Thursday, 1 October 2015

EECA report on solar energy

Here's the EECA report I referred to in my letter to the editor of the Upper Hutt Leader:

Background information on solar PV

1.    This paper summarises the economics of grid-tie solar photovoltaic generation. The key finding is that while solar photovoltaic generation may be viable in future, it is currently a net cost from a national and consumer viewpoint. Further, there are many better energy related investments and behaviours that consumers and businesses can undertake to achieve cost savings or greenhouse gas reductions (i.e. pending their motivation).

Current Situation

2.    The price of solar photovoltaic panels (or PV panels) in New Zealand have decreased (see Appendix 3) due to four main factors, namely:
-       on-going technological improvements
-       increased scale of manufacturing
-       temporary global oversupply of PV (due to combined effect of overseas subsidies being removed, expanded production facilities and the recession reducing global demand for PV), and
-       foreign currency exchange rates.

3.    The current installed retail cost of PV in New Zealand residences is about $3-$4 per Watt. This equates to about $10,000 installed cost for a 3kW system[1] . These prices have many ‘exclusions’ such as building consents, metering, and often only applies to the main urban areas in the North Island. Therefore, in practice, average PV system prices are likely to be higher. These PV capital costs equate to a delivered PV electricity cost of about 30c/kWh. Consumers will only save money with a PV system if their electricity tariff is greater than about the 35c/kWh (and they use most of the PV generation themselves, with little exported).  From a national viewpoint, solar PV is currently about three to four times more expensive than the grid-scale renewable generation it offsets.

Key Issues Affecting the Consumer Economics of Solar PV

4.    There are four main issues that affect solar PV economics are discussed below.

·         The system installed cost and any on-going maintenance or equipment replacement costs (as noted above, installed costs are currently about $10,000 for a 3kW system);
·         The proportion of solar PV generation used in the home versus exported to the distribution network (and what you get paid for exported electricity);
·         The future price path assumed for grid sourced electricity (i.e. the counterfactual);
·         The cost of financing the system (e.g. extending a mortgage for 20 years).

5.    The proportion of solar PV generation used in the home depends on a household’s daytime summer electricity demand (typically low), and the size of the PV system installed. A hypothetical scenario is shown in Figure 1. Analysis indicates that 50% of solar PV generation exported over a year is not unusual – but there is significant variation. This factor is important because a unit of PV generation used directly in the home offsets the full retail electricity tariff (from a consumer’s viewpoint), but an exported unit of PV generation only earns between about 4 cents/kWh and about 17 cents//kWh (i.e. electricity Retailers buy PV generation for less than the residential retail electricity price).

6.    The future price path of electricity is a key variable in the analysis, because it is the counterfactual to solar PV (i.e. the electricity costs faced without an investment in PV). There are significant differences between the solar PV industry’s view of the future electricity price path and that of government (i.e. MBIE’s Energy Outlook scenario). These differences are shown in Appendix 5. The PV industry’s extreme electricity price increase forecast is based on a short period of non-representative historical electricity price information.

Perceptions of Solar PV

7.    Regardless of the economics of solar PV, householders, businesses and Councils are installing PV anyway. This appears to be because there is an emotional attachment to solar PV because of perceived independence from the grid, and because they perceive financial and environmental benefits. In general, these benefits do not exist. For example, a grid-tie PV system will stop generating if there is a grid blackout. Further, there is no greenhouse gas abatement arising from solar PV under the current circumstances of grid-scale renewables being the counterfactual.

