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Estimates, Guesstimates, Obsolete & Just Plain Wrong: Severin Borenstein's PV Costs Paper

In January, Professor Severin Borenstein, E.T. Grether Professor of Business Administration and Public Policy at The Haas School of Business, University of California, Berkeley, published his academic paper entitled, "The Market Value and Cost of Solar Photovoltaic Electricity Production."

As an energy expert with extensive real-world experience in power systems, environmental engineering, and regional energy planning, I have worked with U.S. and Latin American organizations to provide expert testimony and analysis, strategic planning, and power equipment assessment.

Taking a pragmatic and market-oriented view in reviewing Professor Borenstein's academic paper, I conclude that it is simply not a real world account, but is based on guesstimates, estimates, and obsolete information. The differences between an academic exercise and real-world realities are clear, especially given that Professor Borenstein has not overseen or managed deployments of solar PV or other energy systems.

In comparing today's actual costs and benefits associated with PV solar to the extrapolations in the paper, nine flaws in Professor Borenstein's paper are:

1. Estimate: Peaking PV prices are much lower than peaking turbine costs

Borenstein ignores real-world generation technology evaluations and PV tariff rates that are in conflict with his conclusions regarding the cost-effectiveness of PV compared to peaking gas turbines. For example, the California Energy Commission has calculated the levelized cost of power from a 50-megawatt (MW) peaking turbine at $508/MWh, significantly higher than the levelized cost of PV estimated by Borenstein at $408/MWh [Endnote 1]. The Borenstein estimate of $408/MWh assumes an $8 per watt installed PV cost for a 10 kW residential system and no subsidies or incentive payments. Installed PV costs for very large thin-film PV systems in today's market are as low as $5 per watt [Endnote 2].

2. Guesstimate: Ignoring actual PV pricing for hypothetic analysis

The on-peak summer tariff established for commercial PV power by Pacific Gas & Electric (PG&E) is $368/MWh [Endnote 3]. The on-peak summer tariff established by Southern California Edison is  comparable [Endnote 4]. These rates are over three times what Borenstein asserts this PV is worth. His work would be more useful if it acknowledged that the utilities are paying as much as $368/MWh for PV power and examined whether the economic justification developed by the utilities for this PV tariff is sound.

3. Obsolete: Working from a 10 kW residential PV system ignores market realities

Borenstein is wrong to base his entire analysis of PV on a 10 kW residential-scale system. Large commercial systems are more cost-effective and account for much more installed PV capacity. The California Energy Commission assumes a 1,000 kW PV system in its December 2007 study comparing the levelized cost of generation technologies [Endnote 5]. Commercial PV systems account for a large majority of the PV capacity being installed under the California Solar Initiative [Endnote 6].

4. Obsolete: Basing analysis and comparisons of PV with obsolete combustion turbine costs

Borenstein compares the levelized cost of PV power to that of the highest cost conventional generator, simple cycle combustion turbines. Borenstein's combustion turbine levelized cost numbers are low and obsolete. Combustion turbine fixed costs are escalating rapidly. The California Energy Commission's 2007 combustion turbine fixed costs are well over double what Borenstein assumes in his analysis [Endnote 7]. In contrast, the California Energy Commission projects that PV costs will drop in half by 2020 [Endnote 8].

5. Just plain wrong: Dismissing the value of PV in avoiding billions in new peaking turbine or transmission line build-out

Borenstein incorrectly dismisses the value of PV in delaying or eliminating new peaking turbine and transmission projects. This is the primary reason that PG&E pays $368/MWh for PV in California. Utilities use projected load growth as the justification for adding power generation assets locally or building more transmission. One MW of PV available during peak demand periods will reduce the utility demand projection by 1 MW. It is that simple.

6. Just plain wrong: Dismissing current and future utility-scale PV deployments to avoid criss-crossing California with more transmission lines

Transmission congestion is a major issue in California. Borenstein's logic that PV has not historically been focused in transmission-constrained areas of California, and therefore little or no economic value can be credited to PV for avoided transmission infrastructure, is flawed. The fact that PV has not been focused on transmission constrained areas in the past does not prevent PV from being focused on those areas now. All three major electric utilities in California, PG&E, SCE and San Diego Gas & Electric, are currently petitioning to build major new transmission lines [Endnote 9]. All of the utilities are justifying these projects on access to renewable energy, increased grid reliability, and reduced transmission congestion. PV meets all of these objectives without building the transmission lines.

7. Guesstimate: Ignoring real-world non-energy capacity payments in revenue requirements of peaking turbines

Borenstein's analysis assumes that the only price that matters is the levelized wholesale market price of power. He acknowledges that non-energy capacity payments occur, and asserts these payments distort the market. However, he then proceeds to compare PV to a hypothetical low ($111/MWh) levelized market power price that does not take into consideration the dominant role capacity and related payments play in meeting the revenue requirements of peaking turbines in the real world.

8. Just plain wrong: Ignoring direct and indirect subsidies for gas-fired peaking turbines defining the technology as a "pure market" player

Borenstein's implication that natural gas-fired peaking turbines are pure market competitors, and that PV can not compete against this pure market competitor, is fundamentally flawed. The dominant peaking turbine variable cost is the cost of fuel. The tax code, through the depletion allowance, has heavily subsidized the production of natural gas for most of the last century [Endnote 10 and 11]. The depletion allowance effectively allows oil and gas producers to recover their entire capital investment in as little as a few years [Endnote 12].

9. Just plain wrong: Dismissing oil and natural gas production subsidies on market prices

Borenstein incorrectly dismisses the significance of domestic oil and natural gas production subsidies on the market price of power, asserting that the world price of oil is unaffected by U.S. subsidies to its domestic oil and gas industry. The U.S. Treasury has foregone hundreds of billions of revenue, in real dollars, since the depletion allowance was introduced [Endnote 13]. If even a small fraction of this cumulative government largesse to oil and gas producers had been directed at PV technologies, such that PV systems were also recovering their entire capital investment within a few years, the cost of PV would almost certainly be lower than it is today and the installed PV capacity would be much greater. That is exactly why Congress just passed legislation to move $17 billion of subsidies from the oil and gas industry to cover renewed tax credits for the renewable energy industry - to level the playing field [Endnote 14].

In conclusion, it is suggested that Borenstein title his paper: "An Ivory Tower Viewpoint: The Market Value and Cost of Solar Photovoltaic Electricity Production."

If he would like experts to help him revise his paper and conclusions based on real costs, in a real world, we can find the experts to help him.

Bill Powers, P.E., is an energy expert with extensive knowledge and experience in the fields of energy and environmental engineering, air emissions control, and regional energy planning. He works with clients throughout the United States and Latin America, providing expert testimony and analysis, strategic planning, and equipment testing for public sector and private industry clients. He is the author of the 158-page report, San Diego Smart Energy 2020.


Endnotes:

1 California Energy Commission, Comparative Costs of California Central Station Electricity Generation Technologies, Final Staff Report, December 2007, p. 7, Table 2. 50 MW simple cycle combustion turbine investor-owned utility levelized cost is $507.98.

2 February 2007 press release, JUWI Group, World's largest solar power plant being built in eastern Germany - 40 megawatt project near Leipzig a milestone on the road toward a 100% renewable energy supply. Installed cost of the 40 MW PV project is €3.25/watt, or $4.85/watt. The euro (€) to dollar exchange rate as of February 26, 2008 is 0.67 euro to 1 dollar. 

3 PG&E commercial solar A-6 tariff, January 1, 2008. Peak summer energy tariff is $0.36806/kWh ($368.06/MWh).

4 California Energy Commission, Integrated Energy Policy Report, November 2007, p. 143. "SCE's tariff pays 3.28 times the base market price referent for deliveries during the summer peak time of delivery period." Online at: 

5 California Energy Commission, Comparative Costs of California Central Station Electricity Generation Technologies, Final Staff Report, December 2007, p. 7, Table 2.

6 Telephone conversation between B. Powers and J. Supp, California Solar Initiative (CSI) program manager, California, Center for Sustainable Energy, February 25, 2008. Currently 225 MW of commercial PV capacity and 40 MW of residential PV capacity are reserved under CSI.

7 Ibid, p. 200, Table E-2. California Energy Commission estimates combustion turbine fixed cost is $164,550/MW-yr ($164.55/kW-yr). Borenstein estimates combustion turbine fixed cost at $72,207/MW-yr.

8 California Energy Commission, Integrated Energy Policy Report, November 2007, p. 55.

9 PG&E: Canada/Pacific Northwest to Northern California Transmission Project, SCE: 500 kV Devers-to-Palo Verde 2 (DPV2) transmission line, SDG&E: 500 kV Sunrise Powerlink.

10 Robert Bryce, Cronies - Chapter 4: Depleting the Federal Treasury, pp. 47-48. For many decades, oil and gas producers could deduct 27.5% of the income from their wells.

11 U.S. Department of Energy - Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 1999: Primary Energy, September 1999, p. 22. Independent oil and gas producers can now deduct up to 15% of the income from their wells.

12 Industrial Economics Incorporated, Fueling Global Warming - Federal Subsidies to Oil in the United States, June 1998, p. 2-6. "Percentage depletion allowances for oil allow the industry to write off a percentage of the gross income from oil production each year, as opposed to a percentage of the gross investment. As a result, deductions can actually exceed the original investment. Beginning in 1975, the provision was successively narrowed so that it primarily benefited smaller, independent oil companies. However, this trend has been reversed somewhat since 1990, because percentage depletion has been allowed on transferred properties (even if the new owner would not otherwise be eligible for percentage depletion benefits) and exempted from the Alternative Minimum Tax."

13 Robert Bryce, Cronies - Chapter 8: Bleeding Oil, p. 93. By late 1960s, the depletion allowance has cost American taxpayers an estimated $696 billion in 2002 dollars.

14 RenewableEnergyWorld.com, House Passes Renewable Tax Credit Bill, February 28, 2008.

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