Renewable vs. Fossil Fuel Electricity Costs

LCOE: The Right Way to Compare Energy Costs

Different power plants have radically different cost structures. A coal plant is cheap to build but burns expensive fuel for 40 years. A solar farm costs more upfront but has zero fuel costs forever. Comparing them on upfront cost alone is meaningless, you need to calculate the total lifetime cost per unit of electricity produced. That's what Levelized Cost of Energy (LCOE) does.

LCOE formula: (Total lifetime costs) ÷ (Total lifetime electricity output). It's expressed in dollars per megawatt-hour ($/MWh), equivalent to tenths of a cent per kilowatt-hour. An LCOE of $50/MWh equals 5 cents/kWh.

LCOE includes capital costs (building the plant), operations and maintenance (O&M), fuel costs, and financing. It does not include the cost of storage, transmission upgrades, or backup capacity, which is why it understates the full system cost of intermittent renewables and overstates the cost of dispatchable fossil fuels when comparing them in isolation.

LCOE by Energy Source, 2024 Estimates

Data from Lazard's Levelized Cost of Energy Analysis (v17.0) and EIA Annual Energy Outlook 2024. Ranges reflect differences in location, financing costs, and project scale.

Sources: Lazard LCOE Analysis v17.0 (2024); EIA Annual Energy Outlook 2024. Ranges reflect geographic variation and project financing conditions. Does not include grid integration or storage costs.

Solar: The Cost Collapse

No technology has dropped in cost faster than utility-scale solar photovoltaic power. The cost of solar panels has fallen over 90% since 2010. In 2010, utility solar cost around $350/MWh, more than four times the most expensive fossil fuel option. In the best locations today (Texas, California, Arizona), new solar is being contracted at $20-30/MWh, the cheapest source of new electricity ever built.

The driver is manufacturing scale. Solar panels are manufactured goods, and like semiconductors, their cost declines predictably as manufacturing scales up. Each doubling of cumulative installed capacity has reduced panel costs by about 20% (a relationship called Swanson's Law, analogous to Moore's Law for chips). Nothing comparable has happened to coal or gas plant construction costs, those follow general construction inflation.

The limitation: solar only produces during daylight, typically 20-25% of hours per year (capacity factor). A coal plant operates 80%+ of hours. Check solar energy source data for state-level solar generation.

Wind: Competitive Across the Great Plains

Onshore wind is competitive with natural gas across a wide range of conditions, with LCOE as low as $24/MWh in high-wind areas of Texas, Oklahoma, Kansas, and the Dakotas. Wind capacity factors in these regions reach 40-50%, far better than most solar except in the Southwest. This is why Texas, Iowa, and Oklahoma have the most installed wind capacity in the US.

Offshore wind is significantly more expensive ($72-190/MWh) due to higher construction and maintenance costs at sea. However, it offers much higher and more consistent wind speeds than land, and it can be built near East Coast population centers that lack onshore wind resources. The offshore wind industry is navigating cost challenges as steel and labor costs rose sharply after 2020. See wind generation by state.

Natural Gas: Still Competitive, But for Different Reasons

Natural gas combined-cycle plants are no longer the cheapest source of new electricity in most US markets. But they remain essential for a reason LCOE doesn't capture: dispatchability. Gas plants can ramp from zero to full output in 10-20 minutes. Solar and wind cannot. As long as the grid needs instant-response capacity to handle cloudy days, wind lulls, and evening demand spikes, gas plants have value that their LCOE understates.

Gas prices also create significant LCOE uncertainty. The low end of the range assumes roughly $3-4/MMBtu gas. When gas prices spiked to $8+ in 2022, gas LCOE nearly doubled. Solar and wind have no fuel cost exposure, once built, their LCOE is fixed by capital and O&M costs alone. This price certainty is an increasing advantage for renewables in long-term contracts.

See natural gas generation data for state-level reliance on gas. Check price trends to see how gas price spikes flow through to electricity rates.

Coal: The Stranded Asset Problem

No new coal plants are being built in the US. The last coal plant to break ground was in 2017 (a small unit in Alaska). At LCOE of $65-160/MWh for new construction, coal simply cannot compete. Even the "coal is cheap" argument doesn't survive LCOE analysis: once you account for the capital cost of building a new coal plant, it's more expensive than combined-cycle gas, and far more expensive than new solar or wind in most of the country.

The remaining question is what to do with existing coal plants, where the capital cost is already spent. Many existing plants can produce power at $35-55/MWh in fuel and O&M alone, still competitive with new solar in some regions, especially in cloudy northern states. But as carbon regulations tighten and new renewables undercut even those marginal costs, existing coal is being retired at an accelerating pace. See coal's declining share by state.

What This Means for Future Electricity Rates

The economics of the energy transition suggest electricity rates will face competing pressures:

• Downward pressure: New renewable capacity with near-zero fuel costs gradually displaces expensive gas and coal in the generation mix. As the grid's marginal cost falls, wholesale electricity prices should decline.
• Upward pressure: Grid modernization costs (new transmission lines to connect remote wind and solar), storage (batteries to manage intermittency), and retirement of paid-off coal plants before their natural end of life all impose real costs on ratepayers.
• Net effect: Highly renewable regions with good resources and permissive grid permitting may see lower rates. Regions with extensive legacy infrastructure requiring replacement, or those building expensive offshore wind, may see rates rise before they fall.

Track how your state's generation mix is evolving with RateWatt's state pages, which show both current rates and the energy source breakdown driving them.

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