Most renewable energy advocates are familiar with feed-in tariffs, also known as CLEAN Contracts. They offer standard, long-term contracts for renewable electricity with prices sufficient to allow producers to get a reasonable return on investment (in Germany, it’s 6 to 8 percent). And research has shown that they tend to drive prices down more effectively… Continue reading
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While seeming counterintuitive, a focus on smaller-scale distributed generation enables more and faster development of cost-effective renewable energy.
Last week I wrote about the illusion that we can “move forward on all fronts” in renewable energy development; rather, a bias toward centralized electricity generation in U.S. policy reduces the potential and resources for distributed generation.
In contrast, distributed generation provides unique value to the grid and society, and its development can also smooth the path for more centralized renewable energy generation.
First, distributed generation is cost-effective. Economies of scale for the two fastest-growing renewable energy technologies (wind and solar) level off well within the definition of distributed generation (under 80 megawatts and connected to the distribution grid). Solar PV economies of scale are mostly captured at 10 kilowatts, as shown in this chart of tens of thousands of solar PV projects in California. Wind projects in the U.S. are most economical at 5-20 megawatts, illustrated in a chart taken from the 2009 Wind Technologies Market Report.
Besides providing economical power relative to large-scale renewable energy projects, distributed renewable energy generation also has unique value to the electric grid. Distributed solar PV provides an average of 22 cents per kWh of value in addition to the electricity produced because of various benefits to the grid and society. The adjacent chart illustrates with data coming from this analysis of the New York electric grid. Grid benefits include peak load shaving, reduce transmission losses, and deferred infrastructure upgrades as well as providing a hedge against volatile fossil fuel prices. Social benefits include prevented blackouts, reduced pollution, and job creation.
Distributed wind and solar also largely eliminate the largest issue of renewable power generation – variability. Variability of solar power is significantly reduced by dispersing solar power plants. Variability of wind is similarly reduced when wind farms are dispersed over larger geographic areas.
Not only are integration costs reduced, but periods of zero to low production are virtually eliminated by dispersing wind and solar projects over a wide area.
As mentioned at the start, distributed generation also scales rapidly to meet aggressive renewable energy targets. Despite the conventional wisdom that getting big numbers requires big project sizes, the countries with the largest renewable energy capacities have achieved by building distributed generation, not centralized generation. Germany, for example, has over 16,000 megawatts of solar PV, over 80 percent installed on rooftops. Its wind power has also scaled up in small blocks, with over half of Germany’s 27,000 megawatts built in 20 megawatt or smaller wind projects. In Denmark, wind provides 15-20 percent of the country’s electricity, and 80 percent of wind projects are owned by local cooperatives.
With all these benefits, distributed generation can also smooth the way for centralized renewable energy, in spite of energy policies that favor centralized power. When distributed generation reduces grid stress and transmission losses by provided power and voltage response near load, it can defer upgrades to existing infrastructure and open up capacity on existing transmission lines for new centralized renewable energy projects. A focus on distributed generation means more opportunity for all types of renewable energy development.
It may seem counterintuitive, but distributed renewable energy should be the priority for reaching clean energy goals in the United States.
From the ability to reduce peak demand on the transmission and distribution system, hedge against fuel price increases, or enhance grid and environmental security, solar power has a monetary value as much as ten times higher than its energy value. The cost of residential-scale distributed solar PV is around 23 cents per kilowatt-hour (kWh) in… Continue reading
In the clean energy community, collaborative meetings often reveal a unity around goals (maximizing clean energy production and use) but a disagreement over the means. It’s not that people oppose distributed generation, but rather they see it as a secondary approach to meeting long-term clean energy goals. The following conversation is typical: Advocate 1: Cheap… Continue reading
A delightful infographic from 1BOG, residential solar aggregators who are driving down the cost of solar PV across America.
They also note that the cleanup cost for the oil spill – $32 billion – would buy enough solar to power all of Los Angeles county for 30 years, for less than 15 percent of what Los Angeleos are expected to pay through 2040.
Using the tax code to support wind and solar power significantly increases their cost. I wrote about this problem last year because project developers were selling their federal tax credits to third parties at 50 to 70 cents on the dollar.
Along these lines, the Bipartisan Policy Center released a study [last week] showing that simply handing cash to clean energy developers is twice — yes, twice — as effective as supporting them through tax credits. [emphasis added]
The problem is that all but the largest renewable energy developers or buyers can’t capture the full value of the federal tax credits. So, prior to the economic collapse, a number of enterprising investment banks (and others) started buying up tax credits to reduce their tax bills.
This was great for big banks, but lousy for taxpayers and electric ratepayers. In fact, using tax credits instead of cash grants for wind and solar projects increased the cost per kilowatt-hour produced by 18 and 27 percent, respectively. (Wait, why not 50 percent? Because even though the tax credit is only half as good as cash, the cash payment only covers up to 30 percent of a wind or solar project’s costs. So cash in lieu of tax credits can only improve that portion of a project’s finances.)
