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$5.4 Billion in Solar: California Goes All In

“The government support — which includes loan guarantees, cash grants and contracts that require electric customers to pay higher rates — largely eliminated the risk to the private investors and almost guaranteed them large profits for years to come. The beneficiaries include financial firms like Goldman Sachs and Morgan Stanley, conglomerates like General Electric, utilities like Exelon and NRG — even Google.”

- Eric Lipton and Clifford Krauss, “A Gold Rush of Subsidies in Clean Energy Search,” New York Times, November 11, 2011.

A recent article by Pete Danko, “Solar Power Hitting New Records in California” (Earthechling.com) documents the dramatic growth of solar energy generation facilities in California. Three large-scale solar PV installations recently on-line or underway are: California Valley Solar Ranch; Antelope Valley Solar 1, and Topaz Solar Farm, together representing a nameplate capacity of over 1,000 megawatts (1 gigawatt).

Because of their size and cost, it is worthwhile to take a look at these three facilities in greater detail:

Project Nameplate capacity (MW) Projected annual output (MWh) CF (%) Capital Cost $/watt
California Valley Solar Ranch 250 482,000 22.0% $1,600,000,000 $6.40
Antelope Valley Solar 1 250 482,000 22.0% $1,360,000,000 $5.44
Topaz Solar Farm 550 1,096,000 22.7% $2,400,000,000 $4.36
Combined Totals 1,050 2,060,000 22.4% $5,360,000,000 $5.10

Analysis of Economics and Performance

A simplistic but reasonable financial analysis can be conducted using the following assumptions:

· The average wholesaleprice of electricity in southern Californiain 2013 is about $36 per MWh.

· Price of electricity will rise at a rate of 2.5% per year.

· PV cell output will degrade at a rate of about 0.5 % per year.

· O&M costs for the systems will be about 0.5% of the original capital cost per year.

Please refer to this link to the CA Solar Projects Analysis; and note that, in an effort to simplify, the analysis ignores significant issues such as:

· The cost to operate and maintain a traditional fueled back-up system of equal or greater capacity, which is necessary to meet demand at night and when the sun is not shining adequately.

· The extra cost of integrating a diffuse and inconsistent supply onto the grid.

· The cost of service on any debt incurred for the capital investment or O&M costs.

· The cost of taxes, lease payments, depreciation, and other costs not noted.

The bottom line demonstrates, even with all these other costs ignored, that only 40% of the original $5.36 billion combined capital investment can be returned over 30 years by sale of electricity at market rates.

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To be clear, the point of the simple analysis is to demonstrate that the owners and operators of the solar facilities cannot expect the sale of electricity at market rates to return their investment and cover their O&M costs; not even remotely. So, if the money is not coming from the sale of electricity at market rates, then where is it coming from??

The answer to this question is that the money to prop up these non-viable ventures is coming from the taxpayers and from the consumers of electricity. The taxpayers are on the hook for low interest guaranteed loans, and are footing the bill for production tax credits and/or stimulus grants. The owners and operators of the solar facilities are also the recipients of special Power Purchase Agreements (PPAs) that guarantee the sale of their electricity at greater than market rates; the costs of which are, of course, absorbed by the consumers.

“As NRG’s chief executive, David W. Crane, put it to Wall Street analysts early this year, the government’s largess was a once-in-a-generation opportunity, and ‘we intend to do as much of this business as we can get our hands on.’ NRG, along with partners, ultimately secured $5.2 billion in federal loan guarantees plus hundreds of millions in other subsidies for four large solar projects”

Eric Lipton & Clifford KraussNY Times

Cost (Risk) vs. Benefit

I have often heard the argument that life is not all about economics, and not everything can be reduced to a cost analysis; but I contend that in a very basic sense this is not true, and that life IS all about cost and risk vs. benefit analysis. Money just happens to be the predominant way in which we measure cost and risk in modern society.

With regard to energy strategy the same principle applies; everything is a cost vs. benefit analysis. It may be popular to think that “it does not matter what it costs” (I hear this frequently), but this is simply not true. Society has limited resources, and it does matter. If your community invests in solar panels they are making a cost vs. benefit judgment.

If they do this instead of buying a fire truck, and you are the fire victim awaiting assistance, you might have a different perspective on the wisdom of the judgment. If our government promotes and subsidizes solar (or wind) energy generation we are making a cost vs. benefit judgment. If we drive up the cost and reduce the availability of electricity so that people suffer, we may have made an un-wise judgment.

