Avoided Cost

The strategy of the relative value analysis for solar investment that I outlined in Money from the Sun is to compare a traditional investment with an investment in a supplemental (i.e. grid-connected) solar electric system for your home or business. The value of the two competing investments was projected forward through the minimal (warranted) life of the solar electric energy system. In the analysis, the periodic returns from the traditional investment are reinvested. For the competing solar investment, the periodic savings from the solar investment are invested in a parallel traditional investment vehicle, as are the subsequent periodic investment returns for the parallel investment.

The keystone of the relative value analysis for solar investment is the concept of avoided cost. For the solar investment, savings are realized on your electric utility bill each month. In this circumstance, these are your avoided costs.

For the purpose of economic modeling, the calculation of avoided costs is not a simple matter. The complexity begins with the initial step of calculating the energy that will be produced by the system.

When generating the numbers that I published in 2004, I used conservative numbers for all parameters except the $6.50 cost-per-watt-installed for the solar electric system (in Arizona). I chose the low end of the range in order to emphasize the tipping point of system costs from where sales might begin to snowball.

The most conservative estimate for any parameter was for the utility energy cost increases: i.e. the estimated future avoided costs. I used a 2 percent annual increase. In the intervening years, the utility energy rate increases have dramatically outstripped my conservative estimate. Anyone who waited until recently to install a solar energy system lost several years of excellent investment returns. The same situation exists today. If you are a homeowner, then don’t wait to see if solar can work for you.

If you own a business in Arizona, then wait. Visit this blog often before you invest. One of the primary goals of this blog is to explain why supplemental solar electric energy fails as an investment for most businesses in Arizona.

Be sure to use a reputable, licensed, certified, experienced, and solid solar energy company that understands solar as an investment, and can clearly explain to you the specifics of your case.

One of the more interesting results of a relative value analysis is to highlight the point of diminishing returns when sizing a system for optimal return on investment. Very few solar energy companies understand the issue of sizing for optimal return. Many would prefer to sell a larger system than to deliver a smaller, but more economically optimal one. New retail net metering rules have alleviated this issue of sizing a system.

Finally, the term avoided cost is used in a related context that may affect your investment in solar energy. When an electric utility purchases energy, that energy can be priced based on their avoided cost. In the Southwest, this price is often determined by the wholesale price of electricity generated at the Palo Verde Nuclear Generating Station. For many years, while market rate net metering was in effect, it was a sad irony that the compensation for excess solar electricity was determined by the price of heavily-subsidized, nuclear-generated electricity.

Money from the Sun

“We shouldn’t be looking for heroes; we should be looking for good ideas.” – Noam Chomsky

The energy regime includes nearly every entity involved in energy provision: from equipment manufacturing and supply, to mining, to transportation, to utilities of every ownership cloak, to transmission operators, to regulatory bodies, and to policy makers and other tax beneficiaries. Not only does the regime suffer enormously from professional deformation, but it embodies an enormous inertia.

Early this decade, when I set out to answer a simple question, I had no expectation that I would come to feel the cumbrous weight of this unwieldy mass. I had been working in the solar energy industry for several years. At the time, I was working for an engineering firm. Despite the thrilling work and the rewards of ethical labor, I did not see evidence of financial reward in the neighboring industry. I was also concerned whether our customers were realizing economic value. In order to assure myself, I developed an economic appraisal.

As I examined the LCOE approach, I recognized that it was seriously flawed. Several critical factors of valuation were being omitted. Furthermore, the paradigm of measuring value only from the perspective of energy vendors was fundamentally erroneous.

Instead, I developed a relative value model from the perspective of the home or business owner. After all, they are the market for energy. The model compared an investment in on-site, supplemental solar electric energy with traditional investments. The model incorporates the reinvestment of savings and of investment returns.

The results of this analysis were very interesting: It showed that in Arizona, with the state’s extraordinary solar resource, and with existing incentives, a low-risk investment in solar energy outperformed the stock market*.

When more fairly compared with low-risk traditional investments (e.g. T-bills), even without incentives, the solar investment frequently outperformed them.

