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Why Renewables Are Becoming More Attractive by the Day

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Renewables

Favorable environmental policies have driven the spread of renewables in power generation much faster than expected recently. For instance, one megawatt-hour of wind power produced in Germany is currently remunerated with 85 euros. That’s nearly four times wholesale power prices. Critics say that this is the collateral damage of the ecology.

According to Bloomberg New Energy Finance, wind power is the cheapest in Germany and the United Kingdom without government subsidies, and it’s the cheapest in the United States with subsidies. Solar power (TAN) is also on the same track, eating into the generation mix of fossil fuels.

The increasing efficiency of renewables generation and falling costs are indeed distressing signs for traditional operating utilities.

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Capacity factor

Renewables are often criticized for their lower capacity factors. Fairly, solar plants are the least functional during nights or cloudy days. Wind farms are less useful when it’s less windy. As a result, renewables have an average capacity factor of ~20% compared to coal’s or gas’s near-70% levels.

Nuclear power plants can even have capacity factors of above 90%. Interestingly, even so, renewables are becoming more and more economical by way of tax benefits and investment tax credits.

Renewables’ self-reinforcing cycle

Another reason for renewables’ high efficiency is their zero fuel cost. When power generators spend huge sums on fuel costs, renewables seem like an attractive proposition. Bloomberg’s Tom Randall calls this a self-reinforcing cycle.

Randall explains, “As more renewables are installed, coal and natural gas (UNG) plants are used less. As coal and gas are used less, the cost of using them to generate electricity goes up. As the cost of coal and gas power rises, more renewables will be installed.”

Renewables giant NextEra Energy (NEE) is aggressively expanding its 11,000-megawatt wind portfolio. Xcel Energy (XEL) is also developing a 600-megawatt wind farm in Colorado. Utilities such as Duke Energy (DUK) and Southern Company (SO) are also heavily investing in renewables generation.

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