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What happened to 5.36 giga-dollars in CA?

December 15, 2013

“The government support — which includes loan guarantees, cash grants and contracts that require electric customers to pay higher rates — largely eliminated the risk to the private investors and almost guaranteed them large profits for years to come. The beneficiaries include financial firms like Goldman Sachs and Morgan Stanley, conglomerates like General Electric, utilities like Exelon and NRG — even Google.”    Eric Lipton & Clifford Krauss –  NY Times

Recently an article by Pete Danko entitled “Solar Power Hitting New Records in California” appeared on Earthechling.com.  The article indicates that installation of solar energy generation facilities is growing dramatically in California, and specifically touts three major large scale solar PV installations that are now in-progress or on-line recently;  the California Valley Solar Ranch, Antelope Valley Solar 1, and the Topaz Solar Farm, representing a combined nameplate capacity of over 1000 mega-watts (1 giga-watt).

Because of their size and cost, it is worthwhile to take a look at these three facilities in greater detail:

Project

Nameplate capacity (MW)

Projected annual output (MWh)

CF (%)

Capital Cost

$/watt

California Valley   Solar Ranch

250

482,000

22.0%

$1,600,000,000

$6.40

Antelope Valley Solar   1

250

482,000

22.0%

$1,360,000,000

$5.44

Topaz Solar Farm

550

1,096,000

22.7%

$2,400,000,000

$4.36

Combined Totals

1050

2,060,000

22.4%

$5,360,000,000

$5.10

Analysis of Economics and Performance

A simplistic but reasonable financial analysis can be conducted using the following assumptions:

  • The average wholesale price of electricity in southern California in 2013 is about $36 per MWh.
  • Price of electricity will rise at a rate of 2.5% per year.
  • PV cell output will degrade at a rate of about 0.5 % per year.
  • O&M costs for the systems will be about 0.5% of the original capital cost per year.

Please refer to this link to the CA Solar Projects Analysis; and note that, in an effort to simplify, the analysis ignores significant issues such as:

  • The cost to operate and maintain a traditional fueled back-up system of equal or greater capacity, which is necessary to meet demand at night and when the sun is not shining adequately.
  • The extra cost of integrating a diffuse and inconsistent supply onto the grid.
  • The cost of service on any debt incurred for the capital investment or O&M costs.
  • The cost of taxes, lease payments, depreciation, and other costs not noted.

The bottom line demonstrates, even with all these other costs ignored, that only 40% of the original $5.36 billion combined capital investment can be returned over 30 years by sale of electricity at market rates.

ROI Chart

To be clear, the point of the simple analysis is to demonstrate that the owners and operators of the solar facilities cannot expect the sale of electricity at market rates to return their investment and cover their O&M costs, not even remotely.  So, if the money is not coming from the sale of electricity at market rates, then where is it coming from?? 

The answer to this question is that the money to prop up these non-viable ventures is coming from the taxpayers and from the consumers of electricity.  The taxpayers are on the hook for low interest guaranteed loans, and are footing the bill for production tax credits and/or stimulus grants.  The owners and operators of the solar facilities are also the recipients of special Power Purchase Agreements (PPAs) that guarantee the sale of their electricity at greater than market rates; the costs of which are, of course, absorbed by the consumers.

“As NRG’s chief executive, David W. Crane, put it to Wall Street analysts early this year, the government’s largess was a once-in-a-generation opportunity, and ‘we intend to do as much of this business as we can get our hands on.’  NRG, along with partners, ultimately secured $5.2 billion in federal loan guarantees plus hundreds of millions in other subsidies for four large solar projects”    Eric Lipton & Clifford Krauss –  NY Times

Cost (Risk) vs. Benefit

I have often heard the argument that life is not all about economics, and not everything can be reduced to a cost analysis; but I contend that in a very basic sense this is not true, and that life IS all about cost and risk vs. benefit analysis.  Money just happens to be the predominant way in which we measure cost and risk in modern society.

With regard to energy strategy the same principle applies; everything is a cost vs. benefit analysis.  It may be popular to think that “it does not matter what it costs” (I hear this frequently), but this is simply not true.  Society has limited resources, and it does matter.  If your community invests in solar panels they are making a cost vs. benefit judgment.  If they do this instead of buying a fire truck, and you are the fire victim awaiting assistance, you might have a different perspective on the wisdom of the judgment.  If our government promotes and subsidizes solar (or wind) energy generation we are making a cost vs. benefit judgment.  If we drive up the cost and reduce the availability of electricity so that people suffer, we may have made an un-wise judgment.

The negative “externalities” associated with fossil fuels and CO2 emissions are often cited as reasons (excuses) to proceed with government subsidized solar energy projects, regardless of the reality of performance and cost. However, when we recognize the negative “externalities” associated with reliable, abundant and relatively low cost electricity, we must also recognize the huge positive “externalities”.  The overwhelming benefits gained by humanity for the past century from advances in food production, health and longevity, industrial production of necessities (and luxuries), transportation, scientific knowledge, communication, etc. have been driven in no small part by abundant, reliable, and relatively low cost electricity.

In a recent article on MasterResource, David Howden discusses the concept of subjective externalities, and writes the following with respect to CO2 emissions in particular:

“………..Maybe instead of being a negative externality there is actually a positive aspect to these emissions, and as per standard microeconomic theory those who benefit should pay those who create the positive externality. Everyone on the planet eats food, so perhaps a tax should be imposed on every global citizen to remunerate the creators of carbon dioxide. 