In 2003, I began sharing the results of this analysis in various public forums. An article introducing this approach was published in April of 2004 as the premier cover story in the 100th issue of Home Power magazine.

Today, six years later, promotion of solar energy based on investment returns is becoming fashionable.

However, this investment analysis was only the beginning of a more interesting analysis.

* based on the historical, long-term, annual average returns of the S&P 500.

Energy Valuation

Note: The previous posts were intended to provide context for the central issue addressed by Rate Crimes: the specific, long-standing, and ongoing repression of solar energy imposed through economic manipulation. The many benefits of solar energy have been introduced, a bit of astounding solar history has been shared, and a brief overview of the minimal penetration of solar energy in today’s energy portfolio was presented. Finally, this meager penetration was juxtaposed against solar resource availability. We will next introduce the analytic approach to solar energy economics that illuminates the more aggressively political (and more entertaining) analyses to follow.

Heroes have been championing solar energy before more than half the world’s current population was born. Significant investments in solar energy have been made. In the face of diminishing and increasingly expensive historical fuels, why does solar not yet make a significant contribution to our energy portfolio, even in the sunniest climes? Why do toxic fossil and nuclear fuels remain predominant?

One apparent advantage of the finite, extracted fuels is that they are dense, stored energy; whereas solar is gathered energy that often requires concentration and ancillary storage. A second apparent advantage of the finite fuels is the availability of large, accessible reserves. However, these apparent advantages of extracted fuels are counterbalanced by diminishing reserves in conjunction with ever-increasing costs of extraction, refining, transportation, waste management, environmental remediation, and decommissioning.

Without a clear advantage, and with the increasingly apparent disadvantages of historical fuels, the issue of economic valuation is becoming central to the development of energy policy. In the current economic climate it is ever more critical that clarity be brought to this issue.

The economic valuation of energy is fraught with hazards and dispute. However, the greatest hazard is the most pervasive. It can certainly be argued that the greatest hazard is poor regulation, or perhaps ignorance. However, I argue that the greatest hazard in the valuation of energy is professional deformation: the favoring of familiar lines of evidence, while ignoring that from other disciplines or perspectives.

The current energy regime makes investment decisions from the perspective of a large, long-established, complex, rigid, vested plutocracy. Their vision is not only professedly self-interested, it is myopic.

The central doctrine of valuation for the energy regime is the levelized cost of energy (LCOE). This tool is regularly used to explain and justify choices for energy solutions, investments, and policy. Even major environmental groups subscribe to the dogma born of LCOE analysis:

“The cost of solar energy has fallen sharply over the last 20 years. Still, electricity from a concentrated solar power plant can cost about 10 to 14 cents per kilowatt-hour, compared with about 4 cents per kilowatt-hour from a coal or natural gas power plant. Electricity from small or medium-scale solar photovoltaic arrays (installed on homes or businesses) costs around 25 to 40 cents per kilowatt-hour, but these prices should continue to drop thanks to falling installation costs and the growing number of incentives and tax packages offered by nearly every state government” – National Resource Defense Council

However, like all tools, LCOE can be, and often is misused. The term ‘LCOE’ is often used peremptorily and to lend authority to conclusions that are based on incomplete or incorrect analysis. LCOE is a delicate instrument that can easily be twisted to produce predetermined results, or to obscure. LCOE is only a guideline. It is neither necessarily rigorous nor irrefutable. It is not an effective tool for comparing apples to oranges.

There is a more rigorous, complete, and revealing approach.

Where the Sun Does Shine

The American Sun Belt is replete with ungathered riches. Here, the term ‘Sun Belt’ refers not so much to the easy-living retreat strung across the tier of southern states made possible by air conditioning fueled by burning coal. Rather, the term best applies to the Western deserts where the power of the sun strikes with a bright, steady force.

Too few yet recognize this wealth, but it is certain that our children will do so. Whether future generations will realize this wealth depends on you . . . now.

Arizona is at the center of the Sun Belt. The state enjoys an abundance of sunshine. It receives about twice the average annual solar irradiation as Germany or New Jersey.

