White Paper: Cost Comparison Solar to Natural Gas. Introduction

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1 White Paper: Cost Comparison Solar to Natural Gas Introduction Information about the compared cost of natural gas generation and solar is changing rapidly due (1) to rapid decrease in capital cost solar PV per watt, (2) fluctuating price of natural gas as a fuel source, and (3) rapid decrease in storage and integration costs to accommodate variable production of solar energy. This paper is designed to provide an analytical framework to assure that participants in a debate on compared costs are speaking apples to apples. Since many are startled at the Arizona Public Service (APS) concession that the levelized cost of solar compares favorably to natural gas, it is appropriate to examine the relevant variables which might have contributed to such an analysis. The APS analysis here reflected here in a bar chart indicates that solar costs are along with natural gas the cheapest. There are critics of this analysis, the most notable of whom are Republican candidates for the Arizona Corporation Commission. They have criticized an energy policy weighted toward solar as extreme and claim that it is likely to result in skyrocketing energy rates. This chart, along with the cost analysis outlined below, belies these claims. 1

2 The cost analysis works from assumptions, which are identified below. They represent considerable research into cost issues, a process simplified by the availability of authoritative reference on the internet. That being said, they do not represent universal agreement among politicians and technologists. More important perhaps, is the use of this analysis to help concerned citizens identify where crucial factual disagreements lie, so that discussions comparing costs can proceed in a cooperative orientation to truth. Preliminary assumptions: (1) The cost of gas as a fuel. Natural gas prices are listed in price per million btu (MMBTU). The energy generation using MMBTU in with Advanced NGCC generators is about 100 KWH. ( See US Energy Information Report 2012) To get a price per megawatt hour (MWH) of generation, of course, multiply by 10. Therefore, $5 MBTU market price for gas translates into a $50 per MWH in fuel cost. (2) The cost to build a gas plant. In order to build a generator which has the fuel efficiencies supporting the above fuel costs of gas is, again according to APS, roughly $1 million per MW of generating capacity. We assume--favoring gas that these plants will run 20 hours per day. The national average running time for these plants is only 70 percent of capacity. (3) The cost of building a solar PV plant. According to APS, the cost is $2.5 million per MWH of generation. The $2.5 million number may be dated however, as First Solar formally quotes utility scaled production facilities at $2.0 per watt and trends in cost and efficiency strongly suggest that within 2 years, installed cost will fall another cents. In order to get production capacity comparable to natural gas, we need to build about 3 times the amount of generating capacity. Why? Because you can run a natural gas plant 24 hours per day, but solar generation shuts down at night. So, to build a PV plant with a generating capacity comparable to gas, we need to pay roughly $6.0 million. (3 times $2 million) (4) Maintenance costs. Solar and gas have roughly equal maintenance costs. (5) Anticipated lifetime of plant. Solar and gas generation facilities have roughly equal anticipated lifetimes. (6) Fuel cost of Solar. Solar has no fuel cost to factor into cost of solar, where gas generation cost is highly dependent on gas fuel cost. (7) Low risk vs. High risk. In a Low Risk energy futures scenario, there are very low assumed external and/or regulatory costs calculated as a consequence of climate change/global warning considerations which are apt to bring taxes and other costs down on natural gas generators. Nor are assumptions made about the dynamic of aggressive global competition for fossil fuels which would appreciable affect cost scenarios. High Risk based scenarios consider the regulatory management of global warming and price volatility in a wildly competitive international fuels market driven by peak oil scenarios. (8) Timeframe for the calculation of return. The preferred time for the calculation for the overall cost of a given energy generating technology is 25 years, as it represents both the anticipated life of a generating facility, and the existing warranty for solar panels. 2

3 Most experts expect that solar panels are viable for 50 years or more, though with percent decline in efficiency with age. Due to the fact that many cost-to-ratepayer models invoke accelerated depreciation, included below are 10 year cost estimates. Method of calculation: With these assumptions, comparison of cost becomes a matter of simple arithmetic. A cost comparison can be done by simply taking the cost of building a facility and adding to that the cost of fuel. This works as a method of comparison because maintenance costs and anticipated life of the generating facilities are regarded equal. It isn t necessary to calculate levelized cost (i.e., the average cost per kilowatt hour over time) because time averaging affects both solar and gas equally unless we need to calculate financing costs. We will consider the issue of finance costs separately below. The cost comparison we develop below is therefore just the cost of running 1 MW generator over time, and correcting for the fact that you need to build more solar generators to make up for the fact they stop running at night. To say, for example that a solar installation costs $6 million over 25 years means that the combined construction and fuel cost of a solar generating facility is $6 million. This framework also allows someone to compare solar to gas simply and efficiently, and to pinpoint factual points of disagreement. It is easier in this analysis to compare apples to apples, in other words. Cost comparison: Assumed low risk in fluctuation of gas price: If we assume a natural gas price of $2.5 per MMBTU, gas compares favorably to (i.e., beats) solar at present price points. The 10 year cost of to gas is $3,190,000 ($1 million construction cost plus fuel cost of $2.190 million) compared to solar at $6.0 million ($2.0 construction cost times 3). When we take the full 25 year life of the system into account, gas trails solar--$6.475 million gas to $6.0 million solar PV. However, this assumed fuel cost is ridiculously low, some say due to a temporary market glut. This figure is well below current extraction costs. Even natural gas proponents claim a go forward figure for natural gas at no less than $5 per MMBTU. When that assumption is made, gas continues to compare favorably to solar over 10 years $5.38 million gas to $6.0 million solar PV. But over 25 years, fuel savings place solar significantly ahead of gas $11.95 million gas to-$6.0 million solar. Solar beats gas in generation costs due to fuel savings in approximately 13 years. 3

4 This arithmetic essentially confirms the valuation supplied in the APS chart inserted above. But perhaps it is reasonable to challenge some of the assumptions which place natural gas on roughly equal footing with solar. Since we have identified a group of working assumptions affecting a cost comparison, we can begin to debate rationally what future scenarios might look like if assumptions are changed. We have been assuming that natural gas enthusiasts are right in saying that there is a 100 year supply of cheap gas--$5 MMBTU by their estimate. Their enthusiasm about cost and supply is problematic, however, due to complications in extraction technologies, impacts on water supplies and other environmental challenges which we assume are manageable but which have appeared recently as more significant than earlier predicted. It also fails to factor in market pressures one might associate with rapid movement toward gas generation in parts of the country with poor renewable energy resources. If everyone in the northern states addressed increased energy needs with gas generators, will cheap gas at $5 per MMBTU be available to places in Arizona? Significantly worsening this outlook for cheap natural gas prices is the high price of natural gas in Europe and Asia about $12-14 per MMBTU. The transportation cost per MMBTU, including liquefying and shipping, is about $4 per MMBTU. Why would the natural gas industry sell Arizona at $5 per MMBTU if it can sell to Europe at $12-14? (See Forbes, 6/13/2012, The U.S. Has A Natural Gas Glut; Why Exporting It As LNG Is A Good Idea). It is reasonable to assume that demand in developing countries will accelerate due to a trend toward industrialization, and will gobble up fuel supplies at an accelerating rate? If we make the assumption that natural gas will level off at $8 per MMBTU ($12 international price less $4 transportation cost), what happens to the numbers? Solar beats gas hardily--$8.01 million gas compared to $6.0 solar in ten years, and $18.5 million gas compared to $6.0 solar in 25 years. The return on solar is better than gas in less than 8 years. If we make the further reasonable assumption that utility scale solar PV generation will fall below $2 per MW in construction costs say to $1.5 by year 2015 what happens to the comparison. First-Solar and Chinese competitors are already at $2 and predict further significant cost reduction due to technological advances increasing the efficiency of thin film PV. Well, at $5 gas price per MBTU, we have $5.38 million gas in ten years compared to $4.5 million solar PV, and $11.90 million gas to $4.5 million solar in 25 years. At $8 gas price per MBTU, we have----$8.08 million gas to $4.5 million solar in ten years, and $18.52 million gas to $4.5 million solar in 25 years. 4

