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Commentary: In solar debate, something so obvious, we don’t even see it

Commentary: In solar debate, something so obvious, we don’t even see it

Ever notice how sometimes you can stare at a puzzle for a long time and never notice the obvious piece that puts everything in perspective?

Well, that’s been happening with all the arguments about the value of consumer generated electricity, and especially rooftop solar.

When consumer-owned solar started popping up on rooftops across the country, utilities were annoyed but not particularly worried. After all, so few people were using it that it was a tiny niche in the overall market and posed no real threat to their business model. And, it was objectively more expensive than the default — simply buying from your utility.

But as rooftop solar has become economical, consumers have taken a second look evaluating the costs and benefits, and there is little doubt that in the next few years solar will become a mainstream choice. Distributed generation and microgrids are the wave of the future, so much that the very concept is threatening the monopoly business model of a lot of utilities.

Just as the breakup of AT&T and the development of mobile phone technology disrupted telecommunications, distributed generation, storage and microgrid technologies threaten the current business model of regulated monopoly utilities, and they are fighting back. That disruption was painful for the phone company because their business model was blown up, but in the long run has been a boon for consumers as well as for the companies who were quick to adapt to where technology was headed.

Just as with ”Ma Bell,” utilities have some compelling arguments in their favor: as universal service providers they bear some costs and obligations that other businesses don’t have to. And, they argue, customers who generate their own power still impose costs upon the system (particularly system maintenance) and, because they purchase less power, pay disproportionately less than their neighbors to defray those costs.

So utilities have, sometimes successfully, argued that solar customers should pay a fee to stay on the system, and a real battle is taking place on whether they should and if so, how much. The utilities are arguing for big fees, naturally. The fee solves two problems – it helps recoup the utilities’ “lost revenue” from solar customers, but it also makes the project less attractive to the customer, serving to dissuade them from making the choice in the first place. A double win for the monopoly utility.

But in most of these public arguments a simple fact, so obvious as to be missed, is left out: consumers who generate their own power do it on their own dime — essentially paying the infrastructure costs that would otherwise be imposed on every other power customer.

That’s a really big deal, with huge ramifications for the economics of power generation over the coming decades.

Consumer participation in the generation market will drive innovation in a way that a few large purchasers never could: as consumers constantly chase the best deal and the newest technology, innovation is spurred in a way that never could happen with just a few large purchasers building plants at a glacial pace.

In this, distributed generation directly mirrors the revolution in telecommunications. For decades the phone company rented out the same model of phone to millions of customers. The great innovations were the Princess phone and touchtone, and that’s about it. Yet when the phone company was broken up and cell providers sprung up, we moved from the “revolutionary” touchtone phone to having supercomputers in our pockets in no time at all.

The same will happen with distributed generation. And it will all happen because consumers are using their own dollars to chase the best value and the newest technologies. Another obvious lesson — markets are the best way to allocate wealth, and to incentivize innovation.

So with all the talk about the potential costs of distributed generation, the biggest benefit is being left out: the distributed purchasing power of consumers, and the effect that will have on the pace of innovation and the costs to the system of developing new technologies.

Distributed generation pioneers — those consumers funding the growing market in home generation — are funding the research and development of revolutionary technologies that will change things for the better. Their investments aren’t primarily imposing costs on others, but rather picking up the R&D slack for the rest of us, while reducing the need for building additional generation.

What is the dollar value of that contribution? It’s obviously difficult to calculate. But if power generation technology moves at a fraction of the pace we have seen in telecommunications, it will literally be incalculable.

David Strom is executive director of the Minnesota Conservative Clean Energy Forum.

David Strom is executive director of the Minnesota Conservative Energy Forum.

