When President Barack Obama announced his Climate Action Plan, he gave broad executive powers to the EPA to establish carbon emission standards for both new and existing power plants. He also increased funding for clean energy, while setting a goal to double our level of renewable energy generation by the year 2020. There will also be new vehicle fuel economy standards developed to take effect after 2018 and numerous other measures to reduce the use of fossil fuels.
Of course, critics claim these actions will hurt the economy by raising the price of energy, which will in turn put a drag on the recovery and lead to more job losses. Leaving the question of green jobs aside for the moment, let’s take a look at the economics of switching to renewable energy.
Letha Tawney of World Resources Institute asked whether renewables are ready for prime time? Her analysis uncovered several reasons why the answer should be, “Yes.”
The first, and to many the most important reason is cost. “Renewables are cheaper than you think,” said Tawney. The average cost of residential solar during the first quarter of 2013 was $4.58 per watt, a decrease of 15.8 percent from last year. But the average can be deceiving as factors affecting cost and effectiveness vary significantly across all regions of the U.S. In some places, the prices dropped below $3 a watt.
This is a point that John Farrell takes up at Renewable Energy World when discussing the notion of “grid parity,” which has been a kind of holy grail for the solar industry. Farrell makes the distinction between subsidized grid parity and unsubsidized grid parity, referring to the various Federal and state tax credits that purchasers of solar panels can qualify for.
When combined with the amount of sunlight available annually in each location, plus the fact that the baseline market price for electricity varies widely by region, it’s no wonder that some areas (he mentions Southern California and New York) are already at unsubsidized grid parity, while other areas like Minnesota and Illinois are still falling short, even with subsidies.
These factors can all be viewed in these solar rankings (Excel download), which shows that New York, Maryland, New Jersey, and Oregon score very well for state subsidies, while Arizona, California, and Nevada do well for hours of cloudless sunlight. Hawaii has the highest utility rates, at over 30 cents, followed by Connecticut at just under 18 cents
So the answer to whether or not solar is cheaper or more expensive than fossil fuels, depends quite a bit on where you live.
Still the trend is clear, and even if you live in a state that is behind the curve, renewable energy prices will continue to come down. Bloomberg recently reported that the cost of onshore wind is now “neck and neck” with new coal plants on a cost per kW basis. In fact, the IEA predicts that by 2016, renewables will beat both natural gas and nuclear.
Energy cost issues aside, there are a number of other ways in which renewables will help save money. There are considerable costs associated with peak demand, primarily in the form of capital costs required to provide sufficient capacity. But solar energy, which is most available during the hottest part of the day, the time when the demand for electricity is at its highest, provides additional value by virtue of its timeliness. In Germany, where the commitment to solar is very high despit being not particularly sunny, solar contributes as much as 35 percent of the peak demand on hot days, driving prices down below the normally discounted nighttime hours.
Likewise, utility-scale wind has the potential to reduce wholesale prices. A report by Synapse Energy Economics found that an additional 33 GW of wind power could save the 13 states served by the PJM regional transmission organization close to $7 billion annually by 2026. An earlier report found similar savings for states served by the Midwest Independent System Operator (MISO) by 2020 with the addition of 20 GW of wind power.
Another criticism that often comes from the energy establishment is that renewables require expensive storage. While it’s true that fossil fuels are inherently storable in a tank or a cylinder in a way that flows of wind, or sunshine or electricity are not. However, as more renewables are being deployed, more opportunities for intrinsic storage are being discovered.
For example, in the Pacific Northwest, the Bonneville Power Administration has been exploring ways of storing thermal energy in concert with their customers, using anything from hot water heaters to refrigerated warehouses. In a sense, it’s almost like the flip side of traditional demand response; instead of requesting the customers to take less energy from the grid during times of peak demand, utilities would be asking customers to take more energy during times of peak production. These types of thermal loads can store energy for both heating and cooling purposes, thereby making good use of this excess power while helping to balance the grid at the same time.
Other examples of loads with storage capacity include energy-intensive processes like aluminum smelters, or anything to do with pumping water or compressing fluids, like municipal water or sewer systems. This represents a great opportunity, which, according to the U.S. Dept. of Energy’s National Renewable Energy Laboratory (NREL), can be expected to grow by a factor of five by 2050. At the same time, the number of interruptible loads will also need to double to accommodate the sophisticated juggling act that the self-regulating smart grid of the future is poised to become. This trend is epitomized by micro-grids. All of this is not to mention the continuing developments in battery-based storage systems.
Finally, if that wasn’t enough to silence the naysayers, there is the fact that renewable energy has become an attractive investment for utilities. Numerous utilities are putting down substantial amounts of cash to build up their renewable portfolio. MidAmerican Energy Co. recently announced plans to spend $1.9 billion to add 1,050 MW of wind capacity, consisting of 656 new wind turbines, to be installed in Iowa by 2015.
CEO Greg Abel gives credit to the administration of Gov. Terry Branstad for “its focus on creating an environment that allows for significant investment in Iowa, and we are pleased to be working hand in hand with them to grow our state and create good jobs.” Branstad, a big supporter of wind power, just approved an extension of the production tax credit. The project will be the largest of its kind in state history. The windmills are expected to save Iowans an estimated $10 million on their electric bills by 2017.
Likewise, Portland General Electric is spending $535 million to add 116 wind turbines with a total capacity of 267 MW to its renewable portfolio. This will help the utility comply with the state mandate to provide 15 percent of its power from renewables.
Things are changing rapidly in the utility sector. These changes will have profound impacts on consumers, the environment and on the utilities themselves. New business models will emerge, and new patterns of generation, distribution and management, that will hopefully lead to cleaner, more efficient, economical and sustainable systems in the future.