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Low-carbon electricity is becoming cost competitive

The levelised costs of electricity (LCOE) generation of low-carbon generation technologies are falling and are increasingly below the costs of conventional fossil fuel generation, finds the 2020 edition of the Projected Costs of Generating Electricity, jointly prepared by the OECD Nuclear Energy Agency (NEA) and the International Energy (IEA).

Despite differences in regional, national and local conditions, the report finds that low-carbon generation is overall becoming increasingly cost competitive.

“As has been demonstrated by the ongoing COVID-19 pandemic, access to electricity is key to advanced societies,” said NEA Director General William D. Magwood, IV. “Reliable and cost-effective electricity is the source of economic growth in both developed and developing countries that face the need to bring more people out of poverty, to provide healthcare and to educate future generations.”

Renewable energy costs have continued to decrease in recent years and the costs of wind and solar PV are now competitive with fossil fuel-based electricity generation in many countries. Onshore wind is expected to have, on average, the lowest levelised costs of electricity generation in 2025. Also, solar PV, if deployed at large scales and under favourable climatic conditions, can be very cost competitive. Additionally, offshore wind is experiencing a major cost decrease compared to the previous edition.

However, if countries are to meet their objectives under the 2015 Paris Agreement to reduce their greenhouse gas emissions, a significant contribution of nuclear power is indispensable. Indeed, electricity from nuclear power plants is also expected to have lower costs in the near future.

In particular, new nuclear power will remain the dispatchable low-carbon technology with the lowest expected costs in 2025. Only large hydro reservoirs can provide a similar contribution at comparable costs but remain highly dependent on the natural endowments of individual countries. Compared to fossil fuel-based generation, nuclear plants are expected to be more affordable than coal- red plants. While gas-based combined-cycle gas turbines (CCGTs) are competitive in some regions, their LCOE very much depend on the prices for natural gas and carbon emissions in individual regions. Electricity produced from nuclear long-term operation (LTO) by lifetime extension is highly competitive and remains not only the least cost option for low-carbon generation – when compared to building new power plants – but for all power generation across the board.

“The electricity sector is essential for the functioning of modern societies, as the Covid-19 crisis has highlighted yet again, and also has a crucial role to play in reducing global emissions,” said IEA Executive Director Fatih Birol. “Investing in affordable low-carbon electricity generation technologies supports economic growth but is also necessary if we are to put global emissions into structural decline.”

“All countries have the right and responsibility to do what they think is right for their citizens,” added NEA Director-General Magwood. “But decarbonisation commitments made as part of post- COVID-19 economic recovery must be approached with a full understanding of the costs and impacts of various technologies in the electricity system as a whole. From an economic and sustainable standpoint, it is crucial to have the right balance of variable renewables and dispatchable resources, such as nuclear and hydro, in order to enable a resilient long-term energy infrastructure.”

Source: OECD NEA.

At the same time, the increasing shares of variable renewables in the energy mix increase also the volatility of electricity prices. Sinking investment costs, for example for battery units, are already making short-term battery storage an economically attractive option in some niche applications.

Storage could become an attractive alternative to peaking units such as open-cycle gas turbines, thus increasing its importance in the coming years. Storage could complement variable renewable generation to improve the alignment of, for example, wind and solar PV generation with electricity demand. In future low-carbon systems, a mix of multiple flexibility options, for example, storage, demand flexibility and flexible low-carbon output from, for instance, nuclear and hydro plants is likely to provide minimal cost solutions.

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