Solar Power's Economic Impact Is Huge

 | Mar 28, 2014 | 3:30 PM EDT
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Solar power is an elegant resource. It is a natural peaking generator. It displaces dirty power. It helps with energy independence. It reduces the need to invest in more transmission lines. Unfortunately, many of solar power's benefits have been hidden from public view. At least up until now.

One of the most surprising benefits is that solar power reduces the market price of power. This fact confuses people because they have heard the opposite. They hear it is a boondoggle, it is expensive and it gets in the way of serious power production.

Opponents are partially right. Today, everything is expensive. New nuclear plants cost about $140 a megawatt-hour. New coal plants cost slightly more. A new solar farm, however, costs approximately $110 a megawatt-hour. Today, new solar beats new nuclear, and it beats new coal. Perhaps it can beat new gas turbines if delivered prices of natural gas remain elevated.

Opponents are also partially wrong. Solar power production actually reduces the wholesale price of power. When solar panels produce electricity, they displace marginal generators. The displacement of marginal generators means the next lowest generator becomes the marginal generator. That new generator sets a new market-clearing price, which is lower.

Of course, one or two panels will not do much. When thousands of panels are operating within a grid, the effects are simply amazing.

Look at the chart below.

While approximate, these numbers came from California's grid. That grid is called California ISO. The silver line represents system-wide demand for power on an hour-by-hour basis.

Notice in the back hours that demand is low. During sunlight hours, demand is high. The first peak appears around noontime. It is sustained until the second peak, which appears to be around the evening rush hour and dinner time.

Notice the orange bars, which represent solar power production. They are on a different scale to provide perspective. Notice solar does not produce any power in the off-peak periods; solar only produces during peak periods.

The chart makes it clear that solar cannot displace base-loaded power plants. It is clear that solar is displacing marginal units on the other end of the merