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 solar inefficiency means prices are about to rise

By Tom Miles

GENEVA (Reuters) – The United States has notified the other 163 members of the World Trade Organization that it is considering putting emergency “safeguard” tariffs on imported solar cells, according to a WTO filing published on Monday.

The move raises the stakes in a global battle to dominate the solar power industry, which has grown explosively in the past five years. As production has increased, prices have tumbled, favoring producers who can take advantage of economies of scale.

The United States, China and India are vying to be the market leader, and are looking out for any perceived breach of the international trade rules by their rivals.

Last September, the WTO ruled that India was illegally discriminating against U.S. solar exports, while India launched its own WTO complaint about solar subsidies in eight U.S. states.

The United States’ ability to attract renewable energy investment has been tarnished by the shift in energy policy under U.S. President Donald Trump, putting China and India on top, a report by British accountancy firm Ernst & Young said earlier this month.

The U.S. decision to consider safeguard tariffs follows a petition to the U.S. International Trade Commission (ITC) by Suniva, Inc, the filing said.

Under WTO rules, such temporary tariffs may be used to shield an industry from a sudden, unforeseen and damaging surge in imports. They can be challenged by other WTO members.

The ITC will decide by Sept. 22 whether the U.S. industry has suffered “serious injury”, and if that is the case it will submit its report to Trump by Nov. 13, the filing said.

Suniva’s petition said the volume of imports rose by 51.6 percent between 2012 and 2016, while the value of those imports grew by 62.8 percent from $5.1 billion to $8.3 billion.

“The petition alleges that increasing imports have taken market share from domestic producers and have led to bankruptcies, plant shutdowns, layoffs, and a severe deterioration of the financial performance of the domestic industry,” the U.S. filing said.

Suniva itself filed for Chapter 11 bankruptcy on April 17.

While imports have risen, U.S. producers have seen business shrivel, with 1,200 manufacturing jobs lost and a 27 percent wage decline in the four years to 2016. U.S. solar cell plants went from running at 81.7 percent of capacity in 2014 to 28.9 percent in 2016, the filing said.

“Data in the petition also indicates that (U.S. producers’)domestic market share fell from 21.0 percent in 2012 to 11.0 percent in 2016, despite a $4 billion growth of the U.S. market over the same period.”

(Reporting by Tom Miles, editing by Larry King and Jane Merriman)