The solar energy industry is telling its pals in Congress that it is willing to lose most of its subsidies. The current subsidy for solar is 30% of the construction cost. To that subsidy, an additional 10% subsidy is available due to special fast depreciation for solar energy plants. The 30% subsidy is scheduled to ramp down to 10% by 2022 and thereafter remain at 10%. This is not a consequence of declining costs of solar that makes the industry no longer in need of such a large subsidy. Solar electricity is a mature industry, and cost declines are moderate. The real reason the solar people are happy with a lower subsidy is that the 30% investment tax credit (ITC) is not their most important subsidy. The real subsidy is more complicated and better hidden.
The real subsidy is rooted in renewable portfolio requirements in about 30 states. These states require that a certain percentage of electricity come from renewable sources. The quota ramps over time. For example it might ramp from 20% now to 50% by 2030. These quotas create a chain of events that guarantee solar and wind energy a market for years to come with a guaranteed profit. If that is not enough, the industry is trying to freeze the quotas into state constitutions so as to make it difficult for the electricity consumers to get out of the trap that has been set for them.
Renewable energy has been defined in an illogical way so as to favor solar and wind. The ostensible motive for increasing renewable energy is to lower carbon dioxide (CO2) emissions and thus avoid a supposed global warming catastrophe. But hydro and nuclear are prohibited from being used to meet the renewable energy quota, even though they don’t emit CO2.
Electricity is responsible for 28% of U.S. CO2 emissions. The rest is from transportation, heating, and industrial processes. Yet the emphasis on reducing CO2 is focused on the electricity sector. The U.S. is responsible for 14% of world CO2 emissions, and our electricity generation creates less than 4% of world emissions. All the effort being put into U.S. renewable electricity will have no important effect on global warming, assuming that global warming is even real. The real source of CO2 emissions is China and India among others.
I will explain how renewable energy quotas subsidize solar. The argument for wind is similar but different in various details. To see how big the subsidy is, I will compare an imaginary, unsubsidized solar electricity business with the existing situation, propped up by subsidies and quotas.
Our imaginary unsubsidized solar business is going to sell electricity to various utilities that its electricity can reach via the transmission networks that are open to companies exchanging electricity.
Solar electricity is erratic electricity. You get it during the day, when the sun is not obscured by clouds. The utilities that deliver electricity must supply electricity in a predictable and non-erratic manner. Why would any utility even want erratic electricity? The answer is that the utility can use its existing plants to compensate for the erratic nature of the solar. The value to the utility of the solar electricity is the value of the fuel saved in its existing plants when solar electricity is actually flowing. Solar can’t replace existing plants because sometimes it’s not there, particularly in the early evening, when electricity demand often peaks. On the negative side, solar lowers the utilization of its existing plants and stresses them more, increasing the cost of electricity from existing plants.
To summarize a complicated story, solar electricity is worth about $20 per megawatt-hour to a typical utility.
Our imaginary company with a speculative market and no guarantees would need an 8% return over a 10-year period to justify the investment. Under these conditions, it is not remotely possible to sell solar electricity for $20 and get the 8% return appropriate to this speculative business. The company would have to get about $100 per megawatt-hour to stay in business. One hundred dollars per megawatt-hour is the true price of solar electricity in a free market.
But suppose the solar company has a 25-year contract with a utility guaranteeing a market and price. Then our not so imaginary company could be financed with a rate of return of 4.5% over 25 years. Under these conditions, the company could prosper by selling electricity for $37 per megawatt-hour. Take it one step farther and assume we have the full 30% ITC, which, in combination with rapid depreciation, is a 40% subsidy. Under those conditions, the company could sell electricity for $22 per megawatt-hour. That $22 per megawatt-hour is in line with the lowest-cost solar agreements being signed at the present time. The subsidy is $100 – $22, or 78%. Take it one step farther and consider when the ITC ramps down to 10%. The subsidy from the ITC and the rapid depreciation will then be 20%. In this case, the electricity can be sold for $30 per megawatt-hour and the company will still get its return.
Because utilities are forced to search out renewable electricity due to the quota, they have to provide terms that will cause the installations to be built. Those terms are driven by long-term interest rates and the cost of building the solar installations. When, and if, the ITC is reduced from 30% to 10%, we can expect the best power purchase agreements to rise from $22 to $30 per megawatt-hour, or a bit less if the industry lowers its costs. The profits of the industry will remain the same. The renewable portfolio quotas protect the business. The payer of the subsidy shifts from taxpayers to electricity consumers when the direct subsidies are reduced.
If the quotas were repealed, the utilities would have little incentive to offer long-term contracts to solar energy producers. The utilities might be willing to pay $20 for the electricity, but without the long-term contracts, the required rate of return needed for a viable business would be much higher, and that would be unobtainable with the $20 amount the utilities would be willing to pay. Even with the 40% existing federal subsidy, the solar producers would need about $60 per megawatt-hour to get an 8% return over 10 years.
What this comes down to is that if you guarantee a market and price for 25 years, that is of great value to the company receiving it. You have taken away most of the risk, and risk requires higher returns. A company with such guarantees is more like a government bond than a normal enterprise.
The proselytizers for renewable energy have cleverly created a good business by convincing states to set quotas for renewable energy. Because there is a quota, the utilities will sign contracts that will result in providing the needed supply. The quotas are justified on the grounds of saving the Earth from global warming, but even if global warming is a real danger, the problem is in Asia, not in the U.S. electricity sector. By banning hydro and nuclear on spurious grounds, the wind and solar industry has fended off the competition for CO2-free electricity.
The experts, like James Hansen and Michael Shellenberger, who really, really believe in global warming, are loudly saying the solution is nuclear, not wind or solar.
It’s time to get rid of the subsidies and quotas and put these scammers out of business.
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