Seen another way, if the $4 billion spent on renewable tax incentives in 2007 had been given as cash instead, it could have leveraged 3,400 MW of additional wind power and 52 MW of additional solar power. This would have increased incremental installed wind capacity in 2007 by 64%, and installed solar capacity by 25%.
The increased costs come from higher prices that utilities pay for wind and solar power (and pass on to consumers) as well as the the cost to taxpayers of passing half of the tax credit value to investment bank shareholders instead of wind and solar projects.
The problem isn’t solved, but has simply been postponed.
When the economy tanked, so did profits (and tax liability) for big banks. Wind and solar producers had no one to buy their tax credits and the entire industry was in danger of collapsing. The adjacent chart illustrates the idiocy of relying on the tax code for energy policy.
Congress stepped in with a temporary fix, allowing project developers to receive a cash grant in lieu of the tax credit. The temporary cash grant (currently extended through 2011) kept the wind and solar industry running during the recession and has saved taxpayers and ratepayers billions of dollars.
It’s also helped level the playing field, allowing for local ownership of wind and solar projects, rather than requiring complex tax equity partnerships. It’s meant more revenue from wind and solar staying in the local community. And this means a larger, stronger constituency for renewable energy.
The cash grant option will expire at the end of 2011, but hopefully the climate hawks and fiscal hawks in Congress will take note: we can support wind and solar at half the price with smarter policy.
Hat tip to David Roberts at Grist for the study link.
Public officials are looking for ways to reduce opposition to wind farms and the United Kingdom is piloting a “community wind fund” program for all new wind projects. Under the program, each wind project must pay in £1000 per megawatt (~$1600 per MW), per year, for 25 years into a community fund where the project is located. The funds would help maintain public support for wind power, but also (conveniently for the conservative government) replace reduced government funding for basic services:
“With all the current talk of libraries, community centres and sports halls being closed because of government cuts , here’s a great way for local communities to replace that funding. Local wind projects will from now on not just bring the benefits of local green electricity, but also the funding of vital social projects that government cuts would otherwise shut down.”
The impact for the community is significant. Compared to the typical land leases (often $5,000 per turbine for the host landowner), the community fund payments would increase local revenue by over 60 percent, with the additional funds spread to the entire community rather than just the lucky turbine hosts.
The impact on turbine owner net revenue is small but not negligible, reducing the net present value of the project by about 3 percent.
Using community funds to overcome local opposition may be worth the revenue reduction for the wind project owner, but the U.K. government strategy of using wind parks to offset (some) budget cuts represents a strategy that is unlikely to work well in the United States.
The plumes of smoke rising from Japan’s Fukushima Daiichi nuclear reactor create a visceral reaction. But the crisis should not persuade Americans to abandon nuclear power.
Instead, Americans should abandon nuclear power for its prohibitive and un-competitive costs.
The wildly escalting costs of nuclear plants under construction in the U.S. are a perfect example. A pair of proposed nuclear power plants in Florida have “overnight” costs of $3,800 per kilowatt, but since nuclear power plants actually take eight years to construct, the total estimated project costs are closer to $6,800 per kilowatt (kW) of capacity. This figure is reinforced by an estimate for Progress Energy’s two new units ($6,300 per kW $8,800 per kW), and Georgia Power’s new plants ($4,000 per kW $6,335 per kW), both still incomplete.
As Mark Cooper notes in his thorough analysis of the so-called nuclear renaissance, this is nothing new. Most nuclear projects haven’t come in on budget, or even close.
But let’s be generous for a moment and assume the U.S. utilities can hold to their current cost estimates. What do those costs mean to consumers? At $6,500 per kW, the expected cost of nuclear electricity is over 15 cents per kWh ($150 per MWh).
At that price, investment bank Lazard estimates that only two technologies are more expensive than nuclear (crystalline silicon solar PV and natural gas peaking plants). But solar PV has significant near-term cost reduction potential and “gas peaking” only refers to the way we use natural gas, not its inherent cost (see Gas Combined Cycle). In the time it would take to build a nuclear plant (6-8 years, optimistically), every commercial energy technology could produce electricity for less.
Subsidies can change the picture – the picture most Americans have of nuclear, that is. The Union of Concerned Scientists recently reported that nuclear subsidies total nearly 7 cents per kWh, twice what a typical wind power plant receives and similar to the federal incentives offered for solar power. It’s time to let the market pick our winners, not outrageous government subsidies for nuclear power.
Beyond its (escalating) costs and huge subsidies, nuclear power also reinforces a centralized grid paradigm where the financial winners are utilities who pass through cost increases onto the backs of ratepayers (sometimes before the plant begins operations). Did we mention that Florida Progress will require $3 billion in transmission upgrades to accommodate its new nuclear plants? Compare that to distributed renewable energy sources that can often interconnect to the grid with a minimum of infrastructure upgrades.