The negative “externalities” associated with fossil fuels and CO2 emissions are often cited as reasons (excuses) to proceed with government subsidized solar energy projects, regardless of the reality of performance and cost. However, when we recognize the negative “externalities” associated with reliable, abundant and relatively low cost electricity, we must also recognize the huge positive “externalities.”

The overwhelming benefits gained by humanity for the past century from advances in food production, health and longevity, industrial production of necessities (and luxuries), transportation, scientific knowledge, communication, etc. have been driven in no small part by abundant, reliable, and relatively low cost electricity.

In a recent post at MasterResource, David Howden discusses the concept of subjective externalities, and writes the following with respect to CO2 emissions in particular:

Maybe instead of being a negative externality there is actually a positive aspect to these emissions, and as per standard microeconomic theory those who benefit should pay those who create the positive externality. Everyone on the planet eats food, so perhaps a tax should be imposed on every global citizen to remunerate the creators of carbon dioxide

I doubt this suggestion will find much support; I don’t even believe in it! But the reason that I don’t believe in it has nothing to do with my feelings over the goodness or badness of the externalities in question. Instead it stems from a recognition that we just don’t know what the relevant externalities are.

I understand the need to protect the future of our environment for my children and grandchildren, but I will not ignore reality and stand-by while our economy is sacrificed on the altar of climate change theology; because this will do no good for my children and grandchildren either.

There is a balance that needs to be struck. Positive change in energy policy requires scientific evaluation of fact as well as logical cost/benefit analysis of performance and economics.

——–

Jerry Graf is an energy expert who blogs at Energy Strategy.

13 comments

1 Doug Proctor { 01.13.14 at 3:07 pm }

The true cost of energy is being hidden by hype. Deep oil and gas, like the Bakken, are expensive; the low gas prices are a reflection of oversupply forced on us by the co-production of gas with the more desirable oil, and the ability of producers to “subsidize” gas production with profits from the co-produced oil. If we separate deep, tight, low-liquid gas from the liquids-rich gas, we see that we need sales prices to be much higher than they are to make economic sense.

The future is not dark, but it is expensive. We have an oil boom now that has a serious end-point due to pressure dropping and increased gas production in the new shale/tight fields. The idea that we are moving into a future of “cheap” energy is a misnomer, unless, of course, we go back to coal. Even then energy is going to be more expensive, as the cheapest and easiest was the first to be produced and is now gone.

The Soviets did not believe in the time-value of money, nor in the profit concept of activity. A buck returned was a wash regardless of how long it took. That was a recipe for disaster. So it is with all energy: to go forward we must produce more energy from our efforts than it took making those efforts. A wash does not let us advance. The eco-green who wishes us to spend 60% of our income – our social energy, if you will – on simply powering that society, leaves little for advancement, and none for any “hiccup” that might come along.

Cost-benefit analyses is what allows us to advance in a universe of limited resources, as noted. An eco-green society as pushed is a stand-still agrarian one with limited opportunities for individual advancement. It is a return to the early 19th century or even earlier. Of course advancement is possible in such a society, if the dribs and drabs of personal “profit” are collectivized into centralized university or government programs. Which is what the eco-green seems to want. Slow down, collectivize and let only universal improvement as and when and how the central elite determine. Made up, of course, of the eco-green.

Energy is becoming more expensive, more difficult. We have to make choices on what we do because we can’t do it all. Margins have become necessarily smaller. Now is not the time to make living and the future more difficult by squandering our resources and social efforts for a philosophy of the Luddite.

2 rbradley { 01.13.14 at 8:45 pm }

Re Doug’s Comments:

I must say like the many warnings of depleting energy from the beginning, say starting with W.S. Jevons’s The Coal Question, the logic seems right. Diminishing returns cannot be held at bay much longer!

But human ingenuity is not a depleting resource but an expanding one, promising ever increasing amounts of energy for a limitless future. BUT will free markets prevail to unleash the ultimate resource (Simon)? That is why climate change activism is the major threat to energy sustainability.

3 Jerry Graf { 01.13.14 at 9:23 pm }

Doug,

Thank you for reading and commenting. I certainly appreciate your perspective and think you and I agree on many points.

The future of our energy strategy will be difficult and will probably be more expensive than it has been. Tough decisions will need to be made, but I think we agree that these decisions need to be made with honest cost/risk vs. benefit analysis based on scientific evaluation of fact and logical analysis of performance and economics; and as Rob indicates, the free market needs to be the driver.

I completely agree with your statement that “to go forward we must produce more energy from our efforts than it took making those efforts”. My point in analyzing the current way in which our political policies are propping up current solar and wind technology implementation is that these efforts are costing us more than they are producing, and are sapping the resources we will need to actually improve our energy strategy.

