Economy of Renewable Energy

American Economic Association
The Private and Public Economies of Renewable Electricity Generation Author(s): Severin Borenstein Reviewed work(s): Source: The Journal of Economic Perspectives, Vol. 26, No. 1 (Winter 2012), pp. 67-92 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/41348807 . Accessed: 21/08/2012 03:46
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- Volume , Number- Winter - Pages67-92 26 1 2012 Journal Economic of Perspectives
The
Private
and
Public
Economics Generation
of
Renewable
Electricity
Severin
Borenstein
primary public policy argumentfor promotingelectricity generation fromsolar,wind,and other renewablesources is the unpriced pollution The externalities from fossil fuels.Some parties also advocaterenewable burning to improveenergy or but electricity generation security, pricestability, job creation, thesearguments more difficult supportin a carefulanalysis, I discusslater. are to as Even comparingthe highercosts of renewableswiththe environmental benefits, is Issues arise because the market value of electricity however, not straightforward. and location,and othercharacteristics generationis very dependent on itstiming, because quantification the nonmarket of value fromreduced emissionsis difficult and controversial. Since Pigou's (1920) seminalwork,economistshave understoodthatpricing externalities likely be the bestwayto move behaviortowards is to In efficiency. the contextof electricity, insightmeans taxes on emissionsor a tradable permit this but system, such market-based policies have garneredlimitedpoliticalsupportin the United Statesand elsewhere.Instead,manygovernments have createdpolicies to promote renewableelectricity generationdirectly, througheithersubsidiesor mandates.How well do thesealternative substitute pricingthe negative for policies externalities generationfromfossil of fuelgeneration?
Severin Borenstein T. Grether isE. Economics Public and Haas ProfessorBusiness of Policy, School Business, He of UniversityCalifornia, of Berkeley, California. is a Co-Director the of Institute Haas, and Director theUniversityCalifornia at Institute. is He Energy of of Energy alsoa Research National Bureauof Economic Massachusetts. Associate, Research, Cambridge, His e-mail address (< is borenste@haas.berkeley.edu ;). fToaccess Appendix, http://dx.doi.Org/10.1257/jep.26.l.67. the visit doi=10.1257/jep.26.1.67
68
of Perspectives Journal Economic
In this paper, I discuss the marketand nonmarketvaluation of electricity as generationfromrenewableenergy, well as the costs and the subsidiesthatare available. On a directcost basis,renewablesare expensive,but the simplecalculaI and costsof renewables. beginby tionsdon't accountformanyadditionalbenefits studiesof the costs of renewablesand conventionalgeneration, briefly discussing thatare I the cost drivers. thendiscussthe manyadjustments highlighting primary that across to accountforthetime, location,and othercharacteristics vary necessary and within generation technologies. Many such adjustmentsare idiosyncratic, characteristics substantially individualproject,but broader technology by differing also playan important partin theirdeterminations. the of The nextstepsin the analysis, evaluating benefits reducingexternalities seem. The timingand than theymay at first withrenewables,are more difficult what generationis displaced, as will location of renewablegenerationwill affect mix fuelgenerationin the system the pre-existing offossil (fora short-run analysis) mix (for a longer-run or counterfactual analysis).I then turnto other potential and describe the offers market failures thatmayaffect value thatrenewableenergy forgovernment such asjob creation, how theseimpact industry policy justifications in and security, moderating swings energy prices.I argue thatthese building, energy and in some cases are based not supportedempirically are justifications generally on faulty economic reasoning. thereis oftenconfuIn normative analysesof renewableelectricity generation, sion about whicheconomic actorsare included in thewelfare being evaluated.For solar panels on city hall instance,should a small townthatis considering installing count federalsubsidiesas a benefitor just a transfer? economic analyses Though renewable energy often draw a brightline between privateand public benefits, Each maybe demonstrates thatin practicethere is a continuumof perspectives. a the of question.Evaluating incentives particiappropriateforanswering different in a market the analysis frommanyperspectives. pants generally requiresdoing here to rankorderthebenefit/cost ratiosforthe major Thus, I do not attempt forgeneratingelectricity, whichin any eventwillvarywiththe decitechnologies sion maker'spreferences, perceivedcosts of environmental the and externalities, the state of technology. Technological progress,as well as ongoing research on make anysuch table obsolete shortly after is printed.However, it the externalities, In microeconomic toolsto carry and critiquesuch analyses longer-lived. this out are the issuesin renewableenergy costanalysis illustrate use, to paper,I use the current and occasional misuse,of thosetools. Generation Costs of Conventional and Renewable Energy otherthanhydroelectricity Though renewablesourcesofelectricity generation froma miniscule have grownveryquicklyin the last decade, theywere starting and theyremain a verysmall share of total generationtodaydue primarily base, to theirhigh directcost. Table 1 presentsthe share of electricity generatedfrom
Severin Borenstein 69
Table1 GenerationbySource Electricity data are 2007) kWh; (unitsarebillion for Oil and Natural other GeoOther HydroTotal gas Coal Nuclear electric Windthermal Solarrenewables** Region/Country liquids* OECD OECD North America United States Mexico OECD Europe OECD Asia Japan Total OECD 5,003 20% 44% 18% 13% 4,139 22% 244 37% 3,399 22% 1,747 23% 1,063 28% 10,149 21% 49% 18% 29% 40% 31% 38% 3% 0.8% 0.4% 0.0% 1.3% 1.3% 1.2% 3.1% 1.4% 2.1% 1.9% 0.1% 0.2% 0.3% 0.1% 0.3% 0.0% 0.2% 2.6% 0.5% 1.3%
19% 6% 2% 0.8% 0.4% 0.0% 4% 11% 26% 0.0% 2.9% 0.0% 26% 15% 2% 2.9% 0.3% 0.1% 22% 7% 6% 0.3% 0.3% 0.0% 24% 7% 8% 0.2% 0.3% 0.0% 21% 12% 3% 1.4% 0.4% 0.1% 4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Non-OECD Non-OECD 1,592 36% and Europe Eurasia Russia 959 40% Non-OECD Asia 4,779 10% China 3,041 2% India 762 6% Middle East 674 57% Africa 581 25% Central South 1,009 15% and America TotalNon-OECD8,634 20% Total world
25% 17% 18%
23% 15% 18% 3% 0.0% 0.0% 69% 2% 14% 4% 0.4% 0.3% 80% 2% 14% 2% 0.2% 0.0% 71% 2% 16% 3% 1.4% 0.0% 5% 0% 3% 35% 0.0% 0.0% 45% 2% 17% 11% 0.2% 0.2% 6% 2% 65% 9% 0.1% 0.3% 47% 5% 20% 7% 5%
0.2% 0.2% 0.0% 0.9% 0.3% 0.0%
18,783 21% 42% 14% 16%
Source: International Outlook , tables EIA 2010 H11-H20. Energy * Includes fuels suchas ethanol and fuels, petroleum-derivedand non-petroleum-derived liquid andgas-to-liquids. Petroleum which a solid, included. included is is Also biodiesel, coke, coal-to-liquids, arenatural liquids, oilconsumeda fuel, liquid crude as and gas hydrogen. **Includes biomass other energy and waste sources.
conventionaland renewablesources for regions of the world and selected countriesduring2007, the most recentyearforwhichcomparable worldwidedata are available. Coal is the dominant generation source worldwide, with natural gas, and nuclearpoweralso playing roles. hydroelectricity, major Coal and natural gas remain the lowest-cost technologyfor new electricity generation in most parts of the world. These cost comparisons,however,show remarkablevariance, with renewable generation far from competitivein some studiesand quite cost-effective others.Nearly ofthesestudiescalculatea "levelin all ized" costofelectricity, as I discussbelow,theexacteconomic assumptions but made can driveenormousvariation.
