The declining cost of solar panels and the widespread adoption
of rooftop solar in California lead to many cocktail party discussions about
the competitiveness of green energy.
While at first glance it may seem that
solar power and other renewable energy sources are able to compete with
conventional resources, a closer examination of the characteristics and costs
of electricity systems demonstrates that current renewable technologies are not
economically competitive.
The fixed costs of
electricity systems, the capital costs of transmission and distribution
systems, are large. Actual electricity tariffs do not typically recover fixed costs
explicitly and separately from electricity use. Instead they recover them
through use charges per kWh. If electricity pricing were more efficient,
customers would pay a large fee for the use of the transmission and
distribution systems disconnected from the amount of electricity they use and
would be charged a separate variable fee based on actual consumption. (See this
article by Ahmad Faruqui and Mariko Geronimo Aydin in the Fall 2017 issue
of Regulation for a more thorough discussion of electricity pricing.)
Thus, current bills do not inform consumers about how high the fixed costs of
the system really are.
Understanding the
significance and recovery of fixed costs is important because of the manner
through which customers with solar panels on their roof are reimbursed for the
power they generate. Solar production in many states, especially
California, is reimbursed at full retail rates. But when a household produces
solar power and reduces the use of system-generated electricity, the system
saves only the marginal costs of the power that it did not have to produce,
which is usually much less than the retail rate. None of the large fixed costs
are saved.
In California,
because of its tiered retail rate structure, the discrepancy between the retail
rate and the amount the system saves because of rooftop solar production is
large. The marginal cost of power generation is about 6-10 cents per kWh, but
customers are reimbursed at full retail rates (many at over 30 cents per kWh)
rather than the lower marginal costs of system generation. Reimbursement at
full retail rates shifts the fixed costs of the electric system from solar panel households to other users. Without the
excessive payments, decentralized solar would not be competitive.
Other renewable
generation sources would appear to be competitive with natural gas generation.
According to estimates of the total costs of various
generation technologies over their operating lifetime, large-scale
centralized solar generation in the deserts of the American southwest and
large-scale onshore wind generation both have costs that are competitive with
new natural gas generation. (Offshore wind is much more costly. See my blog on Cape Wind, a
failed plan to build a wind farm off the coast of Massachusetts.)
However, even if
the lifetime average costs of wind and solar are the same as coal or natural
gas, the equivalence needs to be qualified. Different electricity generation
technologies are very
imperfect substitutes. The marginal value of electricity varies across time
because demand varies by time of day and space because of transmission
constraints. For example, wind power supply is greatest during winter nights,
when demand is low, and lowest during summer when demand is highest. Wind is
also most plentiful far from where people live and consume electricity, meaning
it incurs additional costs to transport the electricity to people. At least
solar output is large during the summer afternoon peak demand period. But both
solar and wind are not dispatchable. That is, their output cannot be made to
vary up or down.
Until
cost-competitive green energy that is dispatchable is available, renewable
sources of electricity require backup conventional generation. Because the sun
eventually sets, and the wind stops blowing, natural gas generation whose
output can be varied (sometimes quickly) must be available as backup. The fixed
and variable costs of the backup must be paid by someone. These hidden costs need to be considered in any calculation of “cost
competitiveness.”
Future
technological breakthroughs, such as more efficient batteries to store electricity and more cost
effective dispatchable solar power sources, may make green energy a
better substitute for conventional generators. But for the time being, without
governments putting their thumbs on the scale, green energy is not
competitive.
Peter van Doren is a Senior Fellow and Editor at the Cato Institute HERE. This article was written with
research assistance from David Kemp.
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