Global Renewables: Cost declines, batteries and the future of electricity markets

Posted by Macquarie Asset Management

August 25, 2020

Renewables is a rapidly growing sector and one where technological change is having a profound impact. Costs have come down, government subsidies have been wound back, intermittency issues have been intensifying in some markets, and technology is offering up potential solutions to the challenges that renewables create. Yet at the same time, government revenue guarantees can provide a stable and heavily yield weighted return. All this can make renewables a complex sector to navigate.

The fall in cost of renewable energy – how far and how fast?


For solar, in 1976 a photovoltaic (PV) module cost $79/W (in real, 2018 dollars). This price has since fallen to around $0.2/W1. That is a -12.7% annual fall in module costs for 44 years and a learning rate (average price fall per doubling of capacity) of 27.8% (Figure 1). The key drivers of this long-run decline in costs include the more efficient use of polysilicon (as improved slicing methods have reduced waste), greater use of monocrystalline silicon (which is more efficient), and improvements in module design (which have increased power output).

Module pricing

Source: BNEF NEO (July 2019)


The cost of wind power has also fallen, although not as rapidly as solar. Most of the capex cost for wind – roughly 60-80% although it does vary by market - is the turbine2. Data from Vestas shows that the global price of turbines has fallen from around $1.45/W in 2009 to $0.91/W in 2017, a -5.6% fall in cost per year (Figure 2).

Other costs such as foundation construction, assembly, electrical infrastructure, and wind measurement are generally a function of the number of turbines, with larger turbines thereby reducing these costs in per MW terms. 

Turbine price

Source: BNEF NEO (July 2019)

“The combination of sharp cost declines and government support for projects has led to rapid growth in renewables capacity over the past decade. But this rapid growth has created a challenge for regulators and system operators.”

Daniel McCormack, Macquarie Infrastructure and Real Assets Economist

Being hostage to meteorology, renewables power supply cannot simply be dialled up as needed to meet an unexpected surge in demand or shortfall in other supply, something that has the potential to create demand-supply matching problems3.

Can batteries solve the intermittency challenge?

There are many ways to solve this demand-supply matching problem (otherwise known as the intermittency challenge). Batteries are one option and from a technical point of view they are very good at managing short-term demand and supply mismatches.

The economics of batteries have also improved dramatically in recent years. In 2010 a lithium-ion battery cost $1183 per kWh but by 2019 that price had dropped to $156, an -87% fall over nine years (Figure 3)4.

Battery prices5

Source: BNEF (March 2020)

Battery prices have now fallen to the point that very large, grid-scale batteries are being deployed.  In some cases, this is a solar PV plus battery unit being used in remote locations (such as on a Pacific island6) to replace diesel generator-based power.  But in others grid-scale batteries are being used. A recent example is the Hornsdale Power Reserve in South Australia. When it was installed in December 2017 it was the largest battery in the world7 and was seen as a real test case for grid-scale batteries. Overall, the battery has proved adept at frequency management, at providing short-term power in the event of outages of other supply and has generally been regarded as a resounding success8. Essentially, it has provided proof of concept for grid scale batteries.

What impact could batteries have on the future of electricity markets?

Electricity is an essential service for communities and is necessary for a broad range of other economic activity. Reliability of supply is, therefore, crucial and this makes electricity markets different to markets for other goods and services. At the same time governments have climate change and cost9 objectives to meet. The challenge of meeting all three of these goals is often referred to as the energy trilemma.

To solve the reliability issue governments have increasingly been making use of the capacity market concept, where producers are required to have a certain amount of supply on standby and are paid for providing that surplus capacity. In our view, capacity markets, power purchase agreements and batteries are all likely to form part of the solution to the intermittency and reliability challenge. But the clean nature of the power renewables produce, and their growing cost advantage, means they are likely to be a key part of the solution to the energy trilemma as well and governments are likely to remain incentivised to ensure private capital investment in renewables projects can obtain an adequate risk-adjusted return for quite some time to come.

For more information about our renewables capabilities, please contact us.

All currencies quoted are in $US

1. Prices have since dropped to around $0.2/W – see BNEF’s “May 2020 PV Index: Supply, Shipments and Prices (June 2020)
2. See page 3 of BNEF’s “Onshore Wind: The Experience Curve Revisited”, September 2018
3. Demand and supply matching problems are of course not new, they have been around since we have had electricity networks, this is just a more intense version. Demand and supply matching problems are of course not new, they have been around since we have had electricity networks, this is just a more intense version.
4. Whilst stationary energy storage systems are not the same as those for EV battery packs – as they include additional ‘balance of systems’ costs like grid connections – the underlying decline in battery costs is helping to reduce these total system costs.
5. These prices are for EV battery packs, not stationary storage, but improvements here are driving declines in battery prices generally. 
6. See
9. Governments always want to provide consumers with the lowest cost electricity possible.


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