An explanation of how renewable energy saves you money

Fossil-fuel hacks are lying about renewable energy; don't let them get away with it

Climate denial is dead. Renewable energy denial is here. As “alternative facts” become the norm, it’s worth looking at what actual facts tell us about how renewable energy sources like solar and wind are lowering the price of electricity.

As an example that’s close to home (for me), I’ll focus on the Texas electricity market, which is run by the Electric Reliability Council of Texas, known as ERCOT.

How ERCOT sets the price of electricity

At all times, ERCOT must balance electricity supply and demand, while keeping costs as low as possible. Let’s walk through a simplified example of how they do this.

First, ERCOT forecasts tomorrow’s electricity demand based on factors like forecast weather, historical usage patterns, and expected industrial activity. Let’s imagine that ERCOT predicts a need for 100 megawatts (MW)¹ of power tomorrow.

ERCOT then asks generators to make bids for how much power each one can produce and what it will cost. Let’s assume there are six different generators that bid into the market:

ERCOT sorts the bids by price, producing what’s known as the merit stack. ERCOT then moves down the merit stack, using generators that produce the required power (100 MW) at the lowest price.

This means generator C is out of luck — ERCOT will not be buying power from that generator.

So what is the resulting price of electricity? Rather than paying each plant a different price based on their bids, ERCOT employs what’s known as marginal pricing, in which all of the generators get paid the cost of generating the last unit of energy.

Generator B is the last generator on the stack — sometimes referred to as the marginal generator — so it produces the last unit of power. The price of that last unit is $55 per MW, so that’s what the wholesale price of electricity on this day will be. All of the generators get paid that amount regardless of how much it costs for them to produce the energy.

How renewables change the price of electricity

Now let’s assume that someone builds a wind farm that, on a windy day, can produce 30 MW of power. Wind power has no fuel costs — once a wind turbine is built, the marginal cost of generating power is basically zero. Thus, wind farms can bid their power to ERCOT at extremely low prices, often around zero dollars per megawatt-hour.

Thus, on a windy day, the merit stack in our simple example now looks like this:

The addition of low-cost wind has pushed Generator B off the generator stack. The marginal generator is now Generator F, making the wholesale price of power $40 per MW.

Thus, wind power has reduced the cost of electricity.

I thought intermittent renewables needed backup power

That’s not how the grid operates.

If wind generation drops the following day due to calm weather, then ERCOT will once again call on Generator B . This leads to higher prices — but importantly, these higher prices aren’t a penalty or a problem with wind power. Rather, they represent the cost of electricity generation from conventional power plants.

This is the price we would pay all the time if the wind farm had not been built.

Put differently, “the backup” for the wind power in this example is provided by Generator B, who was already in the market before we added wind and remains in the market after wind is added. The only impact of adding wind power to the grid is that Generator B, instead of running all the time, only runs when it’s not windy.

Because wind power is cheaper than generator B, this reduces the average cost of electricity.

As more and more renewable power is built, the expensive generators run for fewer and fewer hours until they’re no longer profitable and then they shut down. This is basically what’s happened to the U.S. coal fleet — they’ve been pushed out of the market by cheaper energy, mainly natural gas but also renewables, and consumers have benefited.

This discussion applies to grids that have significant fossil fuel generation in it, which is most grids. As grids become majority renewables, the economics and the behavior of the electricity market shift, as I explained here.

A better calculation

Above, I presented a simplified example of how renewables save money in the ERCOT market. A quantitative calculation was performed by Josh Rhodes from tu a few years ago that used actual ERCOT data from the wholesale market to estimate how much money was saved when renewable energy displaced expensive fossil fuel energy.

Here are some of the top line numbers:

• Renewables reduced wholesale electricity market prices on average between $1.17 per MWh (in 2012) and $20.60 per MWh (in 2022) by replacing expensive fossil fuel power plants.

• The widespread adoption of renewables reduced wholesale electricity costs by about $27.8 billion between 2010 and August 2022, saving consumers significantly from what they would have had to pay with a 100% fossil fuel grid.

• In the first eight months of 2022, renewables reduced ERCOT wholesale electricity market costs by about $7.4B (~$925M per month).

If you want to know more, read the report.

What about China? What about India?

If you think renewable energy is expensive, let me ask you a question: What about China and India? As you can see, renewable energy production is exponentially increasing in these countries:

Data from Ember Energy

In fact, China recently passed a new energy law that prioritizes the build out of renewables.

The law notably states that China will prioritise renewable energy development such as hydropower, wind energy, solar energy, biomass energy, geothermal energy, marine energy, and hydrogen energy, while encouraging a rational, clean, and efficient use of fossil fuels. It promotes a safe, reliable, orderly transition from fossil fuels to non-fossil alternatives, aiming to increase the proportion of non-fossil energy consumption. [source]

If it were true that renewable energy were more expensive than fossil fuels, why are other countries prioritizing it? The answer, of course, is that these countries recognize that wind and solar are actually the cheapest energy, saving the economy money and improving air quality and national security.

Here’s another plot of retail price vs. renewable energy fraction for U.S. States. If renewable energy raised costs, you would expect to see a correlation. You do not.

No evidence that renewables increase cost of electricity

Why do people lie about the price of renewable energy?

You cannot look at the pervasive dishonesty about the cost of renewables by itself. Instead, you have to see it as part of a bigger effort to rig the market in favor of fossil fuels. I even wrote an oped in the New York Times about it (gift link) and have previously posted on TCB about it.

This is why, for example, Trump declared an “energy emergency” but excluded renewable energy from the list of energy resources:

from the Executive Order declaring an energy emergency.

This so-called energy emergency is not about energy at all but rather has a primary goal of entrenching fossil fuels in our economy. This is also the motivation for the executive order pausing wind power, and those targeting electric vehicles.

Make no mistake: fossil fuel interests will do whatever is necessary to keep us from transitioning to cheaper, cleaner renewable energy. Lying about the cost of renewables is just one of the tactics they’re using to achieve their goal. Don’t let them get away with it.

Update 1/27: I’ve gotten a bunch of questions about subsidies and the role they play in making renewable energy cheap. Certainly there are subsidies on both sides (yes, massive subsidies for fossil fuels, too). For renewables, people have looked at the role of subsidies in the price and it is quite minor. For example, see page 10 of this document.

Update 1/29: Whenever I write a post I think is pretty good, I find that

Hannah Ritchie

already wrote one about it. You can read her take on how renewables affect electricity prices here.

1. This simple example is significantly lower than the actual electricity demand in Texas, which averages around 50 GW.