5 High Risk Orientation: Now let us consider other assumptions which acknowledge risk due to uncertain developments on a global scale. These are: (1) supply crisis due to peak in fossil fuel extraction levels failing to meet global demand and (2) environmental crisis associated global warming and climate change. Supply Crisis factors: The fact of high demand for gas in industrialized countries ($15 per MMBTU), and accelerating demand for gas in developing countries (in the process of rapid industrialization), suggest what peak oil economists have often described as a future of panic stricken markets. Take water for example, the pricing of which is quite affordable where there is abundant supply, but if we reduce supply to a point where people begin to doubt the availability of it to meet basic needs, and the price spikes severely as needy consumers bid prices up at auction. A number of economists have made dire predictions on what will happen to price when essential needs cannot be met. Additionally, the fact that oil supplies are dwindling will place very heavy pressure on the development of all electric forms of transportation because those vehicles are close to outperforming combustion vehicles in terms of speed and maneuverability, and have a very high efficiency per dollar of energy consumption. Thus the rise of oil prices will transfer in significant part to increased demand on utilities generation, and it is not unreasonable to see within the next 10 years spikes in the demand for electrical generation, which will make natural gas prices extremely volatile and various sovereignties and industries compete for supply. We can enact trade restrictions to protect our natural gas reserves, but those will come at a cost on the global market in the form of increased competition over oil supplies, and reciprocal tariffs which destabilize political systems and treaties, and place added pressure on our military resources. The effect of a destabilized global economy is a high level of uncertainty in energy pricing which affects the cost of capital and finance, and will likely spread to more local markets places like Arizona. Oil futures are substantially affected by political destabilization in the Middle East, which is why speculators markets have more than doubled the cost of gasoline in the last ten years. The point of bringing considerations like this into the fore is to emphasize that an energy production strategy based on fuel consumption makes price volatility and inflation very high risk factors to consider. What is the risk, for example, that gas prices will level off at current European levels at $15 per MMBTU or more? If we take peak oil theory as seriously as many do, the risk of high fossil fuel prices is significant i.e., better than 25 percent. 5

6 Adding to this sense of risk is the possibility that international energy markets will fall under manipulative practices designed to exploit dependency on fossil fuels. Predatory pricing designed to exclude market competitors in order to establish dependency is, unfortunately, a recurring problem in under-regulated industries. Local solar generation does not carry even close to the same sort of risk. Environmental Factors: As a practical matter, the debate over climate change is over. Even scientists now paid by climate change deniers are admitting to the fact that human consumption of fossil fuels has had a substantial effect on the atmospheric temperature of the earth. The remaining questions now concern the rate at which the warming process occurs. It is difficult to ask local economies to bear the burden of initiating and controlling climate change. But it is not unreasonable to expect that we will be moving into an era of increased central regulation of fossil based energy generation which is to say that greenhouse gas emission will likely be taxed and sequestration technologies will likely be mandatory. This will affect the gas industry in at least two ways. First, the cost of building gas generators will move from about $1 million per MW to $2.0 million per MW of generating capability. This will reflect the added cost of designing and building carbon sequestration into the plants assuming that a viable sequestration technology exists. Carbon sequestration also impacts the efficiency of fuel use. At least one report endorsed by the U.S. Government indicates that fuel costs utilizing carbon sequestration are high reducing energy efficiency of the generating facility by 25 percent. Second, it will affect the regulation of natural gas extraction and transport. Natural gas consisting mostly of methane gas is in its native form 100 times more potent a greenhouse gas than carbon dioxide. Existing pipelines and extraction mechanisms involve about a 2 percent leakage of methane into the atmosphere. Estimating the cost of eliminating this leakage is difficult, but it conceivably will add percent to the cost of production because it is as hard to stop the last 2 percent of leakage as it is to stop the first 98 percent of leakage. High risk calculation: Given looming peak based pricing dynamics based on accelerating demand for energy, we are at a 50 percent risk of seeing gas prices at $15 per MMBTU or more within 15 years. We are also at 50 percent risk of mandatory sequestration, which would add another 25 percent to the price of fuel. Future energy generation under gas therefore represents a significant potential for an effective fuel cost of $18.75 per MMBTU. 6