The crisis in Japan is terrible, but we shouldn’t eschew nuclear power for its ability to cause immensely disproportionate harm during natural disasters. Instead, we should abandon this costly boondoggle for more cost-effective and renewable energy sources.
Cutting non-module solar PV costs with best design practices could make solar PV cost less than grid electricity for more than 25 percent of Americans.
Half of the installed cost of a solar PV array is the solar module, but the other half (the “balance of system”) involves labor, assembly, and other components. With module prices continually falling, significant decreases in total installed cost depend on reducing balance of system costs. The Rocky Mountain Institute held a design charette last year, and the result was a concept of how to reduce balance of system costs by 58 percent in five years.
From the report’s executive summary [pdf], this chart (right) illustrates the reduced costs.
Even more interesting, the report put those cost savings in the context of the levelized cost of solar electricity. They found that the balance of system savings (and induced reduction in module costs) could lower the price of solar PV electricity from 22 cents per kWh to 8 cents per kWh.
To put that in context, we recently examined distributed solar’s cost compared to grid electricity prices, concluding that “solar PV at $5 per Watt (with solely the federal tax credit) could not match average grid electricity prices in any of the sixteen twenty largest metropolitan areas in the United States.”
With the Rocky Mountain Institute’s best design from their charette, that sentence reads: solar PV (with solely the federal tax credit) beats average grid electricity prices in 13 of the largest 20 metropolitan areas, representing 78 million Americans. With time-of-use pricing plans, the number rises to 19 of 20 metro areas, representing over 100 million – one-third of – Americans.
Grid parity is an approaching target for distributed solar power, and can be helped along with smarter electricity pricing policy.
Consider a residential solar PV system installed in Los Angeles. A local buying group negotiated a price of $4.78 per Watt for the solar modules and installation, a price that averages out to 23.1 cents per kilowatt-hour over the 25 year life of the system.* With the federal tax credit, that cost drops to 17.9 cents. Since the average electricity price in Los Angeles is 11.5 cents (according to NREL’s PV Watts v2), solar doesn’t compete.
Or does it?
In Los Angeles, there are three sets of electricity prices. From October to May, all pricing plans have a flat rate per kWh and total consumption. During peak season (June to September), however, the utility offers two different pricing plans: time-of use pricing and tiered pricing. Time-of-use pricing offers lower rates – 10.8 cents – during late evening and early morning hours, but costs as much as 22 cents per kWh during peak hours. Prices fluctuate by the hour. Tiered pricing offers the same, flat rate at any hour of the day, but as total consumption increases the rate does as well. For monthly consumption of 350 kWh or less, the price is 13.2 cents. From 350 to 1,050 kWh, the price is 14.7 cents. Above 1,050 kWh, each unit of electricity costs 18.1 cents.
The following chart illustrates the difficulty in determining whether solar has reached “grid parity” (e.g. the same price as electricity from the grid). For some marginal prices, solar PV is cheaper than grid electricity when coupled with the federal tax credit.
Over the course of the year, solar is not less than grid electricity. A very rough calculation of the expected time of day production of a solar array in Los Angeles finds that the average value of a solar-produced kWh is 15.1 cents over a year. That suggests that solar power is not yet at grid parity, even with time-of-use pricing.
There are other considerations, as well.
For one, we ignored additional incentives for solar power, including federal accelerated depreciation (for commercially-owned systems) as well as state and utility incentive programs. These programs substitute taxpayer dollars for ratepayer ones, making the cost of solar to the grid lower.
We also didn’t confront the complicated issues involving a grid connected solar PV system. Net metering is the rule that governs on-site power generation and it allows self-generators to roll their electricity meter backward as they generate electricity, but there are limits. Users typically only get a credit for the energy charges on their bill, and not for fixed charges utilities apply to recover the costs of grid maintenance (and associated taxes and fees). Producing more than is consumed on-site can mean giving free electrons to the utility company. So even if a solar array could produce all the electricity consumed on-site, the billing arrangement would not allow the customer to zero out their electricity bill.
Where Can Distributed Solar Compete?
Based on our own analysis, solar PV at $5 per Watt (with solely the federal tax credit) could not match average grid electricity prices in any of the sixteen largest metropolitan areas in the United States. With accelerated depreciation – an incentive only available to commercial operations – solar PV in San Francisco and Los Angeles (representing 21 million Americans) could compete with average grid prices near $4 per Watt installed cost.
Under a time-of-use pricing plan (where prices could be 30% higher during solar hours, as in Los Angeles), 40 million Americans would live in regions where solar PV could compete with grid prices at $5 per Watt with both federal incentives.
With solar at $4 per Watt, Californians would only need the tax credit (not depreciation) for grid parity with time-of-use rates. Adding in the depreciation bonus would increase the number to over 62 million Americans.
Distributed solar is nearing a cost-effectiveness threshold, when it will suddenly become an economic opportunity for millions of Americans.
*Note: for regular readers, we changed and improved our levelized price model (in response to some comments on our cross-post to Renewable Energy World).