Thursday, February 21, 2008

The flip side of photovoltaics

It's a hot time for solar energy, and in the middle of the solar frenzy, a new report is arguing that it all makes no financial sense.

Solar stock prices are up, solar arrays are sweeping across rooftops, there are even shortages in the supply of solar panels. Smart folks are clocking the savings and racking up the tax breaks by installing photovoltaics.

But Severin Borenstein, in a January 2008 report for the Center for the Study of Energy Markets, says none of this makes makes any sense from a society-wide perspective. His paper is entitled “The Market Value and Cost of Solar Photovoltaic Electricity Production.”

“My analysis,” he writes, “suggests that the actual installation of solar PV (photovoltaic) systems in California has not significantly reduced the cost of transmission and distribution infrastructure, and is unlikely to do so in other regions.”

He says the society-wide benefit of installing solar electrical generation is considerably smaller than the cost, and that “the difference is so large that including current plausible estimates of the value of reducing greenhouse gases still does not come close to making the net social return on installing solar PV today positive.”

Borenstein is a professor of business adminstration and public policy at the Haas School of Business at the University of California.

The paper makes you wonder. What does Borenstein know that accountants and businesses, who are banking the savings from installing photovoltaics, don't know?

The answer is that he's looking at the issue from an entirely different perspective—the utility's perspective, or what he calls the “social valuation.” He admits this up front.

“I do not analyze here the private valuation of solar PV for the end-use customer,” he writes.

One key to his analysis: You can't count on solar to be there when you need it. At night, or when cloudy weather inhibits PV production, or when the sun's angle reduces a panel's effectiveness, a utility needs to have alternative generation capacity standing by. And that often means installing and maintaining a big, high-cost, oil-fired, peaking generator.

Borenstein says photovoltaic installation tends to be disorganized. People install it where they want, or where they have property and roof space—not necessarily where it will do the power grid the most good.

“The experience in California is that solar PV has been installed broadly across the state, with no focus on transmission-constrained areas or minimizing line losses. The same is true in the more than 30 other states that have programs subsidizing solar PV installation,” he writes.

One upshot of this is that a utility can't use solar to justify cutting the cost of its grid.

“One might ask how much less a distribution system for a new housing development would cost to install if the developer were putting solar PV on all the houses than if it were not. The answer seems to be that the difference is negligible,” he writes.

It might be argued that the photovoltaics arguments Borenstein makes are flawed, because they compare the cost of PV with fossil fuel power, and fail to account for the massive subsidies the fossil fuel industry gets. Borenstein responds with a remarkable footnote, which argues that oil and coal subsidies have little impact on actual fuel costs.

“The huge subsidies that fossil fuel companies in the U.S. receive through favorable tax treatment are often used to justify offsetting subsidies for renewables. While the argument is correct in some cases, it must be applied carefully. For instance, the billions in tax breaks that oil companies receive for domestic exploration benefit owners of the oil companies, but they do not substantially affect the price of oil, because oil is traded in a world market and the impact of these subsidies on world supply is negligible. While this points out the disturbing lack of a rational basis for such gifts to oil company shareholders, it also means that oil exploration subsidies do not put alternative energy sources at a financial disadvantage in the marketplace.”

In other words, the paper is saying that when your legislator passes a big tax break for an oil company, it doesn't keep your cost of oil down—it just diverts money into the pockets of the oil company owners.

Borenstein does concede that the cost of photovoltaics is going down, and that at some point, it will make economic sense from a society-wide perspective to install it.

His paper is notable for what it doesn't count in its analysis.

Borenstein says his research is purely economic, and does not make judgments on the various other values of going solar, including environmental (such as reduced pollution from fossil fuel sources), geopolitical and security (such as reduced risk that an attack on a power plant will wipe out all generation, or that a foreign fuel disruption will threaten local power supplies).

He also does not inspect the value of storage technologies, like batteries, which could turn solar from an intermittent source to a steady one, and minimize many of his objections to it.

So, given all that, does solar photovoltaic power make sense for you? The Borenstein paper really seems to have no applicability in making that determination.

Many residents and businesses have found that PV is an economic plus, even without considering environmental and other issues, particularly once solar installation tax credits and other incentives are counted. The reduced contribution of greenhouse gases, for example, is simply another plus for environmentally minded consumers.

From a public policy perspective, the paper may be an argument for changing some of the existing incentives to promote their installation in specific localities and in specific ways in which they'll do the society and the grid the most good.

Borenstein's paper is available here:

© 2007 Jan W. TenBruggencate