Tam's Comments

This is a well-written and engaging piece, but it doesn't paint a very accurate picture of the RPS in CA.

First, SMUD is a public utility that calls its own shots. The state law that mandates 33% renewables by 2020 applies to public utilities but it gives almost total discretion as to how to meet that mandate.

SCE is a private utility, which is heavily regulated by the CPUC. The CPUC has engaged in extremely detailed modeling of how to reach the 33% mandate, as part of the Long-term Procurement Proceeding. This modeling includes various scenarios for meeting the mandate, including mostly wind, mostly DG, etc.

SCE has not chosen a PPA model for meeting the mandate. They don't have a choice. State law that began with the de-regulation effort in the mid-1990s generally prohibits utilities from building new generation, including renewables. There are some exceptions, but generally speaking private utilities have to pursue PPAs to meet the 33% mandate.

Last, public utilities can get a better deal through ownership not only through the benefits the SMUD rep mentions but also through the much lower cost of money available to public utilities. This is in fact the lion's share of the benefit of public ownership, which results from the far lower investment risk a public utility represents to a lender than a merchant power producer or a private utility.

John, as I note in my article, US production is in fact up quite a bit (about 600,000 barrels per day) in the last couple of years, primarily due to a dramatic increase in the number of rigs operating. But this doesn't enlarge the resoure, it just sucks it out quicker. Fracking for oil may enlarge the resource a bit, but it remains to be seen by how much and at what environmental cost. Ohio has recently put a partial moratorium on new fracking due to earthquakes being caused!

As for Russia, Mexico and Venezuela, Russian production is in fact up sharply in recent years, defying expectations. Mexico and Venezuela are, however, continuing their downward dive, and Mexico is clearly on a shard slope down the backside of their national peak. Venezuela has huge resources but it's mostly extra heavy oil that is of dubious value.

See IEA's recent warning about oil supplies, due to a number of problems around the world, even as OPEC production just reached a new 30 year high:

http://www.reuters.com/article/2012/03/14/iea-idUSL5E8EE25Y20120314

John, I fully recognize that we can't know with certainty if we're at the peak now. But the plateau of production amid record high prices is highly suggestive that we are. And the unconventional resources you mention are, it seems to me, exactly why Hubbert was off with respect to the global peak and why the US declining tail has been extended far further than the bell curve would suggest.

John, the Brent crude price reached a record in euros and in pounds in February of 2012 - exceeding 2008 prices. You're right, however, that in dollars the record was in 2008, due to currency fluctuations.

As for peaking oil, the trends in global expert opinion have veered sharply toward the view that we are going to peak before 2020 - even the IEA agrees with this now, with the caveat that increased investments might extend the peak. We also have various oil companies supporting the notion of a peak at well less than 100 mbpd.

If we're not at or near a peak now, why are prices so high? Mass hysteria? Or the threat of war with Iran?

Personally, I think it's a mix of all these factors, but the biggest factor weighing in favor of the view that we're at or near a peak now is the production plateau we've been on for many years now, despite record high prices.

I've seen Paula speak a couple of times and read many of her articles. She always provides good data, but her judgments always seem awry to me. And her facts sometimes debatable.

For example, she states in this piece that Germany slowed down in 2011. The data I have shows that Germany installed 7 GW in both 2010 and 2011, with 3 GW in December alone, leading the world in installations. How is that a slowdown? 2011 was a record year for PV installations, continuing a six year period of blockbuster growth in PV installed worldwide.

Why the pessimism?

Paula raises a good point about negative margins for some PV manufacturers. This clearly can't continue. But obviously many companies are making money - perhaps only the Chinese companies. We simply wouldn't have a market for PV sales if none of these companies were making money at current rates.

I don't agree that PV prices necessarily have to rise, however, to keep the market going. Even if we have overshot sustainable pricing for PV currently, based on costs of production, those very costs are coming down steadily. So even if some manufacturers have negative margins now there is a steady race to reduce production costs and make those margins positive.
Also, I wish Paula would engage with her readers here and respond to comments. She's never done so historically so her prognostications keep coming, keep on being shown to be overly pessimistic, and yet her gloomy view of FITs and the PV market in general never change... Methinks that Paula's generally pessimistic views are due for a correction of their own.

Steven, where is that cost figure to German residential rates from? It sounds far too high to me.

John, I mis-typed the date and should have wrote 2010. This was the tax compromise that included an extension of the Bush tax cuts, back in December of 2010. It extended the section 1603 cash grant program by one year for all renewable technologies.

This article has a number of inaccurate statements:

- feed-in tariffs are indeed tariffs. "Tariff" has different meanings and refers, in addition to the better known meaning of an import tax, to utility documents that set forth various agreements or billing arrangements. So a feed-in tariff sets forth the terms by which a utility will buy power from third parties
- also, the federal cash grant for solar applies to projects completed in 2012 (under a one year extension passed in late 2012) as well as those completed in 2011
- last, solar projects qualify for a 30% investment tax credit through 2016, which is equivalent to the cash grant in its amount, but does require that the entity claiming it have sufficient tax liability. So I won't be at all surprised if the US solar market continues its breakneck pace through 2012 and onward.

Steven, I don't have time to look up the detailed history of CA nuclear plant expenditures but I urge you to do so. I recall that very large sums were spent not too long ago to replace steam engines and other retrofits, some time after initial construction. So capital costs seem to be an ongoing issue and I won't be surprised at all if additional billions are incurred in the relicensing process (if it succeeds).

Steven, even though PG&E and SCE often talk as though the capital costs are paid off for Diablo and San Onofre this is not really the case. There are periodic very substantial costs required to keep these plants working and safe. Both plants are also seeking relicensing soon, which will surely come with additional very hefty costs. This is why I wrote in my article that 'stranded costs' would have to be analyzed in detail before any decision is made to shut down CA's nuclear power plants. If it is the case that these plants will require $billions in additional investments to extend their lives (as is likely), let's look at the potential for investing this money, instead, in renewable sources. Many renewables can provide baseload power, including geothermal, which currently provides 5% of the state's electricity, as well as biomass, and solar or wind with storage. Storage costs are still uncertain because these are new technologies but it may be the case that storage costs for variable renewables cost less than extending the lives of these nuclear power plants. Let's urge state agencies to examine the issues in detail, as I suggest, and then decide.

John, I ran these numbers through Clean Power Finance and it looks like you were actually too conservative in your analysis:

Installer Contract Cost $17,609
Solar Incentive Program- Step 5 ($7,431)
Federal Tax Credit/Tax Impact ($3,053)
Net Cost (year of installation) $7,125 ($1.80/watt DC, $2.11/watt AC)

Utility Savings Over Initial Term $21,617
$72 / mo (avg)
Payback Period Immediate
Total Life-Cycle Payback
(Cash Flow compared to Net Cost) 232%
System Resale Value $10,132
Levelized Cost of Solar Energy $0.048 / kWh

And even without subsidies you're actually there in terms of grid parity - with one caveat. Comparing levelized cost of solar to retail grid rates ignores the cost to other ratepayers of the transmission and distribution grid (T&D), which is the subsidy provided by net metering and the fact that in CA you get the full retail rate for any solar power sent back to the grid.

John, could you show your math here? I'm with you philosophically, but I'm not sure your numbers add up.

There's not a website to my knowledge that shows historical and current rates. But here's the draft 2011 MPR resolution (which will put in place the new rate when approved soon by the CPUC):

http://docs.cpuc.ca.gov/PUBLISHED/COMMENT_RESOLUTION/146587.htm

As for your statement about the utilities not being strong price hawks, you're simply wrong. I know from direct experience how hawkish the utilities are on prices for renewables. Yes, contract prices are passed through to ratepayers, but utilities hate to have their rates go up more than they deem necessary for their own investments ("rate-base") because rate increases inevitably draw ratepayer complaints and increased regulatory scrutiny. So when utilities are trying to convince the CPUC to allow them to make their own billions of dollars in investments in improved transmission infrastrucuture, they hate to have renewables further increase prices. Many renewable energy contracts are in fact below the market price referent, including many solar projects from 5-20 MW in size forwarded to the CPUC by SCE for approval earlier this year. The recent trend in CA is for auction programs (like the RPS and the new RAM program) to lead to prices well below the MPR. This is a bit of a problem b/c I think it's very likely symptomatic of a "race to the bottom" rather than real ability to build projects at the prices I'm hearing (well below the MPR). But time will tell.

My feeling is that even if ratepayers are on the hook for a small premium for renewables they are still getting a very good deal overall because of the environmental and economic benefits that result from renewables. Germany has led the way on solar, wind and biomass and has been highly successful with its feed-in tariff program in bringing these global industries to scale. We are now reaping the rewards of Germany's labors with dramatically reduced solar prices, among other things (and of course many other nations' efforts, including the US, with feed-in tariffs and other support policies).

The future looks bright and it's not been because of a strict adherence to a narrowly economistic approach. Rather, policymakers in many nations have recognized the broader benefits of renewables and acted accordingly.

Keller, the market price referent is regularly adjusted to reflect current natural gas prices. The 2011 MPR is about 15% lower than the previous one because of the dramatic natural gas price declines. But keep in mind that NG prices are highly volatile so projecting NG prices is bound to fail. NYMEX values are used for this purpose by the CPUC in crafting its MPR, but the market is also bound to be wrong. It is what it is.

This problem with forecasts is relevant to judging whether renewables are cost-effective. The most recent CA renewable portfolio standard recognized this problem and eliminates the MPR as a means for judging cost-effectiveness.

Moreover, the Abengoa contract was proposed in 2009 and its cost-effectiveness is judged in relation to the 2009 MPR. So you are right that current natural gas electricity can be produced substantially cheaper than when the Abengoa project was accepted by PG&E. But, again, this is an unfortunate consequence of judging cost-effectiveness by highly volatile fossil fuel prices.

One of the many benefits of renewables is that the prices is locked for the entire contract length. In other words, there is no volatility in price because there is no fuel cost. So renewables are a strong hedge against volatility and this value has long been recognized by the CA Energy Commission but not yet by the CPUC.