The key word I would like to emphasize above is IMPLEMENTING. I do not perceive that the money we are spending subsidizing implementation of current solar and wind generation technology will provide sufficient benefit to society, nor do I believe the expenditures and support of implementation will bring the material costs down to a point where they become economically viable (indeed the opposite is more likely). I believe the money is simply being taken from the public to line the pockets of politically favored and connected people and industries. On the other hand, as I have elsewhere indicted, I do not object to support for legitimate research and development (R&D) efforts that might have promise to increase efficiency or reduce costs of any reasonable energy technology, including solar and wind. However, R&D does not require pouring $5.36 billion into solar panels that cannot produce reliable electricity in reasonable quantity; this is not R&D, it is government largess.

4 Wayne Lusvardi { 01.14.14 at 1:43 am }

Have you ever seen California’s infamous “Duck Chart?” It depicts the profile or load shape of various sources of power in California starting in 2015.

What will change in 2015 is that California will shift from natural gas and nuclear as its baseload power source to solar power. Yup, California is going to depend on solar power for baseload demands.

Thus, the load profile show natural gas dropping abruptly about 8 am and solar replacing it. Then when the sun starts setting around 4 pm the solar power fades out and massive amounts of natural gas fired power have to be infused into the grid to meet the steep up ramping demands until about 8 pm.

California has a double peak energy profile of a Noon Peak and a Sunset Super Peak. The Sunset Super Peak will demand the 14,000 megawatts of additional power be dispatched into the grid in a time frame of about 3 to 4 hours.

According to the California Energy Commission, in 2012 solar power only reflected 1.5 percent of the installed electrical generating capacity of California. Solar power is projected to grow into a significant portion of California’s renewable energy standard of 33 percent by 2020. As of 2012, renewables reflected about 20 percent of the power of large electric utilities.

What is going to happen during the sunset hours (especially in the shoulder months of Feb-Mar & Oct-Nov-Dec) is that Californians will have to pay high prices for natural gas peaker power that has been idled all day and must recover its fixed costs in a 4-hour window each day. There will be electricity bill shock for those with new smart meters who realize that it is going to cost them through the nose to watch Monday night football, to turn the A/C to cool the home on a hot night, or for kids soccer league practice under the lights on an athletic field.

To alleviate what politicians must see as political suicide by electricity bill, California is trying to create an Energy imbalancing Market that would buy cheap hydropower from Bonneville and Parker Dams (@ say 2 cents per KWH) for the 4-hour Sunset Hours Super Peak. This will put natural gas out of business with stranded assets of peaker plants with no takers. If California wants backup natural gas power available it may have to provide deep subsidies for natural gas powered generation. At that point the whole system (both green and conventional power) would only be able to turn a profit above their fixed costs if massive ratepayer subsidies were made available. That is why California is desperately looking at battery storage as a solution (@ hundreds of dollars per KWH instead of the few cents per hour for natural gas).

Schoak Cloete, an energy researcher in Norway, has recently done a study of how Germany’s reliance on solar power for baseload energy has ended up with negative prices for green power (price is below fixed cost to produce the power). See Cloete’s article “The Effect of Intermittent Renewables on Electricity Prices in Germany” posted at The Energy Collective.

Cloete believes that California will escape the solar energy tragedy of Germany because Germany has no natural gas of hydropower to back up solar power, but California does. But Cloete warns that if California pushes the envelope with its RPS from 20 percent to 33 percent by 2020, it may find itself in the same boat as Germany.

I will have an article on the California situation cross posted at MasterResource.org soon.

5 Wayne Lusvardi { 01.14.14 at 2:17 am }

According to the California Independent System Operator, California is going to go from 1,345 megawatts of installed Solar Photovoltaic capacity today to 8,845 megawatts by 2020.

Solar PV needs about 7.9 acres of land for each megawatt of capacity. 8,845 megawatts would equate to 69,875 acres of land needed for solar PV buildout (about 109 square miles).

6 Wayne Lusvardi { 01.14.14 at 10:24 am }

“The National Renewable Energy Laboratory recently concluded that in the sunny Western U.S., solar “could” be competitive in 12 years. The Energy Information Administration (EIA) agrees. In its cost projection for 2018, solar is 67% more expensive than wind and twice as expensive as natural gas. At the Pacific Northwest Regional Economic Conference this year, one utility energy planner reported that solar costs about 80 cents per kilowatt hour (kwh) compared to the national average of about 10 cents per kwh.

