Comparing the cost of fossil fuels and renewable energy is a complex economic inquiry. Fossil fuels, including coal, natural gas, and oil, are energy sources derived from hydrocarbon deposits formed over millions of years. Renewable energy, in contrast, harnesses naturally replenishing sources like sunlight, wind, and flowing water. A direct cost comparison requires considering the total economic picture over the lifespan of the generating assets, moving past simple upfront expenses.
Defining the Metric: Levelized Cost of Energy
Industry analysts rely on the Levelized Cost of Energy (LCOE) to compare the costs of disparate power generation technologies. The LCOE represents the average minimum price at which electricity must be sold for a power plant to break even over its projected lifetime. This comprehensive calculation incorporates the present value of all expenses related to the project.
These costs include the initial capital expenditure for construction, financing costs, and ongoing operation and maintenance expenses. For fossil fuel plants, the LCOE also factors in the cost of fuel over the operational period. By dividing the total lifetime cost by the total anticipated energy output, LCOE allows for an equitable comparison between technologies with very different cost structures.
Current Cost Landscape: A Direct Comparison
When comparing the unsubsidized LCOE for newly constructed power plants, utility-scale renewable energy projects have become significantly more cost-effective than new fossil fuel facilities worldwide. This shift results from a dramatic and sustained decline in the manufacturing and installation costs of solar and wind technologies. Utility-scale solar photovoltaic (PV) and onshore wind farms now often register the lowest LCOE figures among all new generation sources.
The cost trajectory for renewables has seen a steep reduction over the last decade. For instance, the price of solar electricity fell by approximately 89% between 2010 and 2019, while the cost of onshore wind dropped by about 70%. This reduction is due to technological advancements and global economies of scale achieved through mass production.
A new utility-scale solar project can have an unsubsidized LCOE that is lower than a natural gas combined-cycle plant or a coal plant. The lack of fuel costs for solar and wind provides a fundamental economic advantage, as their operational expenses are minimal and predictable. Fossil fuel LCOE, particularly for natural gas, remains highly sensitive to volatile global commodity markets.
Beyond the Price Tag: Externalities and Government Support
The true cost of energy goes beyond the simple LCOE metric, as it must account for externalities. Fossil fuel combustion releases pollutants and greenhouse gases that are not factored into the market price paid by producers or consumers. These external costs are borne by the public in the form of environmental damage and public health expenses.
Air pollution from fossil fuel-generated electricity is estimated to cost the United States health care system up to $886.5 billion annually. Climate-related costs—such as damage from extreme weather events, sea-level rise, and ocean acidification—represent a significant liability for the global economy. If these full environmental and health costs were accounted for, the total cost of fossil fuel energy would increase significantly.
Government support for both energy types also complicates the direct cost comparison. Fossil fuels have historically benefited from decades of subsidies, including tax breaks and favorable regulatory frameworks. Renewable energy receives incentives, such as tax credits, aimed at mitigating high initial capital expenditure and accelerating deployment to achieve climate goals.
Another factor is the cost of integrating intermittent power sources like solar and wind into the existing grid. Because these sources do not generate power constantly, the system must incorporate backup generation or energy storage. While utility-scale battery storage, frequently paired with solar farms, addresses this need, it adds to the project’s total cost.
Future Cost Trajectories and Market Drivers
The economic advantage of renewable energy is expected to continue strengthening due to several market drivers. Continued technological improvements in solar panel efficiency and wind turbine design will further reduce capital costs. As global manufacturing scales up, economies of scale will drive costs down along predictable “learning curves.”
Battery energy storage is a primary driver in the future cost picture for renewables. The cost of lithium-ion battery packs has plummeted by over 90% since 2010, making it increasingly affordable to pair storage with solar and wind projects. This combination effectively solves the intermittency challenge, allowing renewables to provide power on demand and compete directly with dispatchable fossil fuel plants.
Finally, the potential implementation of carbon pricing mechanisms, such as a carbon tax or cap-and-trade system, will fundamentally shift the economic balance. By placing a price on carbon emissions, these policies directly increase the operational cost, and thus the LCOE, of fossil fuel generation. This action would improve the cost-competitiveness of zero-emission renewables, accelerating the market’s transition away from carbon-intensive power sources.