70 Journal Economic Perspectives of
A User's Guide to Levelized Cost of Electricity Estimates for The levelizedcost of electricity a givengenerationplantis the constant(in value ofrevenuefrom real terms)priceforpowerthatwould equate thenetpresent Levelizedcost the value ofthecostofproduction.1 theplant'soutputwith netpresent thatvarywiththe technology on numerousengineeringfactors estimates depend in of but being reviewed, theseare not usuallythe main drivers variation estimates fora plantare comparatively fora givenplant.Current technological specifications withreasonableprecision.For the mostpart,researchers agree on easyto establish whatinputsare going in and whatoutputsresult. are among levelized Usuallyeconomicvariables behind the largediscrepancies about inflation These include assumptions cost estimates. rates,real interest rates, how much the generator going to be used, and future is costs,includingfuel input for costs. Engineeringfactorsalso interactwith these economic considerations; example,the optimalusage of a plantwilldepend on the marginalcost of production,the speed withwhichits outputcan be adjusted,and the marketprice (plus receives. The best othercompensation, suchas marginal subsidies)thatthegenerator butmanysuch studiesdo not. levelizedcoststudiesstatetheseassumptions clearly, and Because generationplants are heterogeneousin location, architecture, otherfactors, even plantswithsimilartechnology willnot have the same levelized smallforcoal and gas plants cost of electricity. variationtendsto be relatively The because the fuel is fairly standardizedand the plant operation is less affected by location. Even the costs of these plants, however,are affectedby idiosyncratic site characteristics values), local labor costs, environmental (including property transmission access to fuel transportation, and access to electricity constraints, in of solar as wellas variation technicalefficiency operation.Productionfrom lines, and wind generationis largely and thisgreatly drivenby local climateconditions, of increasesthevariancein levelizedcost acrossthesetypes projects. The variation levelizedcost acrossplantswiththe same technology in raisesan caveat: levelizedcost studiesare usuallybased on the averageoutcome important at existing recentplants,but theyare generally or intendedto guide future investment decisions.Technologicalprogress, and learning-by-doing, economies of scale in buildingmultipleplantswill tend to make the cost of the marginalplant lower thantheaverageofexisting recentfacilities, or whilescarcity high-quality of locations willtend to make the cost of a new plant higher thanthe pre-existing average.Some studies explicitly are that the prospective, evaluating levelizedcostofa technology the 1Ifa lasts periods producesinperiod then and future flows the cost at real n, plant ./V discounting cash qn ofcapital the cost isdefined r, levelized ofelectricity by > <yN ( ) o _ = (i + r)n _ sr a LCOE - V Cn{qv...,qN) " ih 'w h, o + *)" ^n=1 (! + ry where .. is real 0 inperiod toproduce stream n the of expenditures Cn(ql,.,qN) the (inperiod dollars) As formula this includes costs before producany output ...,qN). the (qlf suggests, approach capital borne tion take can place.
Economics Renewable Generation 71 ThePrivate Public and of Electricity
1 Figure Levelized Cost Estimates 500" 450 400 350 ^ ' ^0 t X S 250 e <u JS200 v > <u J 150 100 50 Borenstein 2008a Wein 2010 ADuand Parsons 2009 /EIA 2011a, b, EPRI 2009 o Fthenakis 2009 etal. Lazard 2008 Ltd. Cory Schwabe and 2009 et OFreeseal.201 b la,
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is CSP solar PV Notes: CCGT "combined gasturbine." is"concentrated power." is"photovoltaic." cycle is MWh "megawatt hour." authorsassumewillbe installedin some future the year.These are necessarily most future whichgivesthe authorsgreat forecasting technological speculative, progress, latitude makevarying to that levelizedcostestimates. assumptions yieldwidely varying The lack of comparability levelized cost analysesis particularly in troubling because these cost figuresare frequently central focus of policy discussions the about alternative These figures potentially usefulbenchmarks, can be technologies. but they mustbe thoughtfully of adjustedfortheattributes thepowerproduced and otherimpactsof the generationprocess. I considerhere onlystudiesforU.S. generation.Costsvaryaround the world, both due to varying and because fuelcostsand regulatechnologiesand expertise, tionsdiffer. Estimatesof Levelized Costs of Electricity Withthose cautions,Figure 1 presentslevelizedcost estimates major elecfor The notesin theAppendixat the end of thisarticle tricity generationtechnologies. the can presentdetailsof the calculations.2 Clearly, rangeof estimates be significant 2Also seeIntergovernmentalon Climate Panel III discussion of Change Working Group (2011)for renewable and III levelized estimates. cost energy technologies Annex for
72 Journal Economic of Perspectives
and thedetailsin theAppendixtable demonstrate why. Manyof thestudiesinclude of itself. Witha sufficient to subsidiesand taxbenefits thegenerator subsidy, course, can appear to have a low cost. Nonetheless,these calculationscan any technology A decisionmaking. separateissue,whichI discussbelow, stillbe relevant private for forupstream subsidiesto fuelsupplyor transportation. is accounting Coal and naturalgas- the twoleading sources of electricity generation are fuel-intensive generation technologies (in termsof cost share) relativeto the with natural gas being the most fuel-intensive others, major generation techbut is even more fuel-intensive, has a verysmall nology. (Oil-firedgeneration share of grid-connectedgeneration in the United States due to its high cost.) Thus, forecastsof futurefuel prices play a large role in levelized cost estimates. of about the exhaustability These forecasts have high variancedue to uncertainty and governthe resource, technologicalprogressin explorationand extraction, mentregulation(Holland 2003). and usage withingenerationtechnologiesusing the Variationin technology affect levelizedcost. Combined-cycle turbine same fuel source can also greatly gas are highlyefficient termsof "heat rate," the amount of fuel energy (in plants to needed to generatea unitof electricity) , but relatively costly build,whilesinglebut combustionturbinegas plantsare less efficient much cheaper cyclegeneration tend to run most of the time,while to build. As a result,combined-cycle plants at combustionturbinesare used primarily peak times,runningfar fewerhours but per year.The levelizedcostsof these twotechnologiesare quite different, the uses. Because because they intendedfordifferent are isn'tinformative, comparison is demand is quite variableand electricity not storablein a cost-effective electricity thereis demand forsome "baseload" generationthatrunsin mosthours and way, few some "peaker"generationthatis called on forrelatively hoursper year.Neither for could efficiently substitute the other. technology viewedas renewable. and geothermalgenerationare generally Hydroelectric are can be inexpensive,but locations thatare usable and high productivity They also creates such major generation quite limited. Large-scale hydroelectricity alterationsto the landscape that it is generallynot considered environmentally In friendly. addition,hydroelectric generationusuallyfacesa limiton totalenergy and water thatcan be produced in a yearor othertimeframedue to precipitation limits. storage thatare consideredclosestto The threebroad categoriesof renewableenergy are scalable and cost competitive wind,solar,and biomass.Wind and solar being are also location-limited, thoughnot to the same extentas hydroand geothermal. sufficient sites thatif these locationswere developed with Studies have identified wind and solar generation they could make these technologies the dominant sources in the United States see NREL (2010) on wind power and electricity barriers are Mason, and Zweibel (2009) on solar.The more significant Fthenakis, the costofgeneration, costoftransmitting powerto wheredemand is,and thevalue wind power is usuallygeneratedin fairly of the power generated.The lowest-cost the to remote locations,so the cost of infrastructure transmit power to demand
Transmission costsforconnectionto the gridare generally sitescan be significant. in not included in levelized cost estimates, part because theyare so idiosyncratic lines and incompleteproperty Local residentresistance transmission to byproject. in some cases can also createsignificant uncertainty. regulatory rights fundamental technologies. Solar Solar power encompasses two different fluidthatis used to create thermalgenerationfocusessunlighton a heat transfer use Photovoltaic steam,whichis thenused in a turbineto drivea generator. systems to Either technology can to semiconductors convertsunlightdirectly electricity.3 be used forlarge-scale generation, generationin open space, knownas utility-scale near demand,such as on whilephotovoltaic panels can be installedon a small-scale residential rooftops. in transmission Rooftop solar reduces the need for investment high-voltage wires.Some fromlarge-scale to local distribution lines thatcarry generation power but networks, theredo not argue thatitalso reducesthecostofthelocal distribution cost as seem to be reliablestudieson thedistribution impact, I discussbelow.Economies of scale at the local distribution level are significant, the suggesting marginal lines is well below the average cost of fromreduced flowon distribution savings distribution kilowatt hour. Small-scalerooftopsolar,such as on a single-family per economies of scale in construction panel procurement, or home, also enjoysfewer so the up-front per unitof capacitytendsto be much greater.4 cost Biomassis a broad category thatincludesboth burningthe inputsdirectly and in biomass gasification, which the inputs are heated to produce a synthetic gas. The primary biomass fuels are wood scraps and pulping waste,but also agriculturalresidue,landfill gas, and municipalsolid waste.The levelizedcost of biomass tends to depend to a greatextenton the idiosyncratic local cost of collectingand the fuel. In 2007, biomass providedabout halfof the non-hydro renewpreparing able electricity this generationin the United Statesand the world.Mostly, is from biomass withcoal and burningin a conventionalcoal-fired mixing power plant, which requiresfairly small incremental Such approaches equipment investments. the in represent lowerend of thelevelizedcostestimates Figure1, but the opportufor nity expansion is limited. Limitations UsingLevelized Cost Estimates Compare Electricity of to Technologies levelized cost in some formhas been the starting Although point for cost comparisons since the beginning of electricity generation McDonald (1962) discusseslevelized cost comparisonsfromthe earlytwentieth century it is by no 3TheInternational brief overviews ofalternative technologies at Energy Agency provides useful energy (http://www.iea.org/ techno/essentials.htm). 4Tosome the cost photovoltaic isa pecuniary "farms" not extent, lower panel for economy, representing real resource if just it transfer sellers buyers. tothe from to But extent the that panel cost savings, is a rent ishigher small for installations tohigher due or costs or orders, because shipping transaction ofsmall ofthe needtocustomize selection particular ofinstallations, probably to those reflect real panel types cost differences.