Then why is solar popular? Huge taxpayer subsidies hide the actual cost. Other renewables receive a subsidy of about one cent per kwh, solar energy receives about 96 cents per kwh. We pay solar’s cost in the form of taxes instead of as electric rates.”

Source: Stop Subsidizing Solar Power, Todd Myers, WSJ. Sept. 23, 2013
http://blogs.wsj.com/experts/2013/09/23/stop-subsidizing-solar-power/

7 Jerry Graf { 01.14.14 at 9:17 pm }

Wayne,
Good to hear from you again and thanks for all the information you added. Thanks for reading and commenting. Looking forward to seeing the article you mention.
Jerry

8 john werneken { 01.14.14 at 9:22 pm }

Nice to see SOMEONE recognize that profitability – the excess of benefits gained over benefits forgone – is the ONLY way to make a rational decision.

9 NoFreeWind { 01.14.14 at 10:20 pm }

Here is I look at it. Antelope Valley.
Cost – 1.36 Trillion
Let’s say it will last 25 years. A traditional power plant would get a loan, solar just takes the money from the taxpayers and they lose the investment value of that money.
If loan interest rate is 6%, the monthly payment would be 8.7 million dollars per month.
482 MWhr/yr = 40 million kWhrs.
The levelized cost is 22cents per kWhr
This does not take into account maintenance nor degradation nor backup nor loss of energy from following/ramping nor capital costs of backup and general grid costs. True cost is surely over 25 cents per kWhr or about 5 times the cost of “generation” that I pay on my electric bill.
This is one reason, no corporation or person would ever even foolishly build a solar plant and try to sell the power, only with enormous gov’t support is this done.
A solar plant/farm is like figuring out a way to make gasoline at $15/gallon. They call this renewable? Renewable because we can just print more dollars or take this money from the taxpayer. The buyers of this energy lose, while the suppliers win. Why is this so hard for so many to understand? This simple man, me, can understand this while with all the resources behind our Federal Gov’t, they don’t get this???

10 Wayne Lusvardi { 01.15.14 at 9:06 am }

Republican Mayor Leads City To First-Ever Solar Energy Mandate …
thinkprogress.org/…/republican-mayor-leads-city-to-first-ever-solar-ener…?
Mar 28, 2013 – On Tuesday, the City Council of Lancaster, California approved a mandate that most new homes must produce solar energy. This is the first …

11 Wayne Lusvardi { 01.15.14 at 9:24 am }

In an article “The Market Value of Variable Renewables” by Lion Hirth of the Potsdam Institute for Climate Impact Research, March 12, 2013, Hirth surprisingly found that managing daily energy “profile” (load shaping) costs exceeded load balancing costs! Profiling cost reflects about 25 percent of base load system cost. So a hidden costs that are foisted on the management of the grid also need to be taken into consideration. Hirth also concluded the wind power “cannibalizes itself” by resulting in prices that are below the cost to produce it. Hirth studied the market value of renewables, defined as the price that generators earn if they sell their output without subsidies. Variable renewable power results in three extra costs to the grid: profiling costs, balancing costs, and grid-interconnection costs. If renewables penetrate the market by 30% or more prices drop below production costs. Hirth cautions not to use the Levelized Cost of Energy (LCOE) because this does not consider the marginal costs of grid integration.

12 Kenneth Haapala { 01.18.14 at 10:24 am }

The NIPCC Reports and CO2 Science have reviews of thousands of studies that show the positive benefits of increased atmospheric carbon dioxide to agriculture and the environment.

13 Scott Brooks { 02.20.14 at 10:11 pm }

A new item with solar has been adopted and should be considered. Engineers have coupled molten salt storage reservoirs with either solar towers or the parabolic trough designs so they can run them after the sun goes down.

Solana solar farm recently opened 70 miles southwest of Phoenix, Arizona—1920 acres of parabolic trough mirrors that can generate 280 MW of electricity. Solana stores its thermal energy in molten salt at 566°C (1,051°F). It is stored in well-insulated heat tanks where it can remain for hours until needed to create the steam that turns the turbines that generate energy. The technology works, but at 1 MW per 6.9 acres with its $2 billion price tag it will be a long time before Solana pays it off.

I have little idea how effective it is with solar towers like the Sierra Sun Tower which uses flat mirrors just a step above bathroom ones. Of course those solar towers are now showing to be detrimental to birds, like windmills are, by frying them in mid flight when they venture into the focused beams of light. Not sure if you get fries or a biscuit with that.

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