Germany has pursued a vision that now provides almost 50 watts of photovoltaic (PV) nameplate capacity to each person in Germany. Gray and cloudy New Jersey, with its much smaller population, delivers more than 5 watts of PV per capita. Larger and more populous California delivers more than 9 watts of PV per capita.

Yet, California’s immediate neighbor, Arizona, even with its extraordinarily abundant resources, and with its major cities centered under a blazing sun, delivers only a meager 3 watts of PV per capita.

Solar Today

More than four decades after being alerted to value of solar energy, where do we stand?

Ten years after the first publication of The Coming Age of Solar Energy, a revised edition was published in 1973. Electricity production in the United States in 1973 totaled almost 2,000 terawatt-hours (TWh). Three decades later, the nation’s population had increased by about a third, but the total electricity production had more than doubled. By 2006, electricity produced from solar energy expanded from a negligible presence to a negligible 0.028 percent of the electricity produced from coal. Inversely, for each watt of electricity produced by solar energy in the U.S., more than 7,000 watts of electricity are produced from coal, more than 3,500 watts are produced from nuclear, and more than 1,300 watts are produced from gas. Only 0.014 percent of total U.S. electricity is produced from solar.

The average home in the U.S. consumes over 10,000 kilowatt-hours (kWh) of electricity annually. Less than 2 kWh of electricity is produced annually for each American. Germany, the nation with the world’s most progressive solar energy policy annually produces more than 50 kWh of electricity from solar for each German citizen.

The Coming Age of Solar Energy

Once in a great while, a discovery is made that at first seems a happy, but small gift. Then, as it is explored it continues to surprise. Even rarer is such a discovery that resonates over years with astounding harmonics. I made such as discovery when I happened upon The Coming Age of Solar Energy in a used book store in early 2007.

The fiercely intelligent eyes that gaze from this page are those of Daniel S. Halacy, Jr. Mr. Halacy was a decorated veteran of both World War II and the Korean War, a prolific author, a professor, and a sailplane pilot. He served two terms as an Arizona State Senator. In 1979 he joined the nascent Solar Energy Research Institute (now NREL) as a Public Affairs Specialist. Six years later, he became the Institute’s first retiree.

I have worked in the solar energy industry and lived in Arizona for many years. I have enjoyed the good fortune to become familiar with many of Arizona’s luminaries in the field of energy. Yet, until I discovered The Coming Age of Solar Energy, I had not heard of Dan Halacy.

His book is astounding for many reasons, but foremost for its prescience. The initial chapter elegantly and accurately describes the central issues of energy and the environment facing us today. Over the years, I have read many books on these topics. Despite my familiarity with the topics, my initial reading of The Coming Age of Solar Energy impressed me with its clarity and style. It was a crystallizing read. Then, when I glanced at the publication date I was abruptly astounded: Mr. Halacy published this book in . . . 1963!

More than two generations have passed since The Coming Age of Solar Energy was first published. I wonder if Mr. Halacy imagined that his generous gift of words would become an indictment.

There is no more important energy

Solar energy comes to us in many forms: solar electric (photovoltaic), solar thermal, solar hot water, passive solar design, . . . a farmer’s tan. Hydrocarbon fuels too are derived from ancient solar energy.

The Rate Crimes conversation centers on solar electric energy because of its importance to the future of our society: a society that is defined by electric energy as much as by the fuels that currently provide us mobility.

Solar electric energy has myriad advantages over the traditional fuels that provide us with electricity. Solar energy is plentiful, clean, immediate, proximate, distributed, mobile, scalable, unobtrusive, long-lived, durable, gathered, simple, safe, unassailable, independent, equitable, and profitable. And, like no other energy source, solar energy has the potential to become ubiquitous.

Solar energy is plentiful. Enough solar energy falls on the Earth in one hour to power the whole planet for an entire year. Resources for exothermic reactions (e.g. combustion, fission) diminish. As this occurs, these traditional fuel resources will no longer be able to meet our demand for energy. Energy generated by the photoelectric effect will supplant the traditional fuels.