arise because electricity means the finalword.Difficulties generationtechnologies have different temporaland spatialproductionprofiles. is Because electricity verycostlyto store,wholesale pricescan varybya factor of 10 or more withina day. As a result,time variationin production,and the affects value of powerproduced. the greatly operator'scontrolover thatvariation, Generation resources over which an operator has greatertemporalcontrol are due considered "dispatchable,"while those that varysignificantly to exogenous discussesin detail the factors considered"intermittent." are Joskow(2011a, 2011b) impactof temporaloutputvariationon the value of powerproduced bydifferent sources. generating on gas Amongconventional and coal plants,thereare constraints how quickly a plant'soutputlevelcan be increasedor decreased ("ramping , rates") howlong the it mustremainoffonce it has been shut down,and how frequently mustbe plant and thereis the costof starting shutdownforplanned or unplanned maintenance, of benefits pushing also theplant.Economic tradeoffs arisehere betweenshort-run costs and the longer-run the plant to or beyond the engineeringspecifications of increased wear on the plant componentsthatcause greaterneed forplanned outagesand greaterincidenceof unplanned outages. but flexGas-fired peaker plants,forinstance,have low fuelefficiency, are very is and lowstart-up costs.Hydroelectric ible,with generation capability rapidramping Iftheoptimal"dispatch" to valuedforitsability adjustoutputvery also highly quickly. at is of a plant impliesthatit willrun disproportionately timeswhen electricity of - as is the case withgas-fired peaker generationand most high value particularly - then any levelized cost comparisonmust be augmentedwith hydrogeneration for adjustment thisenhanced value of the powerthatis produced. Generation resources that depend on the local weather such as wind and - are intermittent therefore solar and the least dispatchable.Such generationis out almostentirely of the controlof the plant operator (although these technoloso gies can be shut down fairly easilyand quickly, the plant operator can usually resourcesmustbe an upper limiton theiroutput). Power fromintermittent put evaluated in termsof the time at which it is produced. Solar power is produced hours and tends to peak in the middle of the day. In many only duringdaylight demand,whichusually areas, thisis close to coincidentwiththe highestelectricity occurs on summerafternoons. the average economic value of generation Thus, fromsolar is greaterthan ifit produced the same quantity poweron averageat of all hours of the day.Wind poweroftenhas the opposite generationpatternin the United States,in most locations producing more power at nightand at timesof lowerdemand and prices. for Adjustment the timevariationof productionis straightforward: compare the levelized cost to the average wholesale value of the power it delivers. In Borenstein (2008a), I find that power fromsolar photovoltaicsin Californiais likelyto be about 20 percent more valuable than the average power sold in the times.The premium at state,because itis produced disproportionately high-priced would be as high as 50 percent if the wholesale marketwere allowed to clear at
Generation 75 ThePrivate Public and Economics Renewable Electricity of
veryhigh prices,but that doesn't occur, because grid operatorsuse "generation discussedbelow,to meet demand without reserves," allowingpricesto risetoo high at peak times.Frippand Wiser(2008) findthatwindpowerproductionin theWest is likelyto be 0-10 percentless valuable per unit than if the wind generatorhad hour of theday,thoughthatstudy thesame averageoutputin every mayunderstate the appropriatediscountin windvalue because it uses data froma period of very low powerpricevolatility. However,even this temporaladjustmentforwholesale power prices doesn't over which the truevalue of power fluctuates. completely capture the granularity is Because electricity not storableat reasonable cost and the demand side of the in to markethas had limitedopportunity respond to price fluctuations veryshort it to time intervals, is more cost-effective build back-up generationin sufficient The presto occur on thesupplyside of themarket.5 quantity have mostadjustment is ence of back-upgenerationin itself not a barrierto efficient pricingthatreflects the actual shadow value of power at each point in time,thoughthe shadowvalue has never been based is likelyto be low at most times.Grid operation,however, on such a precise marketmodel. That approach made sense under the old utility was owned byone company, companywhichsolved a model in whichall generation a complex optimization problem and implementedthe solution administratively. Even in the more than 20 yearsin which merchant(non-utility) generatorshave role in U.S. electricity a significant markets, played grid operatorshave generally "reserve" services and chargedit to the system a whole. as generation just procured of Thus, the cost to the system an intermittent producerhas been socialized across all generatorsand prices have not fully reflectedthe time-varying value of power. There is now an activedebate about how much the failureto assignthese costsof to skewsincentives. intermittency specificgenerators levelizedcost estimates the intermittency for Adjusting depends on the degree to whichintermittency requiresadditionalreservegenerationor increasesthe risk of a supplyshortagethat causes blackoutsor brownouts. While a grid can easily handle very small sharesof intermittent resources in fact,to a gridoperatorthey look almost the same as the stochasticcomponent of demand that supplymust follow some grid engineers have argued that the cost will increase more than if resourcesconstitute significant a share of generation, proportionally intermittent such as 20 percentor more,as is currendy and has been achieved in contemplated some locationsin Europe. This too is an area of activedebate; a detailed discussion appears in New YorkIndependent System Operator (2010). Ideal marketpricing would reveal the value of a generator'sproductionat everyinstant, wholesale but markets not set up to generatesuch fine-grained are electricity price signals. 5The for demand now but remain about the technologynear-instantaneous response exists, questions cost-effectiveness ofincorporating sophisticated such demand Ifcustomers itacceptable found activity. tohave their thermostat toretail that considered the respond automatically changes, is,ifthey price associated tobe fairly then costofintermittency be substantially cost the could reduced. See low, (2009). Callaway
16 Journal Economic Perspectives of
of There is also a multiyear temporalissue thatcomplicatescomparisons levelized costs. Levelized cost does not incorporateany variationin the real value of is power across years.For instance,if the real cost of electricity expected to rise is over time,thenpowerproduced in the near-term less valuable than substantially assumes that the real in the distantfuture.Comparing levelized costs implicitly is This assumption particularly important marginalvalue of powerwillbe constant. such as comparinga if the output profilesof two generatorsdiffer substantially, nuclear plant thatwill take fiveto ten yearsto build to solar panels thatwillstart a producingwithin yearor less. it due to storageconstraints, variestemporally Justas the value of electricity constraints. due to transmission also varieslocationally Completelocationalpricing but of due is difficult logistically to the complex physics powerflows, a numberof areas of the United Statesdo have whatis knownas "locationalmarginalpricing" short-run efficient thatsendsfairly challengein locational pricesignals.The greater costofadding new transmisis in the long run,because thefullincremental pricing cost fromthe directinfrastructure once one sion capacitycan differ significantly in transmission on all lines in the grid. accounts forthe resulting capacity change Highly granularpricing in bothtimeand location had lessvalue in thehistorical generationand electricity supplyparadigm,withitslowerrelianceon intermittent and transmission withitssingleutility thatcould coordinatelong-term generation of createdbyeach in terms gridcapacity the investment internalize externalities and remainregulatedtoday, Even that and intermittency. in the markets manyof these issues still arise as regulated utilitiesbuy much more power fromindependent than they did 10 or 20 yearsago. generators Locating electricity generation at the customersite, known as "distributed in the mostcontroversy locationalvaluation.Retailprices engenders generation," fixedcost include significant are a very poor guide to locationalvalue,because they and reflect the networks) they (forinstance, fixedcostsoflocal distribution recovery littleor none of the locational (or time) variationin wholesale power purchase solar and wind some advocatesof distributed or productioncost.At one extreme, generationargue that customersshould not only be able to reduce theirpower bills to zero by generatingas much power over a billingperiod as theyconsume, for theyshould be paid the retailrate by the utility any net powertheycontribute to the system. the other extreme,some grid engineersargue thatintermittent At costs much at distributed generationnot only doesn't reduce local distribution all- so should be compensatedno more than the wholesale price of power the intermittent nature of the power and the reverseflowfromcustomersincreases of At thestress distribution on transformers increasesthefrequency repairs. the and in is revenuemodel: local heartof thisconflict an internalinconsistency the utility distribution serviceis a regulated,largelyfixed-cost, business,but costs electricity are recoveredprimarily thatvarywiththe quantity electricity of throughcharges costsaverageonlyabout 50 to wholesaleelectricity consumed.In the United States, coststhat 75 percentof residential retailelectricity bills;mostof the restrepresents withmarginalelectricity don't vary consumption.