Source: Midwest Energy News

One Response to “Commentary: In solar debate, something so obvious, we don’t even see it”

  1. Thomas Malcolm Pendergast says:

    The Hidden Costs of Wind Power
    JANUARY 4, 2013

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    As part of its response to the so-called “fiscal cliff” Congress passed a one-year extension of the Production Tax Credit (PTC) for wind power requested by President Obama and backed by Senator’s Chuck Grassley (R-Iowa) and John Thune (R-S.D.) and at a total cost of more than $12 billion[i] to U.S. taxpayers, necessitating more deficit spending over the next ten years. But that figure doesn’t begin to represent the full cost of wind power.

    The American Tradition Institute recently took a look at just what such wind power is really costing the nation.[ii] They found the cost of wind power to be as much as double the cost that the Energy Information Administration (EIA) is using in its models due to hidden, but true-embedded costs of using wind power. The authors find that ratepayers are paying an extra $8.5 billion to $10 billion per year for using wind energy, which generates 3.5 percent of our electricity, rather than other cost effective forms of generation. This is in addition to the tax credits, which the Obama Administration insisted be extended as part of the tax agreement.

    The American Tradition Institute added the hidden costs that include the cost of fossil fuel power as back-up when the wind is dormant, the additional cost of transmission that frequently occurs with wind farms due to the inaccessibility of the best wind resources, the cost of wind’s favorable tax benefits in ‘accelerated depreciation’, and a shorter estimated life of a wind turbine of 20 years to the per-kilowatt-hour cost of generating electricity from wind power that includes capital costs and operating costs, as determined by EIA and the Department of Energy. They found the cost of wind power to be 15.1 cents per kilowatt hour if natural gas is used to back-up the wind energy or 19.2 cents per kilowatt hour if coal is used as the back-up fuel. These costs are 1.5 to 2 times the 9.6 cents per kilowatt hour estimate the EIA is using for generating electricity from wind in its models.[iii]

    The Wind Power Cost Calculation

    American Tradition Institute started with an estimated levelized cost of wind power from government sources and added to it an estimate of the hidden costs of wind power. Levelized costs are the net present value of the total cost of new construction (including finance charges), maintenance, and operation of a generating plant over its lifetime, expressed in dollars per unit of output, i.e. dollars per kilowatt hour. They are used to compare various generating sources to see which sources are the most cost-effective when constructing new plants.

    The starting levelized cost was 8.2 cents per kilowatt hour that reflects installation costs of $2,000 per kilowatt of capacity and is based on information from EIA and the Office of Energy Efficiency and Renewable Energy at the Department of Energy. Then, assuming a 20-year life of a turbine rather than the optimistic 30-year life assumed increases the levelized cost to 9.3 cents per kilowatt hour (a recent study using empirical information from the U.K. found that the useful life of wind turbines is actually lower—only 10 to 15 years). After backing out the effect of accelerated depreciation for wind investments that the study authors assumed were hidden costs, the levelized cost increases to 10.1 cents per kilowatt hour. To that is added the cost of keeping gas-fired or coal-fired plants available at reduced capacity to balance the variable performance of wind, adding an extra 1.7 cents per kilowatt hour for natural gas and 5.5 cents per kilowatt hour for coal. Extra fuel for natural-gas fired plants adds 0.6 cents, and for coal-fired plants adds 0.9 cents per kilowatt-hour. Lastly, transmission line investment costs to get new wind power to the electricity grid add 2.7 cents per kilowatt hour. Thus, the total cost for wind power, including the hidden costs, averages 15.1 cents per kilowatt hour for natural-gas fired back-up and 19.2 cents per kilowatt-hour for coal-fired back-up. (See table below.)

    Screen Shot 2013-01-03 at 2.26.59 PM

    Source: American Tradition Institute, The Hidden Costs of Wind Electricity, December 2012, http://www.atinstitute.org/wp-content/uploads/2012/12/Hidden-Cost.pdf

    The Production Tax Credit

    Note that the effect of the PTC is not included in the above calculations. The PTC has been extended for one year by Congress and the President, but that one year extension means 10 years of subsidy going to wind operators that have begun construction of their turbines in calendar year 2013.[iv] The PTC provides wind operators with 2.2 cents per kilowatt hour for every kilowatt hour that the wind turbines generate over the next ten years, which is worth about 3.4 cents per kilowatt hour in pre-tax income since the PTC is applied after taxes. The Joint Committee on Taxation estimates that the one year extension will cost American taxpayers over $12 billion.

