Is Green Energy Competitive?

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. 

Written with research assistance from David Kemp.

Article by Peter Van Doren. Originally published at Cato At Liberty.

US taxpayers may lose $890 million in Chilean ‘green energy’ debacle

By Gram Slattery

SANTIAGO (Reuters) – The U.S. government is auditing a foreign aid program that loaned almost $1 billion to renewable energy projects in Chile – including solar farms in such deep financial trouble that the loans may never be fully repaid, according to people familiar with the matter.

The Office of Inspector General for the U.S. Agency for International Development (USAID OIG) is examining approximately $890 million of loans approved by the Overseas Private Investment Corporation (OPIC), it confirmed in an emailed statement after inquiries by Reuters.

The audit, which began in 2016 and has not been previously reported, is centered on OPIC’s decision to fund five Chilean solar farms and a hydroelectric project in 2013 and 2014.

OPIC, which aims to advance U.S. interests by lending to overseas business ventures, has come under fire from critics who say private banks are best suited to make investment decisions and that it places too much emphasis on renewable energy. U.S. President Donald Trump proposed cutting funding for any new OPIC projects in his 2018 budget outline released last week.

If OPIC’s funding is cut, it will be due in part to questions about investments such as its loans to the Chilean solar projects. At least three of its five solar projects have started restructuring their debt, according to two people familiar with the projects’ finances. They said OPIC’s losses on the solar deals are likely to exceed $160 million.

OPIC in a statement said it was confident it would recover the loans over the coming decades, but acknowledged its original timeline for repayments had changed. The agency, which emphasized that most of its worldwide projects are on firm financial footing, added that it would assess the OIG’s recommendations once the audit is complete.

Such audits of specific OPIC investments are relatively rare – the last was issued in 2015 – and can stem from a number of considerations such as “the level of U.S. funding involved” and “reported concerns over the management or performance of a program,” the OIG said.

The Chile audit, which will result in a public report, will examine “the factors OPIC used to assess and approve its energy projects in Chile,” among several other issues, the OIG said. It expects to finish the audit later this year.

“Development banks get the ball rolling in the industry,” Carlos St. James, senior renewable energy advisor at Wood Group, said of OPIC’s investments in Chile. “Unfortunately, they bet on the wrong kind of projects.”

A BIG BET

In 2013 and 2014, according to public OPIC reports, the agency loaned about $2.5 billion to 32 projects throughout Latin America, with over a third of those funds going to Chilean energy projects.

That included loans to five solar farms, four of which were constructed within 70 miles (113 km) of one another in the Atacama Desert. Three of those, known as Salvador, Luz del Norte and San Andres, are now facing severe financial issues, according to interviews with eight people involved in the loans and internal documents viewed by Reuters.

OPIC approved $449 million in loans to the projects despite their reliance on an unusual income structure, one that had never been tried on such a large scale. Instead of contracting to provide power to a third party at a fixed price, the typical arrangement, the projects inject at least half their power into the public grid at the going market rate, which changes hourly.

While several commercial banks examined financing the projects, according to two sources, they largely deemed the so-called merchant pricing scheme too risky.

But OPIC’s internal analysts considered the merchant market a manageable hazard, according to three internal reports from 2013 and 2014 obtained by Reuters, as well as two people involved in the projects.

OPIC expected local power prices of over $100 per megawatt-hour, the people said, a rate that would be more than twice average U.S. power prices. OPIC declined to comment on their expectations.

That view has proven too optimistic. By the middle of 2015, falling demand from nearby mines and slow construction of transmission lines, among other factors, began to severely depress prices. (For a graphic see http://tmsnrt.rs/2rldTim)

When OPIC’s solar projects, along with several others, began producing electricity, they further depressed prices by flooding the local market with power. This spring, prices have regularly touched zero during daylight hours, according to grid data.

OPIC said it expected power prices to rise in the coming years and that the loans were structured to ensure solvency in the long term.

But most analysts are forecasting prices well below the original assumptions made by OPIC. In a November filing, Etrion Corp <ETRN.ST>, a Swiss company that owns the Salvador solar plant, said it was expecting long-term power prices of $38 per megawatt-hour.

Etrion also said in its fourth quarter results that the value of Salvador’s “fixed assets pledged as collateral” to OPIC had almost halved to $87.9 million in 2016 from $166.2 million in 2015. It added that it has reached a restructuring agreement with OPIC, delaying all repayments for a year and leaving open the possibility of further delays.

Etrion Chief Executive Marco Northland did not respond to questions about loan repayments and the audit, but said he was confident market conditions would improve. The Luz del Norte project, owned by First Solar Inc. <FSLR.O>, and the San Andres project, now-owned by private equity firm Ameris Capital, are also being restructured, according to two sources with knowledge of the process.

Javier Contreras, the CEO of Ameris Capital, declined to comment on the audit, but said if both parties remained committed to the projects, the loans would likely be repaid in full. First Solar declined to comment.

Two sources with direct knowledge of the projects’ financing said OPIC would likely need to forgive 40 to 60 percent of the loans given to the three solar projects. That would result in OPIC forfeiting roughly $160 million to $240 million.

The other OPIC projects being audited in Chile are the Maria Elena solar park, constructed by SunEdison Inc <SUNEQ.PK>, and the Amanecer solar park owned by Terraform Power Inc <TERP.O>. The OIG is also auditing the Alto Maipo hydroelectric project controlled by AES Gener <ASG.SN>. In a statement, AES said the “auditors had the opportunity to see the physical works, access to documentary material and elements that, in the opinion of Alto Maipo, demonstrate a positive balance for the project’s implementation.” Terraform Power declined to comment. Now-bankrupt SunEdison did not respond to requests for comment.

(Reporting by Gram Slattery; Editing by Christian Plumb and Paul Thomasch)