in coal and gas plants, which in turn negatively affects investment decisions for any additional capacity, while existing fossil capacity becomes even more uneconomical as renewable installed base grows (i.e. continuously).

According to BNEF the global average levelised cost of electricity (LCOE), for onshore wind reduced from US$ 85 per MWh in the first half of 2015, to $83 in H2, while that for crystalline silicon PV solar fell from $129 to $122. In the same period, the LCOE for coal-fired generation increased from $66 per MWh to $75 in the Americas, from $68 to $73 in Asia-Pacific, and from $82 to $105 in Europe. The LCOE for combined-cycle gas turbine generation rose from $76 to $82 in the Americas, from $85 to $93 in Asia-Pacific and from $103 to $118 in EMEA.

Combine this with statements by the head of the Bank of England of “unburnable fossil fuel reserves” and risks to investors and the news that Greenpeace will be bidding for the brown coal (lignite) fired business of Vattenfall in Germany, including the mines (to shut it down) and it might be that we are entering a virtuous cycle in favor of renewables while fossils are starved of investment, at least in Europe and North America -after all it’s difficult to compete with zero marginal cost.

Of course this will progressively, but rapidly, fundamentally alter the power generation landscape with vast implications for OEMs, engineering companies and service providers. Will be interesting to see new serious studies of market sizes as this unfolds, but for the moment one should look at stock prices of main generation equipment companies and service providers as a proxy. Finding ways to serve or expand business in the renewable industry will be a matter of survival for power plant service providers.

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