solar photovoltaic Residential generationhas been at the centerof thisdebate. Residential solar does offergreater value than suggested by its high levelized at cost because it produces disproportionately times of high demand, reduces and transmission investment, avoidsthesmallpercentageofpowerthatis dissipated a the and linesfrom distant as heatwhenitis sentthrough transmission distribution ratesdon't accurately reflect the generator(Borenstein2008a). Nonetheless,retail social value of distributed solar generation.Withdistributed generation,a signifibills cant share of the savingscustomers in theirelectricity would have gone to see evenin thelong run,when theutility's fixedcosts.These costschangevery little, pay customers generatesome of theirown power. Tax for Adjustments Subsidies and Preferential Treatment Some of the levelizedcostestimates shownin Figure1 (and describedin detail in theAppendix) reflect tax costsafter directsubsidiesand preferential treatments, and some don't stateclearly how subsidiesand taxesare handled. Excludingsubsidies and tax advantagesseems sensibleforcost analysesthatare intendedto guide but public policy, even thatapproach can be questioned.For instance,should state consider federalsubsidiesand tax breakswhen evaluatinga proposed regulators renewable energyfacility? Given the political and logisticalbarriersto accomthe will tradesin these markets, appropriatetreatment plishingPareto-improving on whosewelfare decision makerweighsmostheavily. the depend subsidies and taxbreaksfrom levelizedcostanalyses relatively is Excludingdirect in Indirect subsidies thatoccur straightforward, thoughitcan be challenging practice. the to upstreamand affect price of inputsare more difficult sortout. Advocatesfor renewableelectricity receivesspecial tax treatment argue thatfossilfuel extraction in the United States.While thatis likely and subsidiesforfossil fuelsare larger true, thanforrenewableenergy aggregate, subsidy kilowatt in the hour forfossil fuel per and Barrett, Diamond, Goldman,Pendergrass, generationis quite small.Adeyeye, Schramm(2009) estimatethattotalsubsidiesforfossilfuelsfrom2002-2008 were of wentto domesti$72 billionin theUnitedStates, whichabout $21 billionplausibly coal and naturalgas thatwentintoelectricity callyproduced production(explained in the onlineAppendixavailablewiththispaper at (http://ejep.org)).Even ifthese subsidies werepassed through percentto consumers, 100 whichseemshighly unlikely forthese internationally tradedgoods, thatwould amount to $0.0011 per kilowatt hour ofgeneration theUnitedStatesoverthisperiod.Otherestimates subsidies in of to coal and naturalgas forelectricity lower (EIA 2008) generationare substantially or manytimeshigher (Koplow 2010), but over the range of subsidiesclaimed,the effect electricity on affect theircomparisonto generationcostswill not materially renewablesources. In 29 U.S. statesand the District Columbia,renewableenergy of benefits from a different of indirect sort a share of electricity is mandated that subsidy, minimum to come fromrenewables,oftentermeda "renewableportfolio standard."Nearly all such programs, translate thisquantity standardto some extentinto a however, tax which can be subsidy/ system throughtradable creditsfor renewable energy,
in providers lieu of meetingthe standardthrough purchased by retailelectricity As some calculationsof theeconomicsof renewables theirown generation. a result, include the value of these credits.Whethersuch value should be counted in may the a social cost calculationdepends on whetherthe creditprice reflects truecost to avoided by the generation, whichis difficult assess,as I discuss of externalities discussesthe different in the nextsection.Schmalensee (forthcoming) policiesfor and theireffectiveness.6 renewableenergy generation promoting of calculationsof the fullcost and benefit generaWithmanyfactors affecting mustbe has tion technologies, claims thata new technology attained"gridparity" withgreatcaution. Advocatesof wind generationwho argue thatit is interpreted at grid parityin some locations generallydo not adjust for the timing, location, less and intermittency factorsthatcan make wind substantially valuable. Residenif tial solar photovoltaicpower is sometimesclaimed to be at grid parity it saves the customermoney (usually,aftersubsidies),but such analysesdo not consider rate pays for much more thanjust the energythat the that the retail electricity solar generationreplaces. Of course, grid parityon marketfactorsalone is not the socially optimal driverof technologychoice if some technologiesproduce thanothers. greaternegativeexternalities Incorporating Environmental Externalities Until the 1960s, air pollution fromconventionalelectricity generationwas and in thatsense "free"to the polluter.But in the 1960s and largelyunregulated the rightsof generatorsto emit local air pollutants, 1970s, legislationrestricted sulfurdioxide, nitrousoxides, and mercury. These policies didn't put particularly but such as requiring priceson pollutants, were command and controlregulation, the installation smokestack of devices ("scrubbers")thatremovesulfur dioxide and other pollutants.In the last twodecades, carbon dioxide has been found to be a to to its major contributor climatechange, leading to efforts restrict emissionsas well. About 33 percentof anthropogenicgreenhousegas emissionsin the United States come fromthe electricpower sector,with27 percent coming fromtransand 20 portation, percentfromindustry, the remaining20 percentis agriculture, or residential(EPA 2011, table 2-12). commercial, In a first-best economic world,pollutionrights would be just anotherinputto the productionof electricity froma giventechnology and would automatically be includedin thelevelizedcostcalculation.In mostoftheUnitedStatesand theworld, markets rights emitgreenhousegases or local pollutants spotty for to are however, at best. Most levelizedcost estimates not include the costsof emissionsdirectly, do include the cost of technology thatmustbe installedin though theydo generally orderto meet commandand controlregulations. 6Also inthe States. see(http:/ a comprehensive ofsuch database /www.dsireusa.org/), programs United
ThePrivate Public and Economics Renewable Generation 79 of Electricity
A large literature existson the marginalsocial cost of the air pollutantsthat the cost variesacross plantsand depends power plants emit.For local pollutants, much on the population density, climate,and geographyaround the plant, very as well as the presence of other pollutants(Fowlie and Muller 2010). For greenacross house gases,the damage is not localized,so valuationis much more uniform on and publichealth climate, heavily meteorological, plants.All of thesestudiesrely lives. Muller and Mendelsohn (2007) models, as well as valuationsof statistical of of explain the details and uncertainties such studiesand presentestimates the cost of local pollutants.The caveatsapplied to local pollution cost estimatesare for of even stronger estimates themarginalsocial costsof greenhousegas emissions in climateand public health because thereis even more uncertainty theunderlying and Wolverton models. Greenstone, (2011) presenta detailed discussionof Kopits, in the uncertainties estimating social cost of greenhousegas emissions. the Absent governmentintervention, the external costs will not be borne by producers and will not affectchoices among electricity generation technology. The obvious solution is to price the externalities either througha tax or tradable permitprogram.The relativemeritsof these approaches have been debated at length (Keohane 2009; Metcalf2009; and cites therein).Still,the reality that is both approaches remainrelatively rare compared to alternative interventions such as technology mandatesand subsidiesforgreenpower. mandatesforpollutioncontrolson conventional Technology electricity generation have been and remain the mostcommon response to these marketfailures. fromthe smokestack emissionsof power Technologiesto removesome pollutants have been used since the 1960s. It is well-known thatsuch mandatescan be plants because theyapply uniformstandardsto emitters withverydifferent inefficient, costsof meetingthe regulations, and costsof alternative techproductionprofiles, Also nologies or productionchanges thatwould allow similarpollutionreductions. is don't known,but less highlighted, thatthese command and controlregulations account forwhetherthe emissionsoccur at timeswhen theyare likelyto be more or less damagingto public health.This is particularly for important nitrousoxides, which under some, but not all, meteorologicalconditionscombine withvolatile to solves organiccompoundsand sunlight make ozone. Even pricingtheexternality thisproblemonlyifpricesreflect such variation, whichis oftennot the case, gener(Fowlieand Muller2010). allyforreasonsof simplicity Subsidies forgreen power (or mandated utility offer prices forpower generated in thisway, knownas "feed-in have been portrayed nearly as tariffs") equivalent to pricingexternalities, more politically but This approach,however, is acceptable. forthreecloselyrelatedreasons. very problematic First, subsidizinggreen power forreducingpollution (relativeto some counis the terfactual) not equivalentto taxing"brown" powerto reflect marginalsocial demand were completelyinelasticand green and damage. If end-use electricity brownpowerwereeach completely would have thesame effect; homogeneous,they the onlyeffect the subsidy of would be to shift productionshare the towards green and awayfrombrownpower.But the underlying market failureis the underpricing
