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Is Solar Really “Cost-Competitive” with Fossil Fuels?

by Michael Levi
January 7, 2014

REUTERS/Carlos Barria REUTERS/Carlos Barria

A finding last week by a Minnesota judge that a proposed solar project is a better way to meet the state’s electricity demand than several competing natural gas facilities has been making news. The decision has been reported as a “landmark” declaration that solar is “cost-competitive” with fossil fuels.

It seems that few of those who have been reporting on the ruling have actually read it. A deeper dive reveals that solar got the nod because of state policy rather than superior standalone economics. It also points to some tricky decisions ahead for regulators.

The 48-page opinion is long and complicated but can be summarized pretty straightforwardly. Several developers submitted proposals for meeting incremental electricity demand. A consultant to the government conducted a series of modeling exercises, which all concluded that various proposed gas plants were the most economic ways to meet Minnesota’s electricity needs. The judge pointed out, though, that Minnesota will need to add a substantial amount of solar in the coming years to meet a statutory mandate for solar power. He also argued that the state will need less incremental electricity than some others have claimed. Once that mandated solar power is added, he claimed, the state will need very little additional electricity generation. Hence the proposed gas plants would likely be superfluous, making them almost entirely a waste of money. The solar proposal, at least, would meet the mandate.

On top of that, the judge cited an expert analysis as determining that solar would deliver the lowest levelized cost of electricity (LCOE). But that expert analysis appears to incorporate revenues from sales of renewable energy certificates (RECs) by the solar project in determining its net cost. (I write “appears” because I can’t track down the analysis; I’ve only read filings that refer to it.) Those RECs, of course, only exist because of the mandate.

None of this means that the judge made the wrong decision or that the supportive policies are bad. (I don’t know enough about this case or the details of electricity modeling and regulation to have a view on that.) It does mean, however, that it’s wrong to take this as evidence that solar is cost-competitive absent policy support. Policy support (beyond the federal investment tax credit) was central for the judge’s findings.

This episode also suggests a quirk that needs to be grappled with. The judge’s logic around the state solar mandate seems to have essentially disqualified all the non-solar competition. Ultimately, then, this “competitive” bidding process seems to not have really been competitive, with only one viable project considered. Perhaps the judge is correct that solar is the only way to go – but, in that case, Minnesota consumers presumably should get to play some competing solar bids against each other. As mandates become increasingly important in shaping the country’s electricity system, predictably and transparently integrating them with the utility sector’s peculiar mix of regulation and competition will be of paramount importance.

Post a Comment 8 Comments

  • Posted by Tom Armistead

    I think you dismiss the significance of this decision a bit too easily. I have just filed a story on it to Engineering News-Record (http://www.enr.com) and, in reporting it, I did closely read the administrative law judge’s report and recommendation.

    Something that caught my eye, but apparently others missed, is that the judge’s recommendation hinged in significant part on the life-cycle cost of the solar proposal. He wrote, “this procurement represents an important turning point in Minnesota’s energy resource planning process. Since 1991, Minnesota has had a statutory preference in favor of renewable energy sources. Yet, that preference is overridden when the nonrenewable source has a lower total cost. Notwithstanding the statutory preference, it seemed that nonrenewable energy sources always won the head-to-head cost comparisons. Not anymore. Geronimo entered this bidding process as the sole renewable technology and beat competing offerors on total life-cycle costs. It deserves application of the statutory preference.”

    Fossil-fuel proposals have consistently beat renewables because their initial costs looked better than those of the renewable competitors, he is saying. Short-term thinking is a cultural bias of American business today. But looking at the life-cycle costs tilts the balance in favor of this renewable proposal.

    I don’t claim this kind of thinking will inevitably win the day for all or even most future renewable proposals, but it is certainly significant that it helped in this case. Presumably it could do so in other cases as well.

    Did “statutory preference” stack the deck against the gas-turbine offerors? In this case it did, but short-term thinking has blown past the stacked deck since 1991. Did renewable-portfolio standards put the fossil-fuel peddlers at a disadvantage here? Sure. But what would the balance look like if fossil fuels were taxed or otherwise penalized for the costs their carbon imposes on society’s health and on the climate?

    The truth is that fossil fuels have enjoyed a century-long, taxpayer-funded romp and their purveyors have become so used to beating their upstart competitors that they shed crocodile tears when they lose. Our taxes have given them breaks for “intangible drilling costs” in the first year of a new well since 1916. They have received a depletion allowance tax break since 1926, though that ended in 1975 for all but small companies. They have received a “domestic manufacturing deduction” since 2004 to prevent the exporting of jobs, but who could export the job of a roughneck on a well in Texas?

    Given all this, the advantages of renewable-portfolio standards and statutory preference enjoyed by the solar offeror in Minnesota are really, really small potatoes. Let the renewables industry snack on those potatoes for a few more years and, who knows? They may grow up some day to actually eat big oil’s lunch.

    Free-market worshipers with blinders on don’t like to admit it, but providing tax breaks and government support to encourage and incentivize innovation and new technologies is the American way.

  • Posted by Karl Rabago

    As a former utility regulator and long-time solar supporter, I disagree that this was policy over economics. The ALJ accounted for the lumpiness of the gas options and the opportunity costs associated with those, and quantified the superior economics of a proposal for multiple distributed installations of solar. He seems to have honored long-standing policy, to be true. The real question is why more renewables have not been built prior under the same policy. Different resources stack up differently – and some adjustments are going to be necessary in order to compare them. This happens all the time in the utility resource planning process. In my opinion, this judge happens to have done it right under the law.

  • Posted by Joris van Dorp

    What is the LCOE of solar energy during a cloudy day or during the night?

  • Posted by Alice Finkel

    Incremental energy demand cannot be met by an unreliably intermittent source, no matter the cost. This is particularly true for high latitude locations during increasingly cold winters.

    Unless they have worked on the front lines of power grid management for many years, judges lack the expertise to weigh the pros and cons of unreliable, unpredictable, intermittent forms of energy such as solar.

  • Posted by Bruce Russell

    Solar energy only helps crony capitalists and their politician sponsors. Minnesota electicity prices will go up while global temperatures go down. Pitchforks!

  • Posted by Nancy LaPlaca

    For at least 40 years, the coal industry has been able to push off pollution controls on a lot of very old, very dirty coal plants. The health and other damages from coal, according to Harvard scientists, are over $500 BILLION/year.

    So while the coal industry purchases $40 billion/year in raw coal from producers like Peabody (some of it from public lands at crazy-low rates), and spins it into $160 billion worth of electricity, the damages from that $160 billion worth of electricity are a staggering $500+ billion.

    Every dollar worth of coal that we burn does $3 in damage. Ouch.

  • Posted by Scott Sklar

    Many electric generation plants are used incrementally, meaning non-24 hour generation. Many increased electric loads are midday consonant with air-conditioning loads peaking midday. And there are many areas of the country where we have transmission and distribution bottlenecks – meaning the lines are at capacity and so bringing electric power closer to the consumer is more efficient and cost-effective. And finally, the judge is correct that solar (or wind, or marine or geothermal) is not dependent on fuel sources whereas coal, natural gas and nuclear plants pass on increased fuel costs to the consumer (via fuel escalation clauses). The easiest test to see if solar is cost competitive against any fossil generator, is to ask (if possible) what the 20 year generation costs is without fuel escalation costs — and most readers would be quite surprised. In most ases no one would ever guarantee the price, and the small percentage that would tends to be higher than solar and the other renewable generation. I teach in my two GWU classes, that the costs of energy has to be considered for the entire fuel cycle — mining, conversion, waste and emissions mitigation — and it is becoming clear that over 50 percent of the time the renewable portfolio is quite cost competitive to fossil and nuclear energy options.

  • Posted by sameer ranade

    Michael – Weren’t the REC’s created in response to a voluntary market instead of the mandate? If the solar project goes to meeting a statewide RPS then it can’t be used as a REC, because that would be double counting, correct?

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