The solar electricity
industry is dependent on federal government subsidies for building new
capacity. The subsidy consists of a 30% tax credit and the use of a
tax scheme called tax equity finance. These subsidies are delivered
during the first five years.
For wind, there is subsidy during the first
five to ten years resulting from tax equity finance. There is also a
production subsidy that lasts for the first ten years.
The
other subsidy for wind and solar, not often characterized as a subsidy, is
state renewable portfolio laws, or quotas, that require that an increasing
portion of a state's electricity come from renewable sources. Those
state mandates result in wind and solar electricity being sold via profitable
25-year power purchase contracts. The buyer is generally a utility
with good credit. The utilities are forced to offer these terms in
order to cause sufficient supply to emerge to satisfy the renewable energy
quotas.
The
rate of return from a wind or solar investment can be low and credit terms
favorable because the investors see the 25-year contract by a creditworthy
utility as a guarantee of a low risk of default. If the risk were to
be perceived as higher, then a higher rate of return and a higher interest rate
on loans would be demanded. That in turn would increase the price of
the electricity generated.
The
bankruptcy of PG&E, the largest California utility, has created some cracks
in the façade. A bankruptcy judge has ruled that cancelation of up
to $40 billion in long-term energy contracts is a possibility. These
contracts are not essential or needed to preserve the supply of electricity
because they are mostly for wind or solar electricity supply that varies with
the weather and can't be counted on. As a consequence, there has to
exist and does exist the necessary infrastructure to supply the electricity
needs without the wind or solar energy.
Probably
the judge will be overruled for political reasons, or the state will step in
with a bailout. Utilities have to keep operating, no matter
what. Ditching wind and solar contracts would make California
politicians look foolish because they have long touted wind and solar as the
future of energy.
PG&E
is in bankruptcy because California applies strict liability for damages from
forest fires started by electric lines, no matter who is really at
fault. Almost certainly the government is at fault for not anticipating
the danger of massive fires and for not enforcing strict fire prevention and
protection. Massive fire damage should be protected by insurance,
not by the utility, even if the fire was started by a power
line. The fire in question could just as well have been started by
lightning or a homeless person. PG&E previously filed bankruptcy
in 2001, also a consequence of abuse of the utility by the state government.
By
far the most important subsidy is the renewable portfolio laws. Even
if the federal subsidies are reduced, the quota for renewable energy will force
price increases to keep the renewable energy industry in business, because it
has to stay in business to supply energy to meet the quota. Other
plausible methods of meeting the quota have been outlawed by the industry's
friends in the state governments. Nuclear and hydro, neither of
which generates CO2 emissions, are not allowed. Hydro is not
strictly prohibited — only hydro that involves dams and diversions. That
is very close to all hydro. Another reason hydro is banned is that
environmental groups don't like dams.
For
technical reasons, an electrical grid cannot run on wind or solar much more
than 50% of the time. The fleet of backup plants must be online to
provide adjustable output to compensate for erratic variations in wind or
solar. Output has to be ramped up to meet early-evening
peaks. Wind suffers from a cube power law, meaning that if the wind
drops by 10%, the electricity drops by 30%. Solar suffers from too
much generation in the middle of the day and not enough generation to meet
early evening peaks in consumption.
When
a "too much generation" situation happens, the wind or solar has to
be curtailed. That means that the operators are told to stop
delivering electricity. In many cases, they are not paid for the
electricity they could have delivered. Some contracts require that
they be paid according to a model that figures out how much they could have
generated according to the recorded weather conditions. The more wind and
solar, the more curtailments as the amount of erratic electricity approaches
the allowable limits. Curtailment is an increasing threat, as quotas
increase, to the financial health of wind and solar.
There
is a movement to include batteries with solar installations to move excessive
middle-of-the-day generation to the early evening. This is a
palliative to extend the time before solar runs into the curtailment
wall. The batteries are extremely expensive and wear out every five
years.
Neither
wind nor solar is competitive without subsidies. If the subsidies
and quotas were taken away, no wind or solar operation outside very special
situations would be built. Further, the existing installations would
continue only as long as their contracts are honored and they are cash
flow–positive. In order to be competitive, without subsidies, wind
or solar would have to supply electricity for less than $20 per megawatt-hour,
the marginal cost of generating the electricity with gas or
coal. Only the marginal cost counts, because the fossil fuel plants
have to be there whether or not there is wind or solar. Without the
subsidies, quotas, and 25-year contracts, wind or solar would have to get about
$100 per megawatt-hour for its electricity. That gap, between $100
and $20, is a wide chasm only bridged by subsidies and mandates.
The
cost of using wind and solar for reducing CO2 emissions is very
high. The most authoritative and sincere promoters of global warming
loudly advocate using nuclear, a source that is not erratic, does not emit CO2
or pollution, and uses the cheapest fuel. One can buy carbon offsets
for 10 or 20 times less than the cost of reducing CO2 emissions with wind or
solar. A carbon offset is a scheme where the buyer pays the seller
to reduce world emissions of CO2. This is done in a variety of ways
by the sellers.
The
special situations where wind and solar can be competitive are remote locations
using imported oil to generate electricity. In those situations, the
marginal cost of the electricity may be $200 per megawatt-hour or
more. Newfoundland comes to mind — for wind, not solar.
Maintenance
costs for solar are low. For wind, maintenance costs are high, and
major components, such as propeller blades and gearboxes, may fail, especially
as the turbines age. These heavy and awkward objects are located
hundreds of feet above ground. There exists a danger that wind farms
will fail once the inflation-protected subsidy of $24 per megawatt-hour runs
out after ten years. At that point, turbines that need expensive
repairs may be abandoned. Wind turbine graveyards from the first
wind fad in the 1970s can be seen near Palm Springs,
California. Wind farms can't receive the production subsidy unless
they can sell the electricity. That has resulted paying customers to
"buy" the electricity.
A
significant financial risk is that the global warming narrative may
collapse. If belief in the reality of the global warming threat
collapses, then the major intellectual support for renewable energy will
collapse. It is ironic that the promoters of global warming are
campaigning to require companies to take into account the threat
of global warming in their financial projections. If the
companies do this in an honest manner, they also have to take into account the
possibility that the threat will evaporate. My own best guess, after
considerable technical study, is that it is near a sure thing that the threat
of global warming is imaginary and largely invented by the people who
benefit. Adding CO2 to the atmosphere has well understood positive
effects for the growth of crops and the greening of deserts.
The
conservative investors who make long-term investments in wind or solar may be
underestimating the risks involved. For example, an article in
Chief Investment Officer magazine stated that CalPERS, the giant California
public employees retirement fund, is planning to expand investments in
renewable energy, characterized as "stable cash flowing
assets." That article was written before the bankruptcy of
PG&E. The article also stated that competition among
institutional investors for top yielding investments in the alternative energy
space is fierce.
Wind and solar are
not competitive and never will be. They have been pumped up into
supposedly solid investments by means of ill advised subsidies and
mandates. At some point, the governments will wake up to the waste
and foolishness involved. At that point, the value of these investments
will collapse. It won't be the first time that investment experts
made bad investments because they don't really understand what is going on.
Norman Rogers writes often about renewable energy. He has
websites: Dumb Energy and Nevada Solar Scam.