    Comparison to Other Technology Costs

    According to the EIA, the levelized cost of an advanced natural gas-fired combined cycle plant is 6.3 cents per kilowatt hour and that of an advanced coal-fired plant and nuclear plant are each 11.1 cents per kilowatt hour. Thus, the full cost of wind power is 140 percent higher than an advanced natural gas-fired plant and over 70 percent higher than an advanced coal or nuclear plant. Thus, assertions made by the wind industry that wind power is becoming cost competitive with fossil fuel-generated power are not the case from these cost estimates.

    According to Forbes, a power company in South Carolina is investing about $11 billion to construct two 1,100 megawatt nuclear reactors on roughly 1,000 acres. To get the same amount of electricity out of wind power that operates at a 30 to 40 percent capacity factor due to its intermittency, would require more than 1,700 turbines stretched across 200,000 acres, for an upfront investment of $8.8 billion, but providing less reliable power.[v]

    According to the study authors at the American Tradition Institute,

    “At the current price of natural gas and before counting any costs of transmission, wind’s cost is 6-7 cents per kilowatt-hour (kWh) more than its benefit—the cost of the fossil fuel it can save and the conventional generation facilities it can replace. For wind’s existing 3.5% share of all U.S. generation, that 6-7 cents/kWh translates into $8.5 to $10 billion extra that ratepayers have paid this year, and will continue paying every year for as long as existing wind facilities (or their replacements) remain in operation.”

    Conclusion

    According to the American Tradition Institute, there are numerous hidden costs to wind power, including the cost of back-up power, the cost of extra transmission, and the cost of favorable tax benefits. And, the assumption of a 30-year life used in government calculations for wind power is optimistic given reports from European countries that have invested early in wind power.[vi] Including these hidden costs in calculating the cost of wind power increases its cost by a factor of 1.5 or 2, depending on the power system that is used as back-up. The Institute calculates that ratepayers are paying an extra $8.5 to $10 billion a year for wind power compared to natural gas-fired generation, and this will only grow as more capacity is added. Add to this the more than $12 billion that the American taxpayer is paying for the ‘one-year’ extension for the PTC, and one can see that the wind industry is getting a real boondoggle at the expense of taxpayers and ratepayers.

    [i] Wall Street Journal, Renewable-Energy Tax Breaks Pass Despite Headwind, January 1, 2013, http://professional.wsj.com/article/SB10001424127887323635504578215790054677734.html?mg=reno64-wsj

    [ii][ii] American Tradition Institute, The Hidden Costs of Wind Electricity, December 2012, http://www.atinstitute.org/wp-content/uploads/2012/12/Hidden-Cost.pdf

    [iii] Energy Information Administration, Levelized Cost of New Generation Resources in the Annual Energy Outlook 2012, July 12, 2012, http://www.eia.gov/forecasts/aeo/electricity_generation.cfm

    [iv] The Hill, Issa takes aim at revised wind credit, January 2, 2013, http://thehill.com/blogs/e2-wire/e2-wire/275301-issa-wind-power-credit-of-serious-interest

    [v] Forbes, Why It’s the End of the Line for Wind Power, December 21, 2012, http://www.forbes.com/sites/christopherhelman/2012/12/21/why-its-the-end-of-the-line-for-wind-power/

    [vi] Energy Tribune, Wind Turbines ‘Only Lasting For Half As Long As Previously Thought’, January 2, 2013, http://www.energytribune.com/69566/wind-turbines-lasting-for-half-as-long

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