The Economics of Renewable Energy, Part 1, Solar Power

As usual during a climate discussion, we always start talking about the wrong part of the issue and get stuck there for years.

Solar power is getting cheaper!
Yeah, but it’s still more expensive than traditional power!
You can get power without going through the utility company–distributed generation is great!
Yeah, but you free ride for the connection you need when the sun isn’t shining and poor people are paying for the maintenance on your wires and poles!
We’re going to have to turn to solar eventually–why not start now?
Because we can’t store it–we’re burning fuel to back you up while you’re burning daylight.

Sound familiar? Getting a little boring?

If you want a fairly recent evaluation of the costs, payback times and energy savings for a solar home, click here.

On a more general level, let’s talk honestly about solar power. It is almost certainly the power source of the future. We will find adequate storage, modules and balance of systems components will continue getting cheaper and there are just too many rooftops begging for panels.

Solar power is probably not the fuel of the present. I predicted 2015 would be the year that solar reaches parity for residential systems. Hasn’t happened yet. Looks like mayyyyybeee 2017. But even when it hits parity that doesn’t mean that everyone is going to switch in a day. Or a decade. It will take 50 years from the point it’s cheaper to the point where it’s everywhere. That’s how long it took coal. That’s how long it took oil.

Here’s the best looking solar chart in the world:

Emanuel Sachs MIT

But here’s one that’s a little more recent:

Economist solar

Solar isn’t there. Solar is almost there.

What tickles me when discussing solar power is that nobody talks about the elephant in the room. Or to mix metaphors, they don’t talk about the parable of the bear. At this point, the cost of solar power could probably just stand still and it would still win out. Why?

Here’s what happened to utility rates between 1990 and 2011:

State % Increase in Avg. Rate
Arizona 22.6%
California 48.1%
Colorado 12.6%
Connecticut 80.9%
Hawaii 238.0%
Maryland 68.5%
Massachusetts 41.1%
New Jersey 50.1%
New York 52.5%
Oregon 101.7%
Pennsylvania 38.4%

While the cost of solar is going down, the cost of everything else is going up.

Astute observers will already have noticed that many of the states with the highest increase in electricity prices are heavy into solar power. Some will say that that’s one reason solar is popular. Others will say that accommodating solar is driving electricity prices higher.

Both statements are trivially true. Solar is popular primarily because upper middle class people want to go green. Utilities are using connection issues that cost them pennies to raise rates by dollars.

Solar will win in the end. The fuel is free and the capital costs get lower every year.

But it won’t win tomorrow. And it will face robust competition from natural gas, coal and the subject of the next post, wind power.

19 responses to “The Economics of Renewable Energy, Part 1, Solar Power

  1. A couple of questions:

    – What percentage of electrical utility costs are attributed to power generation versus distribution? If generation costs are high, the savings from solar will be high. If it is low, savings will be low.

    – What will bring the cost of solar down?

    – When can we expect solar panels to be incorporated into roofing materials. It seems absurd to clad a home in shingles or steel then tack on additional panels.

    – As a homeowner, what can I reasonably expect from solar? Of course, there are many variables but let’s assume that I have a 2,000 sq ft home oriented on a north-south line in the middle of the U. S. What percentage of my (average) household needs can be met with solar? Ballpark…

    • Hi AI, well, obviously the costs are going to vary dramatically–I don’t recall having even seen an industry average for that. A coal fired plant near a big city that buys all its electricity will of course be dramatically lower than a nuclear generating facility supplying a region.

      I saw a couple references on the internet indicating about 7% for transmission and 22% for distribution, so ballparking around that might be reasonable.

  2. The problem with solar and wind is they are not renewable energy so much as intermittent energy.
    Every night is a power blackout for solar. And please let us not fantasize that Mr. Musk is going to have a battery for the people any time soon.
    Every cloudy day is at best a severe reduction in power.
    And wind- too little, too much and no power.
    For niche uses, both can be OK. For grids? Only in the greedy dreams of government insiders and delusional dreams of fanatics.

    • Hiya hunter–well, since ‘dispatchable’ has become a new buzzword, my counter offer is ‘patchable.’ Choosing the right regions and right times and planning can make solar a valuable contributor.

      Obviously nobody sane is going to rely on solar for all their energy. The goal in the U.S. was 30% for all renewables, including hydro. That is a sane goal and we should work for it.

      When we get around to upgrading the grid we can build in the flexibility to accept an even higher percentage.