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of brownpower,not the overpricing green power,so subsidizinggreen power of from revenuesartificially government depressesthepriceofpowerand discourages efficient As a result,government subsidiesof green power energyconsumption.7 lead to overconsumption electricity of and disincentives energyefficiency. for In for any given level of reduction,it will be achieved more efficiently addition, by acrosssectors wellas within as sectors. equalizingthemarginal priceofthepollutant This is not achievable throughad hocsubsidiesto activities that displace certain sources of emissions.Fowlie, Knittel,and Wolfram(forthcoming) estimatethat failureto achieve uniform in the emissionsof nitrogenoxides in marginalprices the United Stateshas raised the cost of regulation at least6 percent. by failsto recognizethe heterogeneity Second, subsidizing greenpowergenerally withinthe green powersectorand among the brownpowersourcesthatare being displaced. Solar power that reduces coal-fired generationlowersgreenhouse gas emissions about twiceas much on averageas ifitreducesnatural-gas-fired by generation. Assumingthat the marginalgenerationdisplaced is equal to the average can be a poor approximation. numberof studies A generationmix in the system have attempted go further infer generationthatis displacedbyan increto and the mentalunitof powerfrom windor solarwithin system, a accountingforthe timing and location of the green power (forexample, Callawayand Fowlie 2009; Cullen 2011; Gowrisankaran, Reynolds,and Samano 2011). These studieshave made it clear how difficult is to identify alternative it the generationemissionseven after the fact.But to giveefficient incentives investment, for must long-run policymakers committo subsidieswell beforetheycould have the data to calculate the alternativeemissions.The problemarisesbecause subsidizing green poweris an indirect to the pollutionproblem,and the relationship betweengreenpowerand approach emissionsavoided is not uniform. would not arise witha directtax (or pricing It throughtradablepermits)on pollution.8 Third, because subsidizinggreen power addresses the policygoal only indiit for rectly, introducesan opportunity what mightbe called "benefitleakage" in which the effect the policy goal takes place out of the immediatearea. If on producingmore greenpowerin one statelowerstheproductionofbrownpowerin a distant area thatexportselectricity the state,thenthe benefits the pollution to of reduction are less likelyto flowto those underwriting subsidies. Obviously, the withgreenhouse gases thiswould be an accountingissue,not a real change in the but benefits, withlocal pollutantsthe local environmental gains fromsubsidizing could be much less than would be suggestedby a calculation that green power assumesno change in trade. 7Green subsidies arepaidfor that a general on are to power through surcharge electricitylikely be a in right but in special dothey inelectricity that cases result the direction, only very step the prices reflect social ofpollution. cost 8 Both brown tothe of instrusubsidizing andtaxing green power require committing level a policy - with imperfect ment such prices quantities only as or of level. knowledgeitsoptimal Subsidizing has additional of the of policy instrument knowing imperwhile green the problem setting level the only the between policy the instrumentthe and variablesreal of interest. fectly relationship
All energysources have environmental for implications whichproperty rights have not been clearlyassignedor would be costly enforce.Wind turbines to harm to birds,as well as create low-frequency thumpingthatsome people finddifficult live with.Large-scalesolar projectsin the desertcan endanger habitatfor native animals. Solar photovoltaic panels contain some heavymetalsthatrequire careful handling in disposal. Geothermalgenerationmay cause ground waterpollution and small-scaleseismicactivity. Tidal and wave power both in nascent developmentstages willlikely run into concern thatthe generators interfere withmarine life.Coal miningcreatessignificant ofsolidwaste.Oil and gas production quantities can resultin leaks thatspoil nearbyecosystems. therehave been concerns Recently about the environmental impact of fluidsused in hydraulic fracturing. Nearlyall sourcesare at some pointaccused ofvisualpollution. generation involvesubstantialcosts which mean substantial Many of these externalities wealth transfers and potentially from large efficiency implications.Externalities fossilfuels have triggered for litigation years.With each new energysource, new conflicts and mustbe adjudicated.Even ifCoasian efficiency property rights emerge resultsafterproperty are assigned,the assignment In rights process is costly. one vividexample in Sunnyvale, a conflict arose betweenone neighborwith California, solar panels and anotherwithredwood treesthathad growntall enough to shade the panels. After lengthy a the lawsuit, solar panels won and the redwoodtreeshad to be removed(Rogers2008) . Non-Environmental Externalities While environmental externalities the leading argumentforpublic policy are that encourages alternative not the only arguenergysources, theyare certainly ment made. Althoughthese non-environmental have become more justifications in in are much prominent publicpolicydiscussions thelastyearor so, they generally less persuasive. Energy Security is but "Energysecurity" rarelydefined precisely, the phrase generallyis used to suggestthatthe United Statesshould produce a highershare of the energyit uses. One justification macroeconomic:Ifthepriceof a fuelforwhichthe United is Statesis highly rises the import-dependent suddenly, commonwealthshockto most consumerscould potentially the this disrupt macroeconomy. Empirically, argument to oil- the United States now consumes nearlytwiceas much oil as it may apply produces but it does not applyto coal or naturalgas, forwhichthe United States is about self-sufficient. the Moreover, United Statesuses almostno oil in producing could perhaps supporta move towards elecelectricity. Energysecurity arguments triccars (or otheralternatives oil fortransportation to fuels). In thatcase, however, fromcoal or natural gas enhances security much as as producing the electricity it fromrenewables.In addition, electricity fromcoal and natural gas producing