I doubt this suggestion will find much support; I don’t even believe in it! But the reason that I don’t believe in it has nothing to do with my feelings over the goodness or badness of the externalities in question. Instead it stems from a recognition that we just don’t know what the relevant externalities are.” 

David Howden – The Externality Debate: Remember Subjectivity in Economic Science

 I understand the need to protect the future of our environment for my children and grandchildren, but I will not ignore reality and stand-by while our economy is sacrificed on the altar of climate change theology; because this will do no good for my children and grandchildren either.  There is a balance that needs to be struck. There is no doubt we in the USA need to alter our energy strategy. The question of how we will change it, however, must be determined by scientific evaluation of fact and logical cost vs benefit analysis of performance and economics.

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5 Comments
  1. Hi Gerry,

    This makes for a very interesting read! You are a very thoughtful guy.

    Yes, it is absolutely ridiculous, how governments create things, which they consider a benefit to the general public, out of thin air and make the taxpayer take up the bill. This applies to many things,
    like military research, military spendings, space exploration as well as emergency aid for disaster struck countries. In all these cases, the actual money return is nil.

    The difference is, how honest they are about these things and how comprehensive their necessity and benefits are, and for or better still to whom.

    The developments you describe are certainly driven by a lobby, but still I believe, that to analyse them only based on their economical terms, does not address all the relevant issues.

    We here in Europe don’t have the space for vast installations and can only dream about putting huge arrays onto some uninhabited soil in a good sun flooded region. Hence I am an advocate of the individual production and responsibility, minimising the need of expensive new infrastructure and the dependency from bank loans and subsidies.

    But, a solar-farm in a dessert might be quite a different thing altogether.

    Although it is a silly argument, that “No expense is to high, and that money means nothing to save the world”, it is true, that money can be created out of thin air, while natural resources can not.
    You might have a laugh, at reading this very simplistic post…

    (http://polutions.wordpress.com/2013/12/10/why-cats-have-no-concept-of-money/)

    Lets just hope, that projects like the ones you describe bring the material costs down to a point, where they become economically viable, while the price for energy most certainly will rise with something much bigger than your very optimistic 2.5% and are finite, no matter how many new resources we still discover, thus putting off the final and ultimate (oops we have just run out of gaz) date.

    (http://www.wtrg.com/oil_graphs/oilprice1947.gif)

    Garry, you might ‘enjoy’ to read this. Depressing though it is, but very true.

    http://www.spiegel.de/international/world/warsaw-climate-conference-shows-capitalism-root-of-climate-failure-a-937453.html

    So, where do we go from here?

    • Thank you again for reading and commenting. I apologize for the delay in responding, the wind down to the end of the year and the Holidays has been hectic for me personally & professionally.

      I object to the use of taxpayer dollars and government regulations to overtly support specific industries (solar and wind energy) because what we are buying and requiring does not make sense. There are better ways to spend the money, generate more useful energy, and at the same time reduce the pollution emissions. I do concur with your comments indicating there are certainly other government endeavors that require similar scrutiny……….I have chosen this one to research and write commentary.

      I do not perceive that the money we are spending subsidizing implementation of current solar and wind generation technology will provide sufficient benefit to society, nor do I believe the expenditures and support of implementation will bring the material costs down to a point where they become economically viable (the opposite is more likely). I believe the money is simply being taken from the public to line the pockets of politically favored and connected people and industries.

      The key word above is “implementation”. As I have elsewhere indicted, I do not object to support for legitimate research and development (R&D) efforts that might have promise to increase efficiency or reduce costs. R&D does not require pouring $5.36 billion into solar panels that cannot produce reliable electricity in reasonable quantity; this is not R&D, it is government largess.

      As you indicate, the key is HONEST analysis of the cost and the benefits.

      With regard to capitalism, with all its flaws, what is the alternative that we should propose?

  2. thrig permalink

    Overwhelming benefits? Well okay a few lucky minority were blessed with superhighways, superfund sites, stripmalls, and spawl, and the rest kinda sort live in grim poverty and it’s not clear where their share of the energy the others already burnt will come from, exactly. Okay, I know, coal. Lots and lots of it, until the obvious limits hammer home. If you need to light candles to find the canary in the mine…but it is amusing to watch humanity try to scorch the night skies in their hilarious effort to run up an exponential curve. You claim to call for science, and yet call climate science theology? What risible nonesense is this? Any sembelance of balance involves using less energy, much less energy, but oh well what ever happened to those perfectly functional solar panels that once graced the Carter Whitehouse?

    • How many millions of lives have been saved and how many billions of lives have been improved by the advances in medicine, transportation, food production, sanitation, industrial production of both necessities and luxuries, etc. etc.? Do you have clean water coming out of your tap? Does your toilet flush? Do you get healthy food at a grocery store? Do you benefit from medicines, and from medical care enhanced by imaging devices? Do you have lights in your home? If you are injured or sick can you call (on a phone) for an ambulance to take you to a hospital? Are you communicating right now on a computer? Billions of people the world over, in one manner or another, benefit from these things; brought to us in no small part by abundant, reliable, and relatively low cost electricity.

      If you will note, I support conservation and efficiency; and I support moving away from coal in the long term. I just do not accept that we need to cripple our economy (and let people die) to do it.

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  1. More Taxpayer Billions to be Frittered Away in California??? | Jerry Graf - Energy Strategy

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