7 Heavy regulation of fossil fuels will also result in the addition of $1 million in capital cost per 1 MW facility. In weighing various scenarios, it is sometimes useful to activate some assumptions and not others. For example, one might assume that the market will remain stable, but that mandatory sequestration will be enacted. Then one can develop cost scenarios which still result in very high costs in comparison to solar. Doing the arithmetic, natural gas presents a significant risk of putting Arizona rate payers into exploding utility rates under gas based generation. Assuming $15 MMBTU and mandatory sequestration--$18.43 million gas compared to $4.5 million solar in ten years, and $41.06 million gas to $4.5 million solar in 25 years. Transferring this risk to a real cost today by factoring in likelihood of such occurrence, taking 25 percent risk that both peak oil and heavy regulation scenarios will occur i.e., applied to potential price increase for fuel to $15 per MMBTU, we are still looking at an enormous difference in current comparison of natural gas to solar--$8.64 million gas to $4.5 million solar for 10 years, and $19.71 million gas to $4.5 million solar in 25 years. (Using $5 as a baseline, calculate 25 percent of the difference between $5 and $18.75 per MMBTU and add that to $5 baseline as fuel cost.) The appropriate value one might apply to risk in performing a weighted risk analysis in terms of present dollars is subject to real controversy. These risk assessments may be high (or not) depending on one s point of view, but the purpose of an analysis like this is to emphasize that there are cost risks in fuel markets which one might avoid, and that it is appropriate to attempt to put a value on it. We are at significant risk in being in peak oil market scenario and heavy regulation within the next years, and it appears as if we can blunt much of the impact of this scenario at zero present additional cost in Arizona by moving to solar energy. Storage Cost: The point of discussing storage cost is to address the variability of generation as well as the variability of demand. Solar only generates during sunlight, and energy consumption peaks at a point in the day corresponding to late afternoon and early evening after the peak generation of solar PV. There are basically two different ways of managing these variations: (1) through the use of ancillary generators which run off of diesel or natural gas, but do not use industrial boilers to generate steam and recycle heat or (2) through the storage of excess output for fast release when it is needed, for example, by pumping water a more elevated reservoir and releasing it through turbines, or charging a very large battery complex. Peak gas generation with the use of combustion generators is much less efficient in fuel usage than, though the price of construction is roughly comparable to steam based generation--$1 million per MW of generation and $2.5 million using carbon sequestration technologies. These are designed to run for about 2-4 hours per day, and have a fuel cost of roughly 3 times that of 7

8 steam generators--$15 per MWH, assuming $5 per MMBTU and $45 per MWH assuming $15 per MMBTU. Assuming 4 hours use per day we have a total 10 year cost of $3.219 million with a gas price of $5 per MMBTU and $6.55 million cost for 25 years. That cost goes way up assuming risks discussed above materialize--$8.57 million in ten years, and $18.85 million in twenty five years. Battery costs have been dropping almost as rapidly as solar PV generation costs now pricing at around $ million for 4 MWH of storage in a battery expected to recharge effectively for 10 years at 90 percent efficiency. (Per estimate by ExTreme Power, Inc.)This suggests battery storage is currently less expensive than the 10 year cost of operating a gas combustion generator, assuming $5 price per MMBTU. Move that price to $8 per MMBTU and current batteries on the market beat peak gas generators decisively i.e., $4.5 million to $2.5 million. Take innovations currently in development with anticipated release on the market within 2 years, it is virtually certain that we will see the battery price (along with other storage technologies) come down to under $1 million for 4 MWH of storage. One advantage that storage has over the use of peakers is that storage can take excess energy from any energy source, including excess baseload generation from gas, coal, nuclear, and wind. Peakers store energy only inasmuch as energy is stored in natural gas. The calculation of costs associated with the integration of storage technologies is very complicated, but for the purposes of this analysis, and one will certainly need more storage capacity within a solar dominated energy program than one dominated by the use of fossil baseload generators. However, it seems that storage difficulties do not present a major obstacle to moving forward with solar energy, especially since utility systems are already equipped with reliable baseload generators which can handle late night and early morning generation needs. For those wishing to develop energy generation which uses only renewables, then wind generation, which would continue to generate at night, provides an effective complement to solar generation. Finance Costs: Some fossil fuel advocates emphasize the cost of capitalization of solar when accounting for the finance costs in the form of interest charges on bond offerings. They say we must add those costs to the cost of capitalization. The identification of this cost, however, can be somewhat misleading for two reasons. First, much of the true rate of interest reflects anticipated inflation. Thus the value of a bond is really only the interest rate less the anticipated rate of inflation, usually only 2-3 points. The reason why this is important is that inflationary pressures are expected to hit the price of fossil fuels much harder than the price of other goods and services produced by an economy. When we speak of anticipated rise in the cost of gas, for instance, we speak in terms of today s dollar 8