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is less expensive,so using those sourceswould make electrictransportation more affordable. The distinct advantageof renewableelectricity generationis its lower environmental to impact,not itsability enhance energy security. A second "energysecurity" argumentis thathigh energyprices enrich some countriesthat are hostile to U.S. global interests. reducing By energy-exporting use of these fuels,the argumentgoes, the United Statescould lowerthe price of which would both help United States consumersand reduce the wealth energy, flows hostileregimesand possibly to reduce military directedtowards expenditures in trade.This argument does not have traction ensuringunimpeded energy again countries of analysis coal or naturalgas in the United States.Even in oil-importing whereoil is a significant source of electricity the quantitiesof oil used generation, for generationare so small relativeto the world oil marketthat replacingthem withrenewablesis unlikelyto have any noticeable impact on world oil prices,as in indicated in Table 1. This argumenthas been raised withmore credibility the contextof European naturalgas purchasesfromRussia. Intellectual Non-Appropriable Property Even withthe strongintellectual laws thathave been adopted in the property most advanced countries,in most cases a successfulinnovatorcapturesrelatively littleof the value fromthe innovation. That outcome surely createssome dynamic whichgovernments haveaddressedin manysectors subsidizing basic inefficiency, by research.Whetherthisincentive problemis greaterin energythanothersectorsis not clear,but it is clear thatU.S. government expenditureson energyR&D have been much smalleras a share of GDP contribution thanin healthcare, defense,or 2010 Chapter4). (NSF technology Governmentsupport for generatingfundamentalscientificknowledge in has energy increasedwiththecreationof theAdvancedResearchProjects Agency the of in Energy(ARPA-E)within Department Energy 2009, but theARPA-E budget for2012 is likelyto be under $200 million.Studiesfromacross the politicalspectrumhave suggesteditshould be 50 percentto manytimeshigher(Augustine al. et 2011; Loris 2011). For those renewable electricity available, a common technologiescurrently forsubsidiesis thatgreater installation lead to learning-by-doing will that argument willdrivedown thecostand priceof the technology. This possibili ustifies tyj government intervention, is however, onlyif the knowledgefromthatlearning-by-doing not appropriableby the companythat creates it thatis, if the knowledgespills over to otherfirms. Though the argumenthas some merit, proponentsfrequently overstate strength the evidenceon thispoint. the of are First,most studiesof learning-by-doing not able to separate learning-byfrom other changes. In solar photovoltaicpower,costs have come down doing since the 1960s as the totalnumberof installedpanels has increased, dramatically withestimates thatevery doublingof the installedbase has on averagebeen associated withabout a 20 percentdecline in the cost of solar panels (forinstance,Duke and Kmmen 1999; Swanson2006). Manyfactors have affected costsoverthistime
silicon (Nemet 2006) . Significant exogenous technologicaladvances in crystalline solar technologieshave resultedfrominvestments made outside the commercial solar power sector,especiallypublic investments made as part of the U.S. space In in investments the semiconductor industry. addition,firms programand private in the industry have gottenlarger,which has lead to savingsfromeconomies of scale- producing more units of output in each period- ratherthan learning-bya of doing,whichis theknowledgegained from largeraggregatehistory production and Seel (2011) presentcomprehensive data over time.Barbose,Dargouth,Wiser, overtime. on changingcostsof solar photovoltaics and The distinction betweenlearning-by-doing economies of scale mayseem for minor,but the implications public policyare immense.If one firmcan drive or down itscostsbyproducingat large scale in itsfactory itsinstallation operation, thosebenefits highly are thatlargefirm. Smallerfirms notlikely are appropriableby is to experience a cost decline because a competitor enjoyingeconomies of scale. economies of scale in any industry, shortof creatinga natural Thus, significant are not generally seen as a basis forgovernment intervention. monopoly, creates more spillovers, because knowledgeis likelyto be Learning-by-doing is Still,the evidence of stronglearning-by-doing thin and portable across firms. credible resultson spillovers even more rare. Nemes (2006) analysis are suggests thatlearning-by-doing actuallyplayed a relatively has small role in the decline of solar photovoltaic costsover the last 30 years.He findsthatthe scope forlearningthe currentcrystalline silicon technology quite limitedgiventhe is by-doing using currentstate of the industry. While the evidence of minimal learning-by-doing in effects solar photovoltaicsis not dispositive, is more convincingthan any it researchclaimingsignificant effects. existing GreenJobs The "job creation" for justification government policies to promoterenewable took on greaterprominenceafter downturn the thatbegan in 2007 and the energy failure climatechange legislation Congresssince then.In thegreen of in jobs debate of 2008-2010, therewas much confusionbetweenthe short-run stimulus goal and the longer-run the policyof subsidizing greenjob creation.As a stimulus program, ofsubsidizing renewableenergy on how rapidly investment the advisability depends can take place and the elasticity investment of withrespectto those subsidies.In the renewableenergysectortends to require large up-front construction general, whichis likely be attractive thecontextofshort-term creation, the to in but costs, job is to limited. capacityto expand such projectsrapidly likely be fairly When the economy recoversand the stimulus fades, is there a justification creation forsubsidizing renewableenergy? This queslonger-term job justification tionhas a static and a dynamic viewis thatrenewableenergy component.The static and energyefficiency more labor-intensive are technologies for producing (or conserving)energythan conventionalenergyproduction.The empiricalsupport fortheseclaimsis uneven,but even iftrue,it is farfrommakingthe case thatgreen To job creationis welfare improving. the extentthatrenewableenergycostsmore,
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renewableenergyabsorbs even afteraccountingfor environmental externalities, - a unit of electricity and more resourcesto produce the same value of output is lowersGDP compared to conventionalsources.Anotherpossibility thatrenewthan conventionalsources,perhaps by targeting able energycreates "better" jobs economic welfareis of particular workers whose incremental importancebecause have very difficult employor because theywould otherwise to theyare otherwise low-wage jobs. in The dynamicview is that investment renewableenergyis justifiableas an to change theequilibrium ofinvestment theeconomy. and One reason path attempt is that and, implicitly, private suggestedis thatrenewableenergy a growth industry investment. investors too slowto recognizetheopportunity, are tosuboptimal leading However,it seems hard to argue the general case that government policymakers businessopportunities than the private sector. A are betterat identifying emerging more nuanced and potentially is compellingversionof thisargument thatup-front investment createnetwork will externalities learningthatspillovermuch more and than a economicadvanstrongly intra-nationally internationally, creating sustainable forthecountry thatmakestheinvestment Such effects could be (Moretti 2012). tage but to important, as countriesmake competinginvestments become the dominant centerof renewableenergy, seemslikely it thatat leastsome of thoserents wouldbe or transferred firms to thatcan choose theirlocations. dissipated The network effects is argument oftenheard in politicaldebates,but evidence it and Spain have subsidizedenormousinvestsupporting is scarce. Both Germany mentsin installation renewableenergy, of solar.In 2008, Spain was the particularly marketfor new solar generationin the world,but its manufacturing and largest installationof new capacityvirtually in 2009 when the countrycut disappeared back subsidies.Germany continuedto growinstallations solar photovoltaics, has of more than quadruplingnew capacity from2008 to 2010, but panel manufacturing in Germanyhas declined from77 percent of new installedcapacityin 2008 to in 27 percentin 2010 as China and Taiwan have made massiveinvestments panel to data fromEarthPolicyInstitute (2011). manufacturing, according This area is ripe forfurther research.I am not aware of any credible studies thathave assessed the short-run stimulus effect greenenergy of investment relative to otherstimulus the qualityof thejobs createdin the long run bygreen policies, or of to investments that investment, the ability governments make strategic energy a trigger sustainablenew sector. Loweringthe Cost of Fossil Fuel Energy lowersthedemand forfossil fuelsand Increasing adoptionof renewableenergy drives downtheir As this the prices. a publicpolicy argument, is essentially advocating exerciseof monopsony in the fossil fuelmarket(a buyeror set of buyers can power drivedown price by reducingpurchases).That outcome has clear inefficiencies some fossilfuels are replaced by more-expensive renewable power but it still on mightbe surplus-enhancing net forthe set of economic actorsthatthe policymakerrepresents. the United States,the effect increasing In of renewablepoweris