Inefficient Investment in PV Generation (public versus private benefits)

8.    The above discussion indicates that PV is currently a more expensive option for consumers than simply purchasing electricity from the grid.  The economics are even worse for PV on a national basis. PV appears close to being viable on a consumer basis only because of wealth transfers between electricity users. On a national basis, PV only avoids the base ‘generation and losses’ components of the delivered electricity cost (i.e. about 8-9 cents/kilowatt-hour (c/kWh) generation cost of the full 26-28c/kWh delivered electricity price), PV generation does not reduce the need for transmission or distribution or other infrastructure on average.
9.    The typical residential peak demand, for which most distribution network capacity is sized, is on winter evenings at about 6pm (i.e. after dark when there is no PV generation, see Figure 1). The residential owners of grid-tie PV are wholly reliant on the grid for their peak electricity demand (i.e. winter evenings).  PV is much more suited to climates such as Australia where there is a summer daytime peak electricity demand due to air conditioners.

10.  This is potentially very economically inefficient; from a national viewpoint, we are investing in PV generation at a cost of about a cost of 30c/kWh, with the sole effect of displacing cheaper renewable generation at a cost of about 8-9 c/kWh (e.g. geothermal and wind generation). 

Figure 1 – Schematic of single household electricity demand and PV generation

Figure 2 - Schematic of electricity price structure, cost structure, and value of PV generation.


Residential Electricity Price Structure and Cost Structure
11.  Grid-tie PV would have to be lower cost than ‘grid-scale generation plus transmission losses’ to be nationally cost-effective. This means that its value is of the order of 5-9 c/kWh as the comparable options are relying on the wholesale market (see Figure 2 above), or wind or geothermal generation. It is expected to be some time (perhaps decades) before residential PV costs reduce from the current 30 c/kWh, down towards 9 c/kWh. This is because the PV price is artificially depressed at present due to favourable exchange rates and an over-supply of product arising from the global financial situation. Therefore, we are not on the edge of a ‘break through; we do not expect PV to be economic on a national basis any time soon.

12.  There is potential for technological breakthroughs in the area of solar PV; graphene[2] is one example. However, graphene is still being investigated at laboratory level, and we are not aware of it being prototyped or trialled as a viable solar PV technology. Therefore, given development lead-times, any advances are expected to be at least a decade away from wide spread deployment at the earliest.  

There Are No Other Material Benefits Arising From PV
13.  Consumers are led to believe that PV generation is a great benefit to the environment. In reality, PV generation is far from the best greenhouse gas mitigation a consumer can effect. PV is simply displacing cheaper grid scale renewables projects[3], and therefore has no material greenhouse gas abatement benefit over the business as usual scenario. There is more than 3,500MW of renewable generation consented and ready to be built – all much cheaper than PV generation.
14.  PV does have a role in off-grid electricity generation, and perhaps in the very few atypical instances of summer daytime peaking load on distribution networks e.g. Auckland CBD air-conditioning load – this is not considered here as it is not the typical case (it is a separate piece of work). See diagram above (Figure 1) for the typical pattern of solar PV generation and household demand of one individual home. 

Opportunity Cost
15.  There is a view that consumer investment in solar PV does no harm. However, this view ignores the opportunity cost of investment in solar PV. The opportunity cost arises because there are many better investments and actions consumers and businesses could take that give rise to real benefits such as cost savings and greenhouse gas reductions. While some people will always invest in solar PV, it may be possible to improve energy choices and redirect some investment to more productive energy-related outcomes (for the consumer and for New Zealand).

[1] PV can be used in conjunction with the grid (a ‘grid-tie’ system), or it can be used ‘off-grid’. Similarly, the grid-tie system can be used with or without batteries (the off-grid system needs batteries). This paper focuses on grid-tie systems without batteries; these are the lowest cost and most common systems.
[2] Graphene is effectively graphite (i.e. hexagonal planar carbon rings), but in an extremely thin layer of only one molecule thickness. It has electrical properties that may have potential in photovoltaic cells.
[3] It is often incorrectly assumed that by installing PV, the consumer is causing Huntly (or similar fossil fuelled) power station to generate less electricity. The actual impact, due to increasing demand overall, is that PV generation is simply delaying the construction of the next new power station. As new generation is predominantly renewable, there is no greenhouse gas abatement benefit. 

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