Energy Destinies – Part 4: Renewable Economics – At Cost

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Yves here. Today Satyajit Das takes a deep dive into the true, as opposed to marginal, cost of renewable energy. Needless to say, it’s difficult to do and careful analyses show wide ranges due among other things to high sensitivity to capital costs. But these analyses also show that renewables do not achieve grid parity. That means these greener energy sources will continue to require subsidies if consumers and businesses are to be spared from paying higher energy costs.

By Satyajit Das, a former banker and author of numerous works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives  (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011), A Banquet of Consequences RELOADED (2021) and Fortune’s Fool: Australia’s Choices (2022)

Abundant and cheap power is one of the foundations of modern civilisation and economies. Current changes in energy markets are perhaps the most significant for a long time. It has implications for society in the broadest sense. Energy Destinies is a multi-part series examining the role of energy, demand and supply dynamics, the shift to renewables, the transition, its relationship to emissions and possible pathways. Parts 1, 2 and 3 looked at patterns of demand and supply over time, renewable sources and energy storage. This part looks at economics of renewable energy.

The economics of renewable energy, notably solar power and wind power, are focused on ‘grid parity’ – a levelized cost of electricity (LCOE) equal to or less than the price of power from the electricity grid. New energy age gurus and their credulous media acolytes rely on this to advocate the replacement of fossil fuels with renewable energy.

The cost of renewable energy has definitely declined.

But any comparison is complicated by a number of factors:

  • As renewable energy requires minimal fuel input, there is a natural cost advantage.
  • Typical comparisons are based on electricity costs, which constitutes less than 20 percent of all energy used.
  • The effects of intermittency, the need for energy storage, energy density, impact on energy infrastructure, surface power density, plant longevity and full life costs are frequently not incorporated.
  • It emphasises one externality (emission reduction) while ignoring other externalities, such as material intensity and stranded assets. Even the emissions benefits remain ambiguous due to problems in accurately estimating the greenhouse gas output and energy needs across the full supply chain.
  • LCOE as a measure is sensitive to assumptions and subject to major limitations.
  • The impact of subsidies, which can be significant, need to be considered.

In practice, identifying the true full rather than marginal costs of renewables is complex.

Local Problems

LCOE measures the average net present cost of electricity generation for a generator over the life of a facility based on numerous assumptions. It is a financial metric comparing different forms of electricity using a consistent set of parameters. Generalised forms include levelized cost of heat, levelized cost of heating or levelized cost of thermal energy.

LCOE is calculated as the average revenue per unit of electricity generated required to recover the costs of constructing and operating a plant during its assumed financial life and duty cycle. It is the discounted costs over the lifetime of a plant divided by a discounted sum of the actual energy delivered. Inputs required include the investment, cost of capital, financing costs, fuel costs, fixed and variable operational and maintenance costs, utilisation rates, operating lives and decommissioning expenses. Taxes or subsidies can be incorporated. It is not uncommon to see one or other input excluded.

As in most large-scale projects, accurate specification of the required elements is not easy. Key issues include:

  • Capital costs – the risk of cost overruns is ever present with some projects exceeding budgets by large amounts. This affects the cost that must be recovered.
  • Cost of capital and financing costs – the calculation is affected by the amount to be financed, capital structure (debt versus equity) and assumed cost of capital. In practice, there is wide variations in capital structure between different owners. Availability of public finance and subsidies can distort the costs and LCOE estimates. Lower cost of capital favour capital intensive, low operating cost methods such as nuclear energy. The reverse also holds. The sensitivity to cost of capital is in the order of 6-10 percent. While LCOE may differ, it does not typically change the ranking of technologies.
  • Operating costs – the major variable is fuel costs. While minimal for many renewables, fluctuations in energy prices can significantly affect LCOE estimates for traditional sources. For renewables with a short history, accurate operating and maintenance costs are difficult to derive.
  • Utilisation rates –in practice, these have proved highly variable and difficult to estimate especially over long periods due to the effect of weather on solar and wind projects. The US Energy Information Administration , for example, assumes effective utilisation rates for solar and wind of 29 percent and 43 percent respectively. Actual data suggests realised capacity factors around 22 percent and 33 percent. Lower utilisation over a long period can increase LCOEs dramatically. Wind-farm capacity factors have improved slowly but this gain has required reducing the number of turbines in a given area increasing land use.
  • Operating lives – the operating lives for existing, well-established technologies are well understood. This is not the case for newer renewable energy sources. In addition, operating conditions have greater impact for some technologies than others. Operational lives for fossil fuel and nuclear generating plants, typically 60-80 years, are typically longer than those for wind and solar. Shorter life spans necessitate constant rebuilding of wind turbines and solar generation and disposal of waste.
  • Decommissioning expenses – the cost of shutting down a plant, rehabilitating sites and disposal of operating and other waste is frequently overlooked. They can be potentially extremely large for nuclear energy running into tens of billions and covering decades. With few if any plants having been fully decommissioned as opposed to having been shut down, such expenses are difficult to quantify leaving a large open-ended liability.

The regulatory framework is important. Changes in laws and standards can potentially have a major impact on LCOE. Environmental regulations, consumer protection rules, tort liability and interference in market pricing of electricity have the potential to affect LCOEs.

The deficiencies of LCOE have led to alternative measures being proposed.

Levelized avoided cost of energy (LACE) seeks to incorporate the economic value that the source provides to the grid, such as dispatchability within the existing energy mix. The US Energy Information Administration recommends that levelized costs of non-dispatchable sources such as wind or solar be compared to LACE – the avoided costs from other sources divided by the annual yearly output of the non-dispatchable source. This provides a useful comparison against fossil fuels or nuclear recognising the cost of backup dispatchable sources for intermittent fluctuating power sources. A ratio of LACE to LCOE, referred to as the value-cost ratio, greater than 1 renders a project economically feasible.

The International Energy Agency has suggested value-adjusted levelized cost of electricity

(VALCOE) which includes the cost of the electricity and the value to the electricity system e.g. the ability to meet peak demand.

No measure is perfect and suitable for every context or location.

LCOE – Estimates

Current LCOE estimates are as follows:

A striking element is the wide ranges. It also does not show consistent grid parity.

There is significant sensitivity to fuel and capital costs.

However, these costs estimates are incomplete excluding important elements.

Impact of Subsidies

Subsidies for renewable energy are common, varying between technologies, countries and regions. For example, some countries seek to encourage renewable investment by giving them preference in terms of projects or grid dispatch. Other incentives include tax benefits or favourable financing terms such as lower borrowing cost or government co-investment.

The level of government support for different energy technologies has changed over time. Pre-pandemic, there was a steady shift from fossil fuels and nuclear to renewables, storage and improved energy efficiency.

The pandemic led to a shift to subsidies for fossil fuels. Fossil fuel consumption subsidies rose to $532 billion in 2021 (a 20 percent increase on 2019 levels). In 2022, they doubled again to all-time record of $1 trillion. Some of this was caused by rebounding fossil fuel prices. Many of these subsidies are concentrated in developing economies, including more than half in fossil-fuel exporting countries. There was an additional $500 billion of extra government spending to reduce energy bills, primarily in advanced economies (Europe alone expended $350 billion) which flowed in part into fossil fuels. These transfer payments lowered the incentives for efficient energy consumption or switching to cleaner fuels.

There is nothing inherently objectionable about subsidies. Energy, like other industries, have frequently been supported to further broader policy objectives, such as promoting new technology or nascent industries, assuring supply security, stimulating particular sectors or segments of the population and, most recently, environmental benefits. Support may be desirable to overcome market imperfections.

However, energy subsidies are inefficient and create side-effects. Most of the benefits accrue to wealthier households, who are larger consumers of power. They encourage higher consumption and reduce efforts to reduce energy intensity. Energy subsidies also distort allocation of capital and sometimes encourage unsustainable industries.

It creates several problems:

  • The true economics of renewables become difficult to determine.
  • Assumptions about continuation or level of support must be made. With government finances under growing pressure, their ability to provide subsidies may reduce over time affecting renewable LCOEs.


LCOE does not take into account externalities, that is, a financial or non-financial cost or benefit of an activity experienced by an unrelated third party.

The enthusiasm for renewables comes from a major positive externality, namely its low carbon emissions. However, this is contestable. Carbon reduction may be overstated.

Renewable energy substitutes material intensity for emissions. The required machinery – solar panels, turbines, dams, batteries, transformers, new transmission lines – will require metals and minerals on scales unprecedented in human history. It will paradoxically require vast amounts of energy fuelled primarily by fossil fuels. There are problems around the disposal of waste, such as scrapped solar panels, which alone could grow to 200 million tons globally by 2050.

The estimated reductions of carbon emissions do not fully incorporate the emissions from the complete supply chain and life cycle of renewable sources. For example, emissions from bulk energy storage required where renewables are a significant part of the grid contribute ‘non-trivial’ emissions. These may reduce or eliminate the positive externality of renewables depending on location, storage operation mode, and assumptions regarding carbon intensity. Only when these are included can the benefit or cost of different technologies be understood.

Renewable energy sources also exhibit certain negative externalities:

  • Intermittency and dispatchability – renewable energy is intermittent and generally not dispatchable, that is, it cannot come online, go offline, or ramp up or down, quickly to meet rapid changes in demand. Meeting demand without curtailment (shutdowns, load shedding or brownouts) requires large scale energy storage or backup generation capacity. LCOE does not typically incorporate these costs, which are difficult to accurately estimate. Measures – the levelized cost of storage (LCOS) and LACE – attempt to capture these issues but can be highly subjective.
  • Characteristics of renewable energy sources –renewable energy is highly focused on electricity generation. It has significantly lower energy density and surface power density. LCOE generally do not incorporate the additional costs of storage in batteries or transforming the electricity generated into fuel, such as hydrogen, for use in certain applications.
  • Infrastructure requirements – renewables require major re-configuration of infrastructure. The electricity grid would need to be altered and major investment in long-distance transmission capabilities made. These costs are generally not considered in LCOE calculations.
  • Stranded asset costs – higher proportions of renewable energy would ‘strand’, that is make redundant, existing generation assets, such as fossil fuelled generation plants and supporting mines and gas fields. This has financial consequences beyond write-offs of undepreciated asset values. It jeopardises the ability of firms with stranded assets to meet their obligations. The amounts involved are substantial. The $25 trillion of global fossil fuel assets estimated as at 2036, in a business-as-usual scenario, might fall in value to $14 trillion as a result of net zero emission policies and the switch to renewables. Institutional investors’ holdings of bonds and shares in fossil fuel companies total $3 trillion. The world’s 60 biggest banks’ direct exposure to fossil fuel assets is estimated at $1.35 trillion. Banks have financed fossil fuel companies to the tune of $4.6 trillion just since the Paris Agreement was signed in 2016. These losses would fall on investors with significant impact on financial stability and savings. The cost of stranded assets is generally excluded from LCOE estimates. Repurposing existing thermal electric assets either by changing fuels to biomass, energy storage or managing grid performance may ameliorate stranded asset losses.

Other negative externalities include ecological changes and effects on biodiversity. Large solar arrays and wind farms fundamentally alter the environment and threaten eco-systems. In the US special permits are granted for the killing of endangered wildlife threatened by turbines.

Cost Evolution

LCOE is, at best, a convenient approximation of the cost of different generating technologies. It has shortcomings especially as its focuses on the hardware in isolation without fully incorporating many real-world system costs and externalities essential to modern energy supply systems.  Irrespective of measurement issues, renewable energy costs have declined over time. Actual falls in LCOE since 2009 are significant.

The falls are driven by scientific progress, improvements in technology and scale and experience curve effect. LCOEs for a given generator tends to be inversely proportional to its capacity. Increasingly larger solar and wind plants have brought down costs.

Substantial further cost declines for the main renewable energy sources are projected.

Forecasts for further rapid declines in renewable energy and storage costs, based on the last three decades which saw a near 10 times fall, may be overly optimistic. The law of diminishing returns which applies to most physical systems and technologies will reduce incremental gains as has been the case in other areas, such as semi-conductors.

A major factor will be efficiency limits determined by the laws of physics. Solar farms are limited by the energy arriving from the sun. Turbines cannot extract more energy than provided by wind kinetics and existing battery types are limited by chemistry.

Energy conversion efficiency is not unrestricted. Just as the Carnot Efficiency Theorem limits the conversion of fuel-to-power to around 80 percent in ideal conditions, solar and wind plants face boundaries. The Shockley-Queisser Limit states that around 34 percent of incoming photons can be converted to electrical energy. The Betz Theoremlimits turbine capture of wind energy to around 60 percent. In practice, these levels are difficult to attain due to engineering and cost constraints. For example, the best internal combustion engines after centuries of development are around 50 to 60 percent efficient with most in common use falling well short of that level.

