Even some less established renewable technologies such as green ammonia are becoming cost competitive as gas prices rise.
The cost of electricity generated from well-established renewable sources like wind or solar has fallen dramatically in recent years. It has long been comparable to - or even cheaper than - power generated from fossil fuel sources, such as combined cycle gas turbines (CCGTs) or coal.
Since Russia’s invasion of Ukraine, the cost of gas in particular has risen sharply as Russia is an important gas supplier.
Alex Monk, Fund Manager, Global Resource Equities, said: “Since the invasion of Ukraine, we have seen a pick-up of energy security concerns, as well as ongoing decarbonisation concerns. This is not just because of quantity of supply from Russia but also because the cost of conventional energy has risen markedly.
“This means that renewable energy, including renewable fuels, is becoming more attractive.”
This is shown in the chart below, which compares the levelized cost of energy (LCOE) of various different technologies. The LCOE represents the lifetime cost of building and operating a generation asset, expressed as a cost per unit of electricity generated.
As the chart shows, solar and onshore wind are clearly cheaper than coal or CCGTs. The cost of the latter in particular is starting to rise.
Alex Monk said: “We can see that the upfront cost of renewable technologies, including batteries, is also rising now after falling for a number of years. This is due to a number of factors, including supply chain disruptions and higher costs of some input materials. But on a relative basis, renewables are looking increasingly attractive compared to conventional energy.”
The cost argument for wind and solar had already largely been won, even before the recent cost increases of fossil fuels. But more nascent renewable technologies are also starting to become more cost competitive as the price of gas rises.
Take ammonia for example. Currently, ammonia is mainly used as fertiliser, as well as in different industrial processes. Most of what is produced is “grey ammonia”, so-called because the production process is very polluting. It is made by reacting hydrogen and atmospheric nitrogen. The hydrogen often comes from the steam reformation of methane, a process that emits CO2.
But ammonia can be made “green” if it is produced in a way that is renewable and carbon-free. One way of making green ammonia is by using hydrogen from water electrolysis powered by renewable energy.
In addition to much-needed fertiliser, there are hopes that green ammonia could be used in other applications too. It could potentially be used for storing and transporting energy from renewable power plants. There are also hopes it could be used as fuel to help decarbonise the shipping industry.
Alex Monk said: “Renewable fuels such as green ammonia or green hydrogen are where the cost argument is becoming really interesting at present. The chart below shows the marginal cost of producing green ammonia. With gas prices so elevated, the cost of producing ammonia using renewable electrolytes is now competitive”.
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