Wednesday, May 22, 2013
Bill Powers, P.E., Powers Engineering
March 10, 2008
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16 Comments
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.
To Clint Porter:
Regarding your post....
For instance, the billions in tax breaks that oil companies receive for
domestic exploration benefit owners of the oil companies, but they do not substantially affect the price of oil, because oil is traded in a world market and the impact of these subsidies on world supply is negligible. While this points out the disturbing lack of a rational basis for such gifts to oil company shareholders, it also means that oil exploration subsidies do not put alternative energy sources at a financial disadvantage in the marketplace.
The obvious difference is that the capital expenditure for producing polysilicon (and probably any other production facility for various types of PV) DOES reduce the cost of the final product.
All the more reason to subsidize PV and NOT oil exploration/production.
Many thanks, Mr. Powers, for your excellent and informative article. We are looking at a world with increasing summer peaks, and to continue to meet the peaks with more CO2 is obviously a bad idea.
The Energy Information Administration (EIA) has underestimated the cost of natural gas wellhead prices by 200-300% during the past decade. As we quit building coal plants, and realize that if we continue to burn coal we will cook the planet, we're turning to natural gas. However, NG production peaked in the U.S., and has been declining -- I just read an article in the Denver Post a few weeks ago that NG production in the U.S. decreased 2.8% from 200 to 2006; and only in hte Rocky Mtn states has it increased. Well depletion rates are at 28% -- meaning that every new gas well is depleted in 3-5 years.
What about stranded assets? What about all the gas plants that are mothballed right now in the Midwest due to high NG prices? Is it smart to invest in infrastructure that may be abandoned in less than a decade -- or perhaps sooner?
We refuse to recognize peak oil, and peak natural gas is right around the corner.
Let's wake up and do what we should have been doing for the past 20 years - invest in renewables and efficiency.
Hermann Scheer made it happen in Germany; many thanks to Bill Powers for the education.
The huge subsidies that fossil fuel companies in the U.S. receive through favorable tax treatment are often used to justify offsetting subsidies for renewables. While the argument is correct in some cases, it must be applied carefully. For instance, the billions in tax breaks that oil companies receive for
domestic exploration benefit owners of the oil companies, but they do not substantially affect the price of oil, because oil is traded in a world market and the impact of these subsidies on world supply is negligible. While this points out the disturbing lack of a rational basis for such gifts to oil company shareholders, it also means that oil exploration subsidies do not put alternative energy sources at a financial disadvantage in the marketplace.
The problem is when you have a Berkeley mucky-muck like this guy going around telling everyone that Renewables are bad economics, it adds to the national consensus that we don't have to invest in clean energy for the future. He needs to drop the 1950's macro economics book and read Herman Scheer instead. Someone needs to get through to this guy that there is more to this than dollars and nonsense...
Re: Powers' comment #6 "Just plain wrong" dimissiong PV's contribution to reducing tranmission line congestion. Distributed generation like PV will help some with transmission congestion, but not enough. The California Energy Commission's current projections for renewable energy growth through 2020 shows the bulk of California's renewable generation capacity will come from wind, not PV. Cal ISO, the agency responsible for scheduling and coordinating the state's power grid, completed a study that concluded major new HV transmission lines will have to be constructed to efficiently move all this new wind power from the most lucrative wind farm sites to California's major power load centers. They also concluded that new technology energy storage will have to be deployed to stablize the grid with these new fluctuating and intermittent power sources.
On the residential level at which Borenstein evaluated his 10 kw system, I calculate that either he valued each kWh at only 3 to 5 cents that the installation replaces (PG&E's current marginal rate "Tier %" is now 36 cents/kWh, not even the cheapest retail rates are below 7 cents/kwh) or, once his theoretical system's modules reach the end of their warranty they are considered worthless. Most manufacturer's warranty coverage is 80% of original rating for 25 years. If we evaluated the costs and value of operating an automobile this way, I think people would be laughing at Borenstein the way I did when I ran across his "study" and self interested call for "more research" a month ago.
Borenstein's most questionable projection is that the current marginal rates are artificially high and are expected to come down. However just last week the upper tiers for PG&E (3,4, and 5) increased just over a penny each. (Tiers 1 and 2 lowered). What this means in the real world is that a "Tier 5" PV system of around 10 kw just increased in value approximately $20 per month. Our latest two PV customers were happy to hear this and it certainly makes my job promoting PV easier. We shall see if Borenstein is somehow playing chicken with the oncoming peak load rates, with their victims, pool owners, home medical equipment owners, and families living in high heat areas of the valley as his hood ornaments. Personally I enjoy the numbers game in this industry, like the fact that a properly marginal rate eliminating PV system of 10 kw is diverting approximately $1.4 million from PG&E over its lifetime of service.
Perhaps Borenstein is a PG&E shareholder? A shill. I hope not. He's a PhD. and we need all the smart people thinking better.
Last but not least, money saved not sending it to pay the power company has also already been taxed, so its value is much more according to ones tax bracket. A personal victory many working families forget about.
Next target: The marginal rate we are ALL paying to burn our internal combustion engines at 20 cents/mile, replaced with the soon to arrive electric vehicle miles which will cost 3 to 4 cents/mile, or next to nothing if charged by PV. There is a billion dollars a day in this country at stake. Sort of explains why the oil companies are grabbing as much profit as they can now!
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