Solar and wind are already relatively efficient with current focus on incremental engineering improvements – larger turbines and bigger solar arrays.  One reason for the slower rate of future improvements in renewables is that many of the underlying raw materials for solar (silicon, copper, and glass) and wind (concrete, steel, copper and fiberglass) are already mass produced efficiently with limited scope for further cost reductions.

Where electricity must be stored or converted into hydrogen fuel, further losses are likely. Production of hydrogen gas via an electrolyser can lose 30 percent or more of the

embedded energy. A further 10-15 percent would be lost to compress or liquefy the gas for transportation. Another 30 percent may be lost in the process of generating an electric current in the fuel cell. It is possible that 70 percent of the electricity used to power the system is lost.

In absence of major scientific or manufacturing breakthroughs, further large cost improvements are unlikely in the foreseeable future.

Renewable Hope

Despite the hyperbole of advocates, renewables are currently a significant but modest component of global energy sources. Between 2011 to 2021, renewable energy increased from 20 percent to 28 percent of global electricity supply. It’s share of total global energy use is much smaller (around 10 percent). Use of fossil energy shrank from 68 percent to 62 percent, and nuclear from 12 percent to 10 percent. Amongst renewables, hydropower decreased from 16 percent to 15 percent, solar and wind energy increased from 2 percent to 10 percent. Biomass and geothermal energy grew from 2 percent to 3 percent.

Forecasts for adoption of renewable energy are ambitious.

The case for renewable energy rests on the limited remaining reserves of fossil fuels and lower emissions. However, intermittency, low energy and surface power density, and locational challenges mean that were a significant share of energy to be from renewable sources there would be a need for bulk energy storage and a major re-configuration of the energy system. The fact it can only generate electricity which makes up a small part of energy consumption and the need for conversion into usable fuels for high power or transportation uses further constrains applications.

Despite claims to the contrary, costs which have improved dramatically over time may not be at grid parity as LCOEs are sensitive to assumptions, financing terms, technology, location and subsidies. In particular, the lack of proper accounting for externalities means comparisons are frequently spurious and vehicles for partisan lobbying.

It means that the ability of renewables to supplant fossil fuel for powering the modern global economy at an acceptable cost is far from established. In the words of American tattoo artist Sailor Jerry: “Good work ain’t cheap, cheap work ain’t good”.

© 2023 Satyajit Das All Rights Reserved


A version of this piece was published in the New Indian Express

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  1. upstater

    This is a great series, but it would be helpful if previous articles in the series had links at the top or bottom. I’ve passed them on individually.

    1. Yves Smith Post author

      Thanks for sharing your positive reaction and circulating Das’ work.

      The first para in the post proper (by Das after his bio) does have links to all the earlier pieces.

  2. John Steinbach

    Thank you Das for your extraordinarily valuable to the discussion about energy futures. I think the most important part of the current paper is your observation that meeting forecasted goals for renewable energy implementation will require “unprecedented” increase in use of fossil fuels and other non-renewable resources. All this would have to occur while maintaining the current system.

    It is clear that in a best case scenario renewables can only supplement fossil fuels as an energy source. The implication is that in the near future truly radical changes in lifestyle are inevitable, especially in the 5 Eyes nations, either through planning or collapse.

    1. Kouros

      At work I am involved in a project of moving funding from acute care to prevention and I used exactly this comparison, that as with greening the energy infrastructure, we’ll have to increase the consumption of traditional energy production while we bild the new one, same in health, we’ll have to continue funding acute care at the needed levels and increase the spending on prevention, until the payoff starts showing some results…

  3. NoFreeWill

    “if consumers and businesses are to be spared from paying higher energy costs.”

    Spare consumers, force businesses to pay the real costs of their industrial activity not destroying human habitable Earth.

    “Other negative externalities include ecological changes and effects on biodiversity. Large solar arrays and wind farms fundamentally alter the environment and threaten eco-systems. In the US special permits are granted for the killing of endangered wildlife threatened by turbines.” lol

    The negative externalities of continued use of fossil fuels include the destruction of human civilization and possible human extinction…. so we’re really comparing an infinite cost with a finite one. Which do you think we should pay?