Table2 Powerunder Levelized Cost of ResidentialSolar Photovoltaic Alternative DiscountRates hour) (perkilowatt Real interest rate Levelized cost 1% $0.249 3% $0.315 5% $0.389 7% $0.468 9% $0.551
: Table presents implied the levelized ofpower a 5 kilowatt located cost for Notes 2 system A five installed. inSacramento, California. system $36,500 Assumptions: kilowatt costs or and Panels for years noshading soiling nomaintenance producing last 30 with costs, over in of declines on average kilowatts all hours first Output panels 0.77 year. by isreplaced 10years $2,552) after and 0.5percent year toaging. inverter The (at per due in on cost based current of$3000 20years $2,171), (at declining 2 percent by annually real terms. further andsources, online For details see Appendix. to reduce demand fornaturalgas and coal. U.S. productionof thesefossilfuelsis so is wealth from U.S. producers to nearly equal to consumption, theeffect to transfer On the the is U.S. consumers. the statelevelwithin UnitedStates, effect much more are unevensince manystates largeimporters fossil of fuelsand a smallernumberare largeexporters. The size of this effect prices is also questionable. While some advocates on have focused on short-run the shift towards price variation, impactof a long-term of renewables willdepend on the long-run elasticity supplyfornaturalgas and coal. Withthe adventof hydraulic itseemslikely thatthelong-run of fracturing, elasticity naturalgas supplyhas become quite high.The long-run of coal supplyis elasticity seen as quite highas well (Miller, to Wolak,and Zhang 2011) . Thus, a shift generally renewablesis not likely have a large effect fossil on fuelprices. An Application to Residential Solar Photovoltaic Power Here, I applythe analytic approach describedabove to update the calculations of levelized cost of residentialsolar power fromBorenstein (2008a), takinginto account recentchanges in the cost of solar photovoltaic systems. and Seel (2011), the cost of installing Accordingto Barbose,Dargouth,Wiser, residential-scale solar systems(less than 10 kilowatt capacity) in 2010 varied in in from$6.3/watt capacity New Hampshireto $8.4/watt capacity in of averageprice in Utah,with California byfarthelargest stateforresidential solar at $7.30. Taking California's numberas the benchmark, Table 2 presentsthe impliedlevelizedcost of powerfora 5 kilowatt located in Sacramento, under alternative California, system real discountrates.The underlying noted in the table are intendedto assumptions be median estimates: anything, are tilted if somewhat towards the they lowering cost. The real interest rate of 3 percentimpliesa levelizedcost of $0.315 per kilowatthour. I followBorenstein(2008a) in adjustingfor the timingof production
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(including line losses), increasingthe value of residentialsolar by 20 percent, and for the location of production,increasingvalue by 1 percent.I incorporate these effectsby adjusting the levelized cost down to $0.260 per kilowatthour of (= 0.315/(1.2 X 1.01)). An additionaldownward adjustment $0.02 per kilowatt hour accounts for long-runsavingsin transmission as investment, discussed in Borenstein (2008b, p. 10), which bringsthe net cost to $0.240. Details of these are adjustments in the online Appendix available withthispaper at (http://e-jep This resultcompares to levelizedcostsforcombined-cycle .org). gas-fired generation thatare now generally below $0.08 per kilowatt hour,giventhe reduced price forecasts naturalgas thatare nowcommondue to theexpectedsupply for increases. if next forenvironmental externalities, one assumes thatnew resiAdjusting dential solar generationsubstitutes new combined-cycle turbines, for then the gas local pollutantreductionis valued at about $0.0015 per kilowatt hour accordingto Muller, Mendelsohn,and Nordhaus (2011). That leavesa costgap betweenresidentialsolarand combined-cycle turbine of gas generation at least$0.158. The gas plant emitsslightly than0.0005 tonsofcarbondioxide per kilowatt less hour ofelectricity, so residential solarwould be costcompetitive a social costbasisonlyifthecostof on carbon dioxide emissions weregreaterthan$316 per ton. Nearlyall social costand for priceforecasts carbon dioxide are wellbelow$100 per ton (Greenstone, Kopits, and Wolverton solar stillat least$0.108 per kilowatt 2011), whichleaves residential hour more expensive. This analysisof the costs of residentialsolar power does not account for network potentialcost savingsin reducing the size of the necessarydistribution for electricity, for spillovers nor fromlearning-by-doing, which analysesoffer for much less guidance. On the otherside, it also doesn't incorporatereduced output due to shadingor soilingof the panels,or installation a less-than-ideal at angle due to the buildingorientation(Borenstein2008b). But thisanalysisprovidesa good notion of the gap thatthosefactors would have to fillin orderforresidential solar to substitute forgas-fired photovoltaics cost-effectively generation. Medium-scale large-scale and solarphotovoltaics installations large-scale and solar thermal are more cost competitive. Contracts theselarger for generation somewhat are in theunsubsidized levelsystems notpublic,butreports theindustry presssuggest ized costfrom theseinstallations probably is between hour $0.15 and $0.20 perkilowatt in 2011, beforeany of the market externality or and likely more adjustments using thana 3 percentreal costof capital.These systems enjoythesame production timing benefit residential as but in solar, less (or none) ofthereduction line lossesand transmission These systems wouldrequirea muchlowercostof carbondioxideto savings. be competitive gas-fired with still $100 per tonor greater. generation, though probably Conclusion The mostimportant market failurein energymarkets almostcertainly is environmental and externalities, thesinglemostefficient policywould be to pricethose
externalities Yet oftenfindpricingexternalities be to appropriately. policymakers discussionis overwhich,ifany, Thus, the second-best nearlyimpossiblepolitically. alternative are to policyinterventions likely do themostgood, or at leastto do more thanharm. good Instead of pricingexternalities, farmore prevalentgovernment the response has been targetedprogramsto promotespecificalternatives conventionalelecto for tricity generation technologies.Justifications such programshave generally withenvironmental concerns,but have oftenexpanded to energysecurity, begun and driving downfossil fuelprices,generally without job creation, supportofsound economic analysis.Such targeted programs also seem especiallyvulnerable to politicalmanipulation. If governments are to implementreasoned renewable generationpolicy,it will be criticalto understandthe costs and benefitsof these technologiesin the contextof modernelectricity This requiresdevelopingsophisticated levelsystems. ized costestimates, and adjusting both the market for value of the powergenerated and the associated externalities, theycan be usefully so compared across projects and technologies. Such adjustments complexand frequently are controversial. More researchat the interface the economics and engineeringof electricity of markets would be veryvaluable, particularly the cost of intermittency, benefitsof on the end-usedistributed and theeconomic spillovers from generation, learning-by-doing and network externalities. on these questionswould enhance renewable Progress in energypublic policy and privatedecision making,particularly a world where market-based first-best, optionsare greadyrestricted. I amgrateful JuddBoomhower excellent to research assistance. also benefited the I for from comments Duncan Callaway Lucas Davis, Meredith MichaelGreenstone , Fowlie, , Bill of Chris KarenNotsund, Richard Schmalensee theeditors. Knittel, , and Hogan,Paul Joskow, Thisresearch supported part undera research was in contract the from California Energy Commission the to Energy Institute Haas. at
