Wind and solar energy have come a long way in the last decade and are now competitive with fossil fuels in a large percentage of the world. An analysis by investment bank Lazard estimates that as of last fall, the cost to build an industry-leading solar plant ($50 to $60 per MWh) or wind farm ($32 to $77 per MWh) was less than building a gas combined cycle ($52 to $78 per MWH) or coal plant ($65 to $150 per MWh). And since last fall, the cost of wind and solar plants have fallen even further, now approaching $30 per MWh in competitive bids. You may think this dynamic would lead to a windfall of projects for U.S. developers like SunPower (NASDAQ: SPWR), First Solar (NASDAQ: FSLR), and the new solar developments of theTesla Motors (NASDAQ: TSLA)-SolarCity combo. But they're all struggling to find growth, and 2017 looks like a down year for most of the industry.
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The low cost of renewable energy is great, and if a utility is building a new plant, wind and solar would likely be an economical choice. But the key word in that sentence is "new." Most power plants in the U.S. aren't new, so renewable energy is competing against coal plants built in the 1950s, and consumption isn't growing, so there's no need for more generation. In developing countries in Latin America or Asia, the dynamic is different. They need all the energy they can get, and renewables are competitive. And that's why they'll likely dominate the U.S. in renewable energy over the next decade.
Image source: Getty Images.
Why renewables have a hard time competing on cost alone
Wind and solar energy is competitive with natural gas, coal, or nuclear when utilities are looking for new generation. But the charts below show why renewable energy has a hard time competing against existing power plants. Natural gas and coal costs are $20 to $25 per MWh, which is nearly impossible for new wind or solar plants to compete with.
Image source: U.S. Energy Information Administration.
If you look closely at when plants were built, it's easy to see why. Below is a chart showing when coal plants in the U.S. were built, and you can see that the vast majority are over 30 years old, and some are over half a century old. This gives them a very low cost basis for generating power.
Image source: U.S. Energy Information Administration.
The problem is that wind and solar need to replace these old plants because U.S. electricity consumption simply isn't growing. According to the EIA, retail sales of electricity will actually decline from 10.31 billion kWh in 2014 to 10.28 billion kWh in 2017.
Why renewables are booming in emerging markets
While U.S. electricity consumption is stagnant, Latin America and China are growing. According to the EIA, China's electricity demand more than doubled between 2005 and 2013, and Mexico's demand grew 25% from 2004 to 2014. This growth is a big reason China is the world's leader in wind and solar energy, and why Latin America has seen a flood of new renewable projects announced this year. Countries across Latin America like Chile, Argentina, and Brazil are also seeing increased electricity demand, which is a big driver of their renewable energy growth.
What separates the growth is renewables in these isn't that they have more of a desire to build wind and solar. It's that they're in need of new electricity generation, and wind and solar are cost-competitive ways to get that energy. The U.S doesn't need new electricity generation, so wind and solar aren't competing with new coal or natural gas plants, they're competing with plants that were built decades ago and have a much lower cost basis.
Where the U.S. can win in renewable energy
You can see that in places where there isn't a structure driving renewable energy development at the utility scale, it will be challenging to move projects forward. But that doesn't mean there aren't opportunities, and three growth drivers are worth watching.
Corporate customers are increasingly buying wind and solar energy to power their facilities. Apple, Amazon, Microsoft, and dozens of other major corporations are buying energy directly from power plants, which will drive more adoption.
Customers are demanding choice as well, driving structures like community solar and renewable energy purchasing options from utilities. Despite sometimes having higher prices than a traditional electricity bill, these structures have increased in popularity.
Consumer generation of electricity on-site will also be a key component to renewable energy growth. This is residential rooftop solar and solar or wind power installed on-site at corporations. The cost of these installations aren't compared to the coal or natural gas costs I highlighted above, they're compared to the retail rate, which averages 13 cents per kWh in the U.S. It's a much more compelling economic value to install solar on your roof given the higher cost base comparison.
Will the U.S. continue to fall behind?
The structural challenges in building more renewable energy in the U.S. will be a challenge for developers like First Solar, SunPower, and now Tesla. But there are opportunities around the world in places where demand for energy is rising, and renewable energy provides a viable solution. Don't be surprised if that's where a lot of these companies grow next.
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Travis Hoium owns shares of Apple, First Solar, and SunPower. The Motley Fool owns shares of and recommends Amazon.com, Apple, and Tesla Motors. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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.