    Yes the transformation costs are enormous, but even just the monetary costs of climate change directly through disasters (not counting loss of human life, destruction of nature, misery) are already massive and estimated to be in the 100s/1000s of trillions in the future. The Pakistani flood last year cost $30 Billion in economic damages, how much do you think Florida and Bangladesh being totally underwater permanently will “cost”? So we should absolutely be spending on a war footing to fund research and development as well as installation, storage, etc. at a massive scale. We are not because the fossil fuel industry owns the world and politics in general is totally captured. This is a problem markets, prices, and capitalism cannot solve.

    Again with all the assumptions that business as usual can and must continue, Das does himself no favors. He does demonstrate that green capitalism is not possible, but that should already be obvious, and he doesn’t argue for actual alternatives, merely against renewables.

    Here are more detailed and in my opinion more coherent arguments in the same vein that do point out also ways we can go back to a lower form of energy use and still maintain quite good standard of living. Speaking of renewables the whole site runs on a solar array.

    1. NoFreeWill

      I forgot to mention massive subsidies to fossil fuel companies directly through just cash and indirectly through all the infrastructure we build to accomadate them, some of those costs are in the past but that doesn’t mean they don’t count. Road maintenance, traffic fatalities, smog, etc. all have health costs in addition to financial ones.

  4. TomDority

    An addition to fossil fuels cost should include the trillions spent for military preservation of US access to the bountiful resources this planet provides gratis – sans the economic exoskeleton man has imposed and being used to support /// wel I’ll not go there.
    Anyway – the more avenues of energy conversion and use – combined with conservation or quantitatively less wasted use on – gotta have marketing and consumerism employed to get turn over rates of production to support an overhead to the asset inflators – gotta have the latest and greatest despite trashing and wasting the embedded energy in a perfectly usefull product you have or selling products that are way overpowered for pupose etc. — like trading a kid a shinny new nickel for that dirty crumpled piece of paper with the picture of some unknown and numbers on it like yucky math.

  5. Ben Page

    My view of this research is it seems to assume that the transmission to renewables (which we have no choice about) happens in isolation. One example is that it will use up carbon because of the increased need for equipment. But that means you reduce production of equipment elsewhere – reduce the production of cars – to do that change the nature of work – rather than drive to the office for the corporation making junk that destroys the planet, you instead educate the community to make work local, growing native species, which uses mixed crops rather than chemicals, small neighbourhood industry to recycle and repair rather than throw away. There are endless social innovations that could lead to happier, healthier more fulfilled humans but massively reduce our needless production of stuff – this offsetting should give space for the mass production of renewable technology – and of course unexpected innovations will be thrown up in the future solving current issues.

    This of course will destroy the grotesque harmful current system and would require democratically empowered communities whose decisions are led by evidence and facts not oligarch media myths.

    1. some guy

      An ” artisandustrial” revolution, if people think that is a memorable word for it.

  6. Susan the other

    At this moment in time when we have looked at the costs and the subsidies and all the inefficiencies of each option, we also need to look at old ideas like photosynthesis, nuclear fusion, natural cycles, extreme recycling, human points of failure, and radical changes in lifestyle. Otherwise, just like Fukushima, we are going to run out of space.

  7. Freethinker

    And still the mainstream media/propaganda outlets in the West bleat that we are not having enough kids & this is somehow a disaster for our societies …..because they know that the masses are too lazy or tired to think for themselves, so believe whatever they’re told from authority figures. Yet without energy, digital ‘money’ disappears & the paper version is just art. No pumped water, food, heating, transport etc., so the carrying capacity of our land eventually becomes reduced to that of human/livestock labour & photosynthesis + primitive renewables like waterwheels for milling grain. (medieval style) A large population in this context is the real disaster …..& in the steps down to this reduced standard of living, while the remaining fossil fuels peter out, wars spark for the dwindling resources. The current population already don’t have enough jobs today, so who knows for the reduced number of children to come as technology is increasingly rendered unusable without power. If this idea seems crazy, look at countries right now where this scenario has already happened, like Cuba & other failed states or the swathe of our planet where industrialisation never really happened and energy is mostly based on hydro & wood.

  8. Dick Swenson

    I assume that the data presentd is accurate. I presume that the values are reasonable. I presume that very little that is relevant has been missed.

    How can I, an individual, make a choice that will not in some way be unreasonable from another point of view? Or have an opinion that is not refutable?

    Life is just too bloody complicated. My vote is to rduce costs for the users and make producers expose their costs and profits. What else can I do?

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