9 value. If you add inflation to which the entire economy is subject, then gas price increases will be those we have already identified, plus other inflationary pressures on prices at large. We do not, in effect, avoid finance charges by moving costs into a fossil fuel market. Inflationary pressures reflected in finance rates will be added to the fuel marketplace over and above what we have already discussed. The relative effect of inflationary pressures through currency devaluation on fossil fuel price is an area where economists will likely disagree, but they will agree on the effect. Second, there are things that government can do to reduce those costs at very little risk to the ratepayers. The government can, through regulation, guarantee a market to solar producers. This will reduce the risk of installation, and correspondingly reduce the real rate of interest less inflation. This is something which can be done at the state level by setting a strong renewable energy standard, feed in tariffs, purchase guarantees, and a number of other regulatory measures likely in a government setting with an interest in moving a fledgling industry forward. The government can also offer loan guarantees toward the repayment of bonds and their premiums, again taking risk down to very manageable level for commercial banks. It is not unusual for government to do such things. The government has been taking measures like these in the fossil fuel and other publicly valuable industries for decades. In solar it makes even more sense to do so because of the risk and external costs associated with excess dependency on limited fossil fuel resources. Conclusion: The popular assumption that solar energy generation is expensive, and in particular, more expensive than natural gas generation is not supported by simple arithmetic. Even with a number of not particularly reasonable assumptions favoring natural gas, the 10 year analysis of comparative cost places solar on par with natural gas and the 25 year analysis of solar places solar generation in a superior cost position to natural gas, the cheapest fossil fuel alternative. This calculation validates the public report currently endorsed by Arizona public utilities. When one adjusts some of those assumptions to reflect currently existing market pressure on the price of gas, and the anticipated future pricing structure for the installation of solar PV, the balance shifts decisively in favor of solar. As one further adjusts assumptions to reflect global market pressures on the price of fossil fuels likely to materialize within the next 10 years, and cost increases in the capitalization of gas based energy systems due to management of climate change, there is a huge divide between the potential cost of gas systems and solar systems. The risk, in fact, is that gas based generation will be 7 times more expensive than solar generation. The risk to Arizona is particularly acute, and unnecessary. Arizona has no control over what the global market will be as the consumption of fossil fuels accelerates, as well as no control over what regulations will emerge at the national and international level on emissions control. By 9

10 contrast, solar generation poses almost no such risk to Arizona because it moves the source of energy generation in-state with no emissions to regulate, while at the same time stimulating the development of Arizona commerce with an active and growing energy industry. Perhaps if we were to take a cynical view of the fossil fuel industry, the temporarily depressed cost of gas may be interpreted as a strategy designed to halt the progress of solar PV installation so that an anxious rush toward the construction of gas generation facilities will result in a dependency on natural gas. Then we might look for the price hikes which no one anticipated, all germinating from consolidated foreign and domestic fossil fuels markets. But given the above analysis, it is unnecessary to guess at motives. Fossil fuels are subject to volatile events in a world which will not peaceably survive without enormous increase in the development of energy supply. The imagined exploitation by of a fossil fuel industry is small potatoes in comparison to the kinds of emergent pressures associated with economic development throughout the world and coordinative challenges associated with global warming. Arizonan s may not be able to do much of their own about such developments, but with solar and other renewable energy sources can do much to take care of themselves. 10