Solar energy is clean. The solar source itself is integral to nearly all life on this planet. The current technology that gathers this energy does relatively little damage to the environment. This technology is improving rapidly.

Solar energy is immediate. The intermediary materials and processes between the resource and its acquisition are thin in comparison to those of traditional fuels. Transparent celestial and atmospheric mechanics determine availability. The eons of geological and biological processes that deliver traditional fuels are far more opaque. This immediacy binds each of us more closely to the natural flows of energy that daily surround us.

Solar energy is proximate. It can be gathered where it is needed. Much of the inefficiency and destruction that occurs in the transportation and transmission of energy is avoided. Generating energy locally also increases awareness of its value and consequences.

Solar energy is distributed. Solar energy generation can be sited throughout an energy network. Because it is relatively mobile, it may be relocated to meet new local demands. It provides for an inherently flexible network design.

Solar energy is scalable on both local sites and within networks of all sizes.

Solar energy is unobtrusive. The most visible elements of a solar electric system can easily be integrated into new or existing structures. Even large arrays hardly disrupt an horizon; as do cooling towers, smoke stacks, wind turbines, and transmission lines. There is no need to banish solar to distant fields to hide unsightly structures, frenetic activity, noise, or toxic emissions.

Solar energy is long-lived. A typical solar electric energy system will gather energy for many decades.

Solar energy is durable. Even forty-year-old, first-generation solar modules are still producing energy. Today’s modules are typically warranted for 25 years. They are designed to withstand high winds and energetic impacts. Solar electric energy systems require relatively little maintenance.

Solar energy is gathered. Once established, a solar electric system gathers a regular flow of energy throughout its decades-long lifecycle. There is rarely a need to hunt new resources to replace those being gathered.

Solar energy is simple. No cadre of specialists is required to sustain system operation or to manage toxic wastes.

Solar energy is safe. A solar electric energy system presents little danger beyond what already exists in a structure’s electrical system.

Solar energy is unassailable. There is no vulnerable, centralized target. No security force is required to protect the system.

Solar energy provides independence. Combined with energy storage, a solar electric system can provide a comfortable lifestyle in remote locations. Elsewhere, it can provide independence from abusive markets and help reduce one’s consumption of traditional fuels that one may consider to be unethical.

Solar energy is equitable. Electical power translates into economic and political power.

Solar energy is profitable. In regions where the solar resource is greatest, an investment in solar electric energy has long outperformed traditional investments. From another perspective, avoiding charges from the electric utility is often your best investment.

Solar energy can become ubiquitous. While some locations are more gifted than others, the sun shines everywhere.

As important as solar energy is, it is not, by itself, a panacea. While it is unlimited, it is not without constraints. However, the constraints shall be overcome. Future posts will expand on many of these attributes of solar energy and its constraints.

The great promise of solar energy is for each person, wherever they may be, to generate an abundance of clean electricity for their own use and to share freely with their neighbors. The failed promise of nuclear energy to provide electricity that is “too cheap to meter” will eventually be realized with solar energy.

© Copyright 2006 SASI Group (University of Sheffield) and Mark Newman (University of Michigan)

Territory size is proportional to the percentage of world electricity production that occurs there.

Welcome

Solar energy is increasingly recognized as being critically important to the future of our technological society and of our culture. The conversation at Rate Crimes exists to explain and to explore why solar energy is important to humanity; why the need for its rapid adoption is urgent; why the American Desert Southwest is central to achieving a rapid and widespread adoption; why the state of Arizona is particularly central to this goal; how a sustainable solar energy future has been, and continues to be delayed; and to expose one of the greatest, and heretofore unrecognized crimes of our time.

The central goal of this conversation is to bring transparency to the discussion of our energy future. The pertinent crime is that the discussion has been kept opaque for far too long. You are invited to join the conversation and help us to achieve clarity.

The conversation will primarily revolve around issues of technology, natural resources, politics, social policy, and economics. Economics will be the fulcrum on which sits the lever that will be this conversation.

We leave you with an image to ponder: