Friday, October 21, 2011

The Economics of Local Renewable Energy Generation

Report CoverThe following is Part 2 from a serialized version of the Institute for Local Self Reliance new report, Democratizing the Electricity System.

Click here for Part 1 or here to download the entire report.

The falling cost of distributed renewable generation has been one of the key drivers of the transformation of the U.S. electric grid.

The following chart illustrates the cost of power generation calculated by averaging the total lifetime cost over the total electricity generated (“levelized cost”), as estimated by the investment bank, Lazard.[1]   Federal incentives cause a significant reduction in the levelized cost of renewable energy, in the form of upfront tax credits as well as ongoing production-based tax credits.  

Levelized Cost of Renewable Energy (Lazard):

Levelized Cost of Fossil Energy (Lazard):

Wind, geothermal and biomass are already less expensive than any fossil fuel energy source, when factoring in federal incentives for all three sources.  
Solar PV is the most expensive, but has strong prospects for lower price.  Already, the average cost for German solar PV (10 to 100 kilowatt (kW) systems) has fallen to $3.70 per Watt,[2 and some 1 MW solar PV systems in the U.S. are being installed at $3.50 per Watt, pushing the lower bound of the prices in the chart.  A design charette aimed at reducing balance of system costs found that best practices could reduce solar PV installed costs by nearly 60 percent within five years, not counting further cost reductions in solar modules.[3]   At these prices, renewable energy competes very favorably against most new fossil fuel generation.  
(Union of Concerned Scientists)
Not all costs are covered in this levelized cost comparison.  A grid with majority renewable power (from variable sources like wind and solar) will require a different approach than the existing grid. Whereas current generation scheduling, peaking and backup are tailored to a system with large, centralized baseload power plants, a grid with distributed renewable resources will require new load balancing ingenuity.  It will be necessary to use smart grid technologies to enable greater demand response and to defer elective electricity use (such as electric vehicle charging) to times with greater supply, and to use energy storage like pumped hydro or batteries to shift surplus production to times of higher demand.  It’s also a question of whether any additional costs incurred would be offset by other economic benefits.  These issues are discussed later in this report.
Likewise, hidden subsidies for fossil fuels – incentives they once received for technological development, the cost of military operations to secure fossil fuel energy sources, and massive environmental externalities – are also omitted.

The Issue of Scale

Average Size of U.S. solar PV project: 10 kilowatts
Average Size of U.S. wind power project: 80 megawatts
Even as renewable energy challenges fossil fuels on cost, the average size of renewable energy projects continues to defy the conventional wisdom that bigger is better.  The average solar PV system in the U.S. is just 10 kW and the average wind power project is 80 MW.[4]   Wind power is often seen as the largest scale renewable energy source, and it provides an interesting lesson.
While the average wind farm size has increased from 35 to 90 MW in the past 10 years, it’s almost entirely due to larger turbines (the average size has jumped from 0.71 MW to 1.74 MW in the same time frame).[5]   Wind projects don’t have more turbines, they just use larger ones.  While a wind farm of larger turbines may require more total land area (to space them further apart), the amount of occupied land is relatively the same, but delivers more power.  
In the same fashion, solar modules have increased in efficiency and quality, allowing for greater electricity output per module.  The technological advance actually reduces the need to be bigger.  
Because renewable energy projects can lend themselves to smaller scale and geographic dispersion, they encourage the development of a distributed grid.  It’s not always the case, however.