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Appendix Al Table Estimates Details forLevelized Cost of Energy interest All use Interest: real annual Borenstein 3% 2008a Inflation:calculations 2007$; rate; Lifetime:years; factor: Subsidies: Online: 25 2007; None; 16%; Capacity simulation factor AC based Notes: Capacity isfor production, onproduction CA. cost for 2007$. Sacramento, Levelized ofenergy (LCOE)inreal for Interest: escalation O&Mcosts; Klein Inflation: 1.6% year, 0.5% About per 2010 plus for cost 4.67% utilities; (WACC) publicly-owned average ofcapital weighted LCOEgiven Local cost: Online: Notes: Carbon None; cost: 2018; pollutant None; case. isinnominal terms. "average" Used Used utility publicly-owned estimates. in in2009 GasCCGT: Lifetime:years; $6.56/MMBtu to$16.80/MMBtu Fuel: 20 factor: at 75%. 2029, nominal Capacity prices; Federal factor: Subsidies: Windonshore: Lifetime:years; 30 37%; Capacity incentive of$4.10/MWh. production factor: Subsidies: Federal Geothermal: Lifetime:years; 30 94%; Capacity incentive of$4.10/MWh. production : Lifetime:years; 30 factor: Subsidies: Online: None; 30%; Capacity Hydropower For and sites." Notes: "small-scale existing 2018; in2029, in2009 Biomass : Lifetime:years; $2.00/MMBtu to$2.91/MMBtu Fuel: 20 incentive factor: Subsidies: Federal atnominal 85%; Capacity production prices; Data stoker boiler. of$4.10/MWh; Online: Note: arefor 2018; Receives Solar & Solar Lifetime:years; CSP PV: factor: Subsidies: 20 27%; Capacity and from ad federal incentive of$4.10/MWh, exempt state valorem production for CSP Notes: MW 250 gross tax; trough solar (concentrated capacity parabolic for solar 250 gross single system PV(photovoltaic). power); MW capacity axis in2009 Gas- conventional cycle: Fuel: 20 simple Lifetime:years; $6.56/MMBtu to in2029, factor: 75%. $16.80/MMBtu atnominal prices; Capacity escalationO&Mand0.5%real in DuandParsons Inflation: annual 3% inflation, 1%real plus in factor: Subsidies: escalationfuel; Lifetime:years; 40 2009 None; 85%; Capacity Online: Notes: LCOEin2007$. Real 2009; Pulverized: Fuel: in2007$ with Interest: real 7.8% WACC; $2.60/MMBtu escalationdescribed Notes: as Based recently on above; proposed supercritical andultrasupercritical coalplants. pulverized in Gas- Conventional Interest: real CCGT. Fuel: 7.8% WACC; $7/MMBtu2007$ with escalationdescribed as above. Nuclear : Interest: real in2007$ escalation with as Fuel: 10% WACC; $0.67/MMBtu described above. onnext (continued page)
EIA2011a, b,
Inflation: Interest: real for 2.9% 10.4% WACC fossil Average annually; generators without 7.4% WACC allothers; real for Lifetime:years; 30 Subsidies: CCS, None; Carbon Cost capital fossil cost: of for without is3 percentage CCS plants points than other Online: Notes: LCOEisin2009$. 2016; higher for generators; Pulverized: Delivered isabout Fuel: in2009$ $2.50/MMBtu 2035; price through Local cost: choose least-cost combination ofscrubbers emisand pollutant Plants sions allowancescomply Clean Interstate Capacity to with Air factor: 85%. Rule; Gas- Conventional Fuel: CCGT. Lower wellhead rises about 48 $4/kCF price from in1990 about in to factor: 87%. $6.50/kCF2035; Capacity
Geothermal: factor: 92%. Capacity 52%. Hydropower: faeton Capacity Nuclear: Proprietary starting Energy Fuel: model from Resources International uranium forecasts; factor: 90%. price Capacity Biomass: Not Fuel: given; factor: 83%. Capacity Solar Capacity CSP: faeton 25%. Solar Capacity PV: factor: Notes: 150MW For fixed-tiltplat flat PV. 25%; Gas- conventional cycle: Lower wellhead rises about 48 simple Fuel: price from in to in factor: 30%. $4/kCF 1990 about $6.50/kCF2035; Capacity EPRI2009 Inflation:calculations real All use 2008$; escalation no ismodeled any for cost Interest: after-tax of5.5%; WACC Lifetime:years; 30 Subsidies: Real, component; Carbon none; cost: Online: LCOEin2008$. Notes: None; 2015; Pulverized: $15/MWh2008$; in Fuel: factor: Local cost: 80%; Capacity pollutant Notes: 650-750 supercritical For MW removal; Mercury plant. Gas- Conventional Fuel: CCGT: $8-$10/MMBtu in2008$; factor: 80%. Capacity Windonshore: factor: Notes: MW 100 wind location not 35%; farm; Capacity specified. Nuclear: $0.80/MMBtu Fuel: in2008$; faeton Notes: MW 1400 90%; Capacity plant. Biomass: $1.22-$2.22/MMBtu Capacity Fuel: in2008$; factor: Notes: 85%; 75MW fluidized plant, 28%efficiency. bed with circulating Solar Capacity CSP: factor: Notes: MW inNew with 125 facility Mexcio wet 32%; and cooling 10%combustion. Solar Capacity PV: factor: Notes: MW fixed plate with flat PV 20 10% 26%; conversion efficiency. Interest: after-tax 5%real discount 1.9% 6.7% Fthenakis, Mason, Inflation: annual; WACC; rate; andZweibel 30 2009 Lifetime:years; Subsidies: specified; not Online: Notes: Assumes new 2020; HVDC transmission construction of$0.007/kWh. costs Solar Capacity CSP: factor: (16hours thermal of Notes: 90% storage); "Gigawatt scale" plant southwestwith hours thermal CSP in US 16 of storage capacity. Solar Capacity PV: factor: (300hours compressedstorage); of air Notes: 90% "Multi-hundred MW scale" assumes advances cost. lower PV; major technological onnext ) (continued page
92
Perspectives of Journal Economic
and credits overall escalation fuel, for O&M, tax Lazard 2008 Inflation: annual Ltd. 2.5% (no Interest: after-tax Lifetime:years; 20 inflation 7.3% WACC; specified); construction LCOEin2008$; based Online imputed onstated Notes: times; years cost: Local Carbon None; cost: pollutant None. as in2008$, escalationdescribed with Pulverized Fuel: coal: above; $2.50/MMBtu of factor: Online: Notes: $74-$135/MWh 2013; 85%; Range estimates Capacity and end 90% capture compression). (high includes carbon factor: in CCGT: $8.00 MMBtu 2008$; Gas- Conventional Fuel: / Capacity Online: Notes: $73-$100/MWh. 2011; 40%-85%; Range of Production credit tax Subsidies: Windonshore: factor: 28%-36%; Capacity 100 facility; $44-$91/MWh. Online: Notes: MW 2009; $20/MWh; Range of tax Production credit Subsidies: Geothermal: factor: 70%-80%; Capacity Online: Notes: $42-$69/MWh. 2011; $20/MWh; Range in2008$; factor: Online: Nuclear: $0.50/MMBtu Fuel: 2014; 90%; Capacity $98-$126. Range: in2008$; factor: Subsidies: Biomass: $0-2/MMBtu Fuel: 80%; Capacity Online: Notes: of Production credit $10/MWh; tax $50-$94/MWh. 2012; Range tax Subsidies: investment Solar Capacity CSP: factor: 30% credit; 26%-38%; Online: Notes: $90-$145/MWh endtower, endtrough). 2010; (low high Range tax Subsidies: investment Solar Capacity PV: factor: 30% credit; 20%-26%; 10 net low Online: Notes: $96-$154/MWh;endisfor MW capacity 2009; Range fixed installation. 10 film thin installation; endisfor MW crystalline axis high as in2008$ escalation with Gas- Conventional cycle: $8.00/MMBtu simple Fuel: factor: Online: Notes: described Capacity $221-$334; 2010; 10%; above; Range turbine. GE GE turbine; endisfor LM6000PC Low isfor 7FA end High rate with internal All Interest: equity and 4% financing 10%target Cory SchwabeInflation: annually; factor: Subsidies: rate Lifetime:years; ofreturn; Interest 5.8%; 20 2009 34%; Capacity Online: Notes: MW tax of 120 facility; Production credit $15-$21/MWh; 2008; and case" scenario. structure "base Used financing "corporate" costs Interest: specified. Not All use 2010$. Freese, Clemmer,Inflation:calculations real Capital Subsidies: fixed 20 based EIAtechnology-specific on and rates; Martinez, charge Lifetime:years; in LCOEisgiven 2010$. cost: Online: Notes: b Carbon None; 2015; None; 2011a, Nogee, factor: in2010$; Pulverized Fuel: coal: 85%; $1.60-$2.70/MMBtu Capacity for 600 supercritical of Notes: $103-$130/MWh; MW plant. Range estimates in2010$; Gas- conventional combined Fuel: cycle: $4.00-$6.75/MMBtu Capacity 400 plant. factor: Notes: 50%-87%; $52-$98/MWh;MW Range Notes: Windonshore: factor: $57-$125/MWh. 25%-45%; Range Capacity Geothermal: factor: Notes: $65-$169/MWh. 85%; Range Capacity Notes: factor: Nuclear: $0.8/MMBtu in2010$; Fuel: 80%-90%; Range Capacity for 1100-1350 plant. MW $141-$184/MWh; in2010$; factor: Notes: Biomass: $1.88-$4.06/MMBtu Capacity Fuel: 80%; Range bed 50MW fluidized plant. $147-$328/MWh; circulating 50-100 Solar Capacity CSP: Notes: factor: $147-$328/MWh; 27%-43%; Range MW facility. Solar Capacity PV: Notes: factor: $126-$260/MWh. 20%-28%; Range cost O&M WACC Notes: LCOEis"levelized ofenergy." is"weighted cost average ofcapital." is"operation PV solar and CSP andmaintenance." is "carbon CCS capture storage." is "concentrated power." is direct HVDC CCGT cycle "photovoltaic." is"combined gasturbine." is"high-voltage, current."

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