      • Tom,
        Yes we are in agreement- I think- if what you mean by “patchable” is what is generally referred to as “niche”. As to 30% of renewables, I think we would be creating a lot more problems than it would solve:
        Also, the problem of stated *capacity* vs. actual *deliverable* is dramatic. Wind power, in Texas, is rated for deliverable power at a small% of stated capacity. And Texas energy grid managers bend over backwards to justify wind.

      • Hiya hunter

        Well, the NREL said in a West Coast study done in (I think) 2010 that the grid as is could live with 25% renewables.

        And yes, everybody will have to work harder to integrate renewables into the grid. And renewables will have to get privileged treatment as well. It will be frustrating for other producers and especially for those managing the grid.

        Them’s the breaks, though. We do want renewables. People pay to have them. They don’t want wind turbines in their back yard, but they do want solar panels on their roof.

        Fickle public. Service professionals have always had to deal with that.

      • Tom,
        In the peak days of eugenics the public was sold on the idea of forced sterilization, racial marriage restrictions and other scientifically based policies.
        I think most of the responses to GK Chesterton’s critiques of eugenics could be summed up as “Well this is what people want”.

  3. Wind and solar power will always be “a few years away” from true economic viability. Their technology and infrastructure demands can only be handled by an advanced economy, which in turn requires extensive fossil-fueled energy. As fossil fuels are depleted, the best energy hopes are nuclear and thermo-nuclear, although those are uncertain. Interesting times ahead!

    • Hiya Mike,

      As I just mentioned to hunter, nobody is planning for solar to be the only fuel. We will still use fossil fuels in a perfect world for specialty uses and probably air transportation. And yes, that may include building renewable plants and materials.

      Using them to generate electricity is wasteful–only a third of the energy consumed is productive–and harmful, both in terms of conventional pollution and CO2 emissions.

      Nuclear, hydro, solar and wind, with ethanol (derived from cuttings, not food). That portfolio in more or less that order, is my policy preference.

      • I am with you regarding nuke power. Hydro? How many river valleys are there to dam up, and how many more should we dam up- it is about the environment, I thought?
        Solar and wind- niche power at best.
        And what sits on wealthy folk’s houses will always produce a minor fraction of even the needs of the house those panels sit on.
        I think this is a prophetic, iconic view of the future of solar:

  4. Morning Tom,

    The utility scale generation mix flowing into the California grid for 2013 is noted on page 2 of Dr. Nelson’s comment to the CEC in regards to the current IEPR-

    Thought you might want the info for your files. Last time I checked the majority of the coal fired generation providing power to the CA grid were contracted with the state’s public (vs PG&E, SCE, SD the big three private firms) utilities. The legislative approval of the 33%RES addressed the generation mix of the public utilities as well as the big three’s generation mix. I haven’t checked if Governor Brown’s 50% RES goal for the electric generation sector of the economy includes the public utilities but I assume it does.

    I have been trying to get a handle on some of the assumptions built into our plans to reduce the energy use in our existing building stock. I came across E-3’s “Pathways GHG Scenarios” that covers some of the expectations for EE efforts. You might find the “forks in the road” technology speaking that are going to enable, hopefully, the 2030 goals to be met of interest. The “Two forks in the road” (see page 15) that are currently in the scenarios are noted here-

    Yes, system wide AVG costs for a kWh of electrical power have been going up in CA. I noticed that the AVG costs for a kWh in Washington went down year over year (Dec 2013 vs December 2014) for all three sectors of the economy tracked by the EIA- residential, commercial and industrial. If I was going to put an energy intensive server farm on the west coast locating in the state of Washington sure seems like the place to go to minimize utility costs. The EIA published a report that indicates that the kWh costs for the state of CA (which no one actually pays as ones electrical service is not provided directly by the state, but via different public (ie LADWP, SMUD), or private (PG&E, SCE, etc.) service providers) indicates that commercial electrical rates increased year over year (December 2013 vs December 2014) by an average of 15.2%. PG&E’s GRC indicated that costs were going to be going up so this makes sense from a state wide perspective. Using the same EIA data we can calculate that the AVG state residential cost for a kWh increased 5.96% and the costs for industrial end users increased 12.17%.

    The electrical rate design in CA has changed a lot since 2012 for the three private electrical service providers. I should of keep a better eye on how costs were going to be allocated by PG&E as I failed to anticipate the magnitude of the changes for my, in their 80’s, in-laws specific Time of Use rate schedule. I recommended that they plan for 5 to 10% increases per year in their electrical energy costs on a kWh basis back in 2012. Boy did I botch that estimate for their actual December, 2014 costs, which I based on what I thought would happen with the more traditional E-1 rate schedule over time. My in-laws experienced a 26% increase in their December 2014 bill (based on the same daily kWh use for both years) compared to their December 2013 bill. This was a bit of unwelcome Christmas surprise.

    In regards to ensuring that residential PV owners pay their fair share of the utility scale RE that has come on line in CA to do to meet the RES ( including the rather expensive new Transmission infrastructure to get the utility scale RE power to the grid) something is likely going to have to change for the big three as far as cost allocations go. SMUD, one of the public utilities in the state, has addressed the issue of allocations in their service territory as follows:
    1. SMUD has been addressing system wide costs associated with Net Metering by allocating PV Net meter customers:
    1) System Infrastructure Fixed Charge- $16/m
    2) Solar surcharge- $.0015 per kWh
    3) State Surcharge- $.17

    • Hiya Mark, thanks for this. See, this is where the utilities game us. $16 a month as a fixed charge for infrastructure? Maybe 16 cents would be reasonable…

      • Tom,
        Maintaining infrastructure costs a *lot* more than you seem to think.
        By the way, those grid upgrades that are just sort of tossed out as a given when it comes to accommodating the intermittent unreliable nature of solar are all “infrastructure” and are not without significant cost. That neither wind or solar could pay for directly and still exist.

      • Tom,

        I have solar, since 2006, and I agree with Hunter on this subject. Exactly how much the fixed charges should be is open for discussion. As SMUD is a PUBLIC not a private utility they can balance all the competing interests at their board level independent of the CPUC- to a point that is. MIT has a paper- my reference to it came from here- that discusses some of the nuances of rate structures, technology developments and cost allocations.

        The report said regulations and pricing systems should adjust to anticipate greater solar penetration. That would include ensuring residential and other solar generators pay their fair share of costs to the overall system, such as maintaining electrical wires.

        At the moment I pay a $10.00 a month fixed fee to PG&E as I opted out of the Smart Meter program- I tried a SMART meter for 3 months and it provided less useful information to me than the previously smarter meter we had at the house and have once again. I’d rather not pay this fee, but they do have to come out and read my meter. The CPUC needs to approve rates to obtain revenue to fund energy efficiency programs, R&D efforts managed through the CEC, reduced rates for the CARE program(s), incentives to encourage folks to purchase electric vehicles- ie lower electric rates than what it costs my in-laws to wash their clothes, etc. etc. etc. So to me the question is which multiple of $5/month should I be allocated a month. Sixteen bucks seems appropriate to me if I was a SMUD customer. I would advocate a slightly lower allocation from PG&E as I supply the energy to power my well and living in a rural environment we provide the equivalent of urban street lightly on our own.

  5. Are you possibly mixing the price of electricity with its value?

    The trouble is PV has plenty of rates.

    Price of production, with and without taxes and subsidies.
    Value for the grid – sometimes heavily negative.
    Price for electricity users.

    Now if PV is gonna have parity without subsidies in 2020, I’m gonna shave my beard.

    Very happily.

    • Hi Hugh, I think your beard is safe. Subsidies are important for solar and will remain so for probably another decade or so.

      I have no problems with subsidies for power. We’ve been subsidizing power for more than a century–why stop now?

      I must confess it tickles me to see that finally consumers can get some of the subsidy instead of utilities.

      • Tom,
        My prediction, cynical as it may be, is that large solar will require significant real subsidies anytime solar is selected for use.

  6. Reading your posts makes me think that just as you and I are luke warm on the climate science we are also luke warm on renewables.

    You said: “Nobody is planning for solar to be the only fuel. We will still use fossil fuels in a perfect world for specialty uses and probably air transportation. And yes, that may include building renewable plants and materials.” The alarmists for renewables seem convinced that renewables can do everything but realistically I don’t think we will never ever run an electric arc furnace on renewables. The deniers on the other end seem to think that renewables have no place.

    I think Hunter is right when he says that renewables have a niche that they can fulfill well but outside those areas bad things will happen. Unfortunately we seem to be in the same song but a different verse as the climate science trying to get a realistic energy policy in place.

    • roger,
      If I built a house today I would incorporate solar power to supplement yard and security lighting, I would at least investigatge geothermal cooling and heating, and possibly look at wind, if I was on acreage in a windy area. But for grid use? No way.If I moved out to the TransPecos region of West Texas I would consider solar and wind. East Texas? waste of money.
      But forcing grids to pick up the crappy power from wind and solar without being properly assessed to the ‘renewables’ is very unfair. Using climate hype to create a false value for the contribution of ‘renewables’ is Enron accounting at its worst.

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