Solar Power 

There are two electricity technologies, solar PV and solar thermal.  Solar PV directly converts sunlight to electricity, and is modular, generating power by interconnecting individual solar modules of approximately 200 Watts into arrays of 5 kW to 50,000 kW (50 MW).  Solar PV costs have fallen steadily,[6 with modules representing about half the cost of a solar PV installation, “balance of system,” and labor and installation the remainder.  
Concentrating solar thermal generates electricity in several ways, with the common element of a solar concentrator (mirror or lens) used to concentrate sunlight to create heat that will be converted to electricity.  Projects are generally 5 MW or larger, with several proposed projects in the U.S. and internationally of several hundred megawatts.  Every commercial concentrating solar technology also lends itself to thermal energy storage, because the sun’s heat can be stored in a variety of methods (most involving molten salts) for several hours.  
Because solar PV power is often installed on residential rooftops at a fairly small scale, many people believe that it is inherently more expensive than its central-station counterpart, concentrating solar. 
The data suggest otherwise.  The following chart illustrates the cost of electricity from two sample solar PV projects, one commercial and one residential, as well as the three most cost-effective concentrating solar thermal power plants.[7]   Solar PV at commercial scale comes out cheaper.  Even smaller scale solar is comparable to large-scale concentrating solar.  These figures do not factor in the cost of long-distance transmission, a common additional line item for concentrating solar power plants.
Solar PV v. CSP Costs:
 These costs are supported by the lower cost of distributed solar in Germany,[8 as well as recent bids for utility-run distributed solar programs in the United States.[9]  
There may be prospects for price decreases for either technology, but it’s hard to see how concentrating solar could win the price war.   An oft-shared graphic (below) illustrates the solar PV experience curve, and shows how solar PV module prices have dropped as the total installed capacity has grown (a ten-fold increase installed capacity has generally reduced module prices by half).[10]   The small dots show actual module prices, and the large dotted line is the trend.  
Solar PV Module Cost Drops by Half for 10-Fold Capacity Increase (Ken Zweibel):
The installed base of solar thermal power plants is just over 1,000 MW, split among several technologies, while solar PV is being installed at a rate of 4,000 MW per year in Germany alone.  Since solar thermal projects tend to require years of planning, financing, and construction, it’s unlikely that centralized solar thermal prices will fall as rapidly as decentralized solar PV, supported by this excerpt from a recent Solar Electric Power Association report:[11]
[Concentrating solar power] (CSP) represents over 6,000 MW of the over 15,000 MW of future solar projects that SEPA is tracking, but there are differences in project development between CSP and PV. PV can be built and sub-sections of the larger project can be energized over time, resulting in lower construction risk and balance-sheet impact. CSP projects need to be completed in full before commissioning, a period which takes several years from start to finish.
Even if solar thermal power can keep pace on cost with solar PV, the latter is much more amenable to distributed generation and local ownership and would be preferable even if the costs were similar.
UofM Morris Solar PV Project
 The second economies of scale question for solar power is big solar PV versus small solar PV.  Here the data are less conclusive.
The following chart provides an illustration of the installed cost per Watt for solar PV at a range of sizes.  The top three lines are historical data from Lawrence Berkeley Labs (LBNL) and the California Solar Initiative (CSI).[12,13]   The lowest line represents installed prices reported to the Clean Coalition from their network of installers in California.[14]
Solar PV Economies of Scale:
There are economies of scale for distributed solar, especially for very small (residential scale) systems.  Historical U.S. data suggests that the savings from size level off beyond 10 kW, but contemporary installed data suggests that there are two breakpoints in economies of scale, at 10 kW and 1,000 kW.  
Data from Germany’s feed-in tariff solar incentive program supports this theory.  There is a 25% price differential between the smallest rooftop solar arrays (up to 30 kW) and the largest (over 1000 kW), with 15 percentage points of the savings in the jump from the 100-1000 kW size tranch to the largest one.[15]  
In other words, there are valuable economies of scale for projects up to 1 MW.  However, there are additional barriers to cost-effectiveness for larger solar PV projects, described in the Solar Electric Power Association’s 2010 Utility Solar Rankings report:[16]
PV projects, which ranged in size from 1-kilowatt residential installations to 48-megawatt power plants, have much shorter planning horizons and project completion times, along with lesser siting, permitting, financing and transmission requirements at these small- and medium-sized scales. However, larger PV and CSP projects (those greater than 50 MW) require overcoming financing, siting/permitting, and transmission barriers that might emerge at these larger sizes.
The trend noted by SEPA is illustrated in a particular example.  Sunpower has a 250 MW centralized solar PV power plant planned for the California Valley, secured by a $1 billion federal loan guarantee.  The installed cost of the system is $5.70 per Watt, 60% higher than installed costs for 1-20 MW projects.[17]
In short, PV is the preferential technology, and distributed solar is better than centralized.  As we discuss later, this has significant implications for the economic benefits of solar power.

Wind Power

The economies of scale of wind power are similar.  The power output of a wind turbine increases exponentially with higher wind speeds, as well as with larger diameter blades.  Since wind speeds rise quickly as height increases, and taller turbines can host larger blades, utility-scale turbines (generally 1 MW and above) at heights of 80 meters or more are unquestionably more cost-effective than small-scale turbines.
When it comes to multi-turbine projects, however, the data show limited economies of scale.  In their 2009 Wind Technologies Market Report for the U.S. Department of Energy,  the Berkeley Lab authors showed that costs fell for projects that aggregated a few turbines (5 to 20 MW), but that larger projects had higher levelized costs of operation.[18]    The following chart (redrawn from the report) illustrates:
Wind Projects 5 - 20 MW Have Lowest Cost per Kilowatt:
The lesson from the report is that wind projects built at a smaller scale capture most of the construction and project economies of scale, but also may avoid diseconomies of scale that affect larger projects.  These diseconomies can include higher financing costs due to multi-billion dollar project costs, time and money costs for new transmission infrastructure, and legal costs to secure the land rights for a large project as well as the cost of overcoming local resistance.  In Germany, home to some of the most effective renewable energy policies in the world, more than half of its 27,000 MW of wind are in projects 20 MW and smaller.[19]   It’s no coincidence that half of Germany’s wind power capacity is also locally owned by farmers and cooperatives.[20]
There are also some potential economies of operation and maintenance, although these shrink as wind projects become more ubiquitous and services are more broadly available. 

Is Distributed Solar Competitive at Retail?

For many distributed projects, the issue is not a comparison to other large-scale power plant costs or economies of scale, but how distributed generation compares to grid electricity.  The liability in such comparison is that grid electricity is mostly from old fossil fuel power plants that were paid off years ago and that generate significant pollution (including carbon emissions).  Furthermore, the price of grid electricity is not static (it’s gone up 3.8% per year since 2000).[21]   However, many prospective customers use their existing electric bill when considering solar, so the comparison has merit.
Consider a residential solar PV system installed in Los Angeles.  A local buying group negotiated a price of $4.78 per Watt, equivalent to 17.9 cents per kilowatt-hour (kWh) with federal incentives.   Since the average electricity price in Los Angeles is 11.5 cents, solar doesn’t appear to compete.  Or does it?  
The following chart illustrates the difficulty in determining whether solar has reached “grid parity” (e.g. the same price as electricity from the grid).  
Solar & Grid Parity – What is Solar’s Competition?
In Los Angeles, there are three sets of electricity prices.  From October to May (off-season), 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.

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.[22]   That suggests that solar power is not yet at grid parity, even with time-of-use pricing.  A similar value was found when examining time-of-use pricing in PG&E’s service territory.[23]   A more robust analysis with assumptions about higher levels of on-site electricity use during peak hours could change these estimates.
There are other considerations, as well.  With a grid connected system, the most common policy governing the connection is net metering.  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 onsite can mean giving free power 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.  Some policies, like CLEAN contracts, eliminate this problem.
Based on ILSR’s analysis, solar PV is becoming competitive with average grid electricity prices in select areas of the United States.  As prices fall to $4 per Watt, solar PV projects that can take advantage of the federal tax credits and accelerated depreciation – an incentive only available to commercial operations – would compete favorably with average grid electricity prices in New York, San Francisco and Los Angeles (representing 40 million Americans).

Under a time-of-use pricing plan (where prices could be 30% higher during hours with good sunshine, as in Los Angeles), the equation changes.  An additional 16 million Americans could use solar PV (along with both federal incentives) to beat their grid electricity price at an installed cost of $4 per Watt.  Even at $5 per Watt, 40 million Americans could use solar PV and federal incentives to best their utility’s time-of-use electricity rate.  

Falling Solar Costs Reach Grid Parity with Time-of-Use Pricing:
As noted above, this grid parity calculation assumes that solar producers can use federal depreciation, an incentive worth as much as 25% of the project cost and only available to businesses or to homeowners who lease their solar panels.  Without any federal incentives, solar PV would have to be installed at approximately $2.40 per Watt to be at grid parity for 56 million Americans.  

In the current environment of incentives, distributed solar is nearing a cost-effectiveness threshold, when it will suddenly become an economic opportunity for millions of Americans.

References here

Community Power

Al Weinrub's ground-breaking new report, Community Power, has made a big splash among local distributed renewable energy generation advocates.  

Below is an excerpt from John Farrell's recent review of Community Power on Energy Self-Reliant States.  

You can also listen to an hour long interview with author Al Weinrub by Solar Times editor Sandy LeonVest here, and view Al Weinrub's presentation, "Why A Decentralized Energy System?" from the 2011 Local Clean Energy Alliance Conference here.

From ESRS....."Our renewable energy goals can be met cost-effectively, more quickly, and with greater economics benefits by focusing on decentralized renewable energy".

That’s the powerful conclusion in the recently released report, Community Power: Decentralized Renewable Energy in California, and the lessons are applicable in every state across America. These lessons are attracting attention, as large-scale desert solar projects and new transmission lines meet stiff resistance from an increasingly broad-based opposition.

The cost-competitiveness of renewable energy is not news to anyone familiar with the industry, but Weinrub shows that for the most prominent decentralized renewable energy source – solar power – decentralized production from photovoltaics (PV) has better economics than centralized solar thermal power plants.

His research is reinforced by data from the California Solar Initiative that shows that a large majority of decentralized solar PV’s economies of scale are captured by projects as small as 10 kilowatts.

Weinrub also shows that California has plenty of decentralized renewable energy potential – with rooftop solar alone – to meet ambitious renewable energy target[s].  As he notes, the actual potential far exceeds the necessary amount required to meet state standard[s]:

The potential for decentralized solar generation goes well beyond the numbers cited in these studies, which represent only the most accessible commercial solar PV installations. Other, smaller rooftops are available for commercial PV power in urban areas, as are carports, parking lots, other disturbed land, rail and highway right of ways, and so forth. 

As important as the actual potential, Weinrub illustrates how decentralized renewable energy is more likely (or perhaps the only) method for reaching ambitious near-term target[s] for renewable electricity.

Centralized renewable energy often requires new high-voltage transmission capacity, which can take 10 years or more to construct, before the renewable energy project itself begins construction. 

Building a Renewable Energy Constituency

While all these arguments for decentralized generation make a compelling case in the electricity market, the most valuable of Weinrub’s findings is the massive economic benefits of choosing a decentralized model for renewable energy deployment.  The jobs and economic impact advantage of dispersing wind and solar projects far outweigh the increased marginal cost – if any – of smaller scale projects.  Weinrub also notes that this development model reduces environmental impacts, a hotly contested topic regarding centralized solar power and its attendant new transmission lines.

Weinrub references but doesn’t make explicit that decentralized energy carries significant political advantages.  By spreading around wealth and expanding the field of energy producers, decentralized generation creates a political constituency to support renewable energy development, in stark contrast to the NIMBY response to centralized desert solar or new transmission lines.
                 From Community Power by Al Weinrub
Unfortunately, while identifying the significant benefits and potential for decentralized renewable energy, Weinrub illustrates a challenging picture for its adoption.  For one, California regulators have allowed incumbent utilities to slip on their commitment to meet the state’s renewable energy milestones and instead invest millions in a fleet of new natural gas power plants.  He also identifies the appropriately named “Legacy Model of Big Power:” a state and federal web of financial and regulatory rules favoring the development of large-scale, centralized power plants.

But the commonsense adage “follow the money” provides the most vivid illustration of structural barriers to decentralized generation.  Rather than invest in decentralized generation, the dominant investor-owned utilities prefer to put their money in new transmission lines, where their investments get a guaranteed profit at the expense of ratepayers.

The striking growth in new transmission lines since 1999 stands in stark contrast to near-flat energy demand.  And every dollar these utilities insist on using to overbuild transmission infrastructure is a dollar that can’t be spent on the tools of the future grid: new distributed wind and solar power, energy storage, or a smarter grid.

Overcoming Barriers

Weinrub offers two political options for overcoming the existing barriers to decentralized generation, although the road for each has its own perils.  Community Choice Energy legislation first passed in California in 2002, but it wasn’t until a year ago that a community successfully overcame utility-funded opposition to take control of its energy future.  Legislation recently introduced in the California legislature in 2011 hopes to fight utility intransigence by strengthening the 2002 law.

The second strategy – a feed-in tariff – has the best track record, but is the least developed in the United States.  Jurisdictions with feed-in tariff (FiT) policies (such as Germany, Ontario, Vermont and Gainesville, Florida) have seen significant deployment of renewable energy (particularly solar) by offering standardized, long-term contracts and prices sufficient to offer developers a reasonable return on investment.

Feed-in tariffs provide cost-effective deployment of renewable energy by reducing the rate of return of developers in exchange for significantly reduced risk.  While feed-in tariffs are actually quite similar to the model for deploying new power generation in regulated utility markets, they have yet to catch hold significantly in the United States. 

Community Power makes a powerful case for decentralized renewable energy generation.  After reading this report, it’s hard to imagine that policy makers would be content to allow renewable energy development to continue under the conventional central-station model.

Community Power is available from the Local Clean Energy Alliance at:

Sunday, October 9, 2011

Task Force Considers Streamlining Transmission in Colorado

Oct 13th UPDATE: The deadline for comment has been extended into November!

SB-45 is a bad idea that gives political cover to those who wish to undermine local control and democracy in Colorado. If the Task Force for Steamlining Siting of Transmission Facilities has its way, Colorado ratepayers will get artificially high electricity rates and a path dependency on old style remote, monopoly-controlled renewable generation. This could diminish opportunities to generate sun and wind energy in their own communities where it creates the most benefit for the least cost.    

New transmission lines cost ratepayers billions of dollars while ensuring Investor Owned Utilities 100% cost recovery and high rates (10-17%) of return on investment.

As such, utility policy in Colorado has created perverse incentives for unnecessary new high voltage transmission while ignoring cheaper, smarter and less environmentally destructive alternatives like distributed generation on existing (easily upgraded) transmission lines.

Little known to most, the Task Force for Streamlining Siting of Transmission Facilities authorized by SB 11-045 earlier this year (see below), has convened several meetings this fall.   While the legislation requires the Task Force to consider public input, that input has been limited to a very few people who are aware of and able to attend the Denver and Pueblo meetings.
 The pubic has not been well informed of the existence or purpose of the Task Force or why the outcome of these meetings is important.  You can learn more by reviewing the meeting agendas and web casts available on the CPUC Task Force websiteIf you don't have time to review the documents yourself, check back in a few days for a summary of the meetings and some suggested talking point.

We just learned that the public comment period has been extended into November and that the Counties, who are generally opposed to having their powers stripped away, will be presenting their concerns at the next meeting on Oct 19th.

More details coming soon.  In the mean time, comments can be submitted to: 

Previous coverage on SB 45 on this blog....

Mar 15, 2010 update: 

Colorado Energy News - Who Will Have 'Power' Over Colorado's Power Transmission?

Gail Schwartz says "this bill is not intended to diminish local authority or input from the siting process", yet by giving task force decision-making powers to only 2 out of 64 counties and no public representation at all, how can it not have that effect?

The GEO Strategic Transmission and Renewables (STAR) Report (page 58), targets Trinchera Ranch and Louis Bacon ("an out-of-state billionaire") as the primary obstacle to new transmission in the San Luis Valley.

This analysis dismisses growing concern that the over-emphasis on absentee industrial solar generation in the rural San Luis Valley, will:
  • increase the cost of renewable energy for taxpayers and consumers
  • increase our energy CO2 footprint, and 
  • unfairly constrain solar energy development in other parts of the state. 

Colorado counties could be stripped of their power to decide about siting transmission lines, if the utilities have their way in the Senate this week.

Senate Bill 11-045, "concerning a streamlined process for securing governmental approval for the siting of electric transmission facilities", pretty much says it all.

Initially, the bill established a Transmission Siting Commission to replace the "1041" land use permitting process adopted by many counties for siting transmission in Colorado.  When Colorado Counties, Inc. balked, backers of the bill (with guidance from Xcel and TriState) quickly amended it to create a task force to "study" the idea.

The 16-member task force would be funded by and comprised mostly of industry and municipal interests and political appointees.  It's task is to "take testimony" through a series of public meetings on the "siting of electric transmission facilities", and report back to the Governor by the end of the year before authorizing the Commission.

Only two of the sixteen member task force would represent Colorado's 64 Counties.

Such narrow representation would effectively silence the voices of rural Colorado and local community groups and ratepayers, who would foot the bill for transmission decisions the Commission could make, should it be approved. 

Simply put; this bill ultimately seeks to disenfranchise people and local communities in Colorado from having a say in siting new transmission.

The bill was approved by a 7 to 1 vote in the Senate Agricultural Committee last week, including a thumbs up from Committee Chair, Gail Schwartz who represents the San Luis Valley.  The Valley is at the epicenter of Xcel and TriState's hotly contested SoCo transmission line, recently approved by the Public Utilities Commission.

The bill sets the stage for authorizing an undemocratic, industry dominated Transmission Siting Commission during the 2012 legislative session. If appointed, such a Commission could effectively push aside rising public opposition to costly new transmission and large-scale solar industrialization of the San Luis Valley.

SB-45 is a bad idea that gives political cover to those who wish to undermine local control and democracy in Colorado. If the Task Force for Steamlining Siting of Transmission Facilities has its way, Colorado ratepayers will get artificially high electricity rates and a path dependency on old style remote, monopoly-controlled renewable generation. This could diminish opportunities to generate sun and wind energy in their own communities where it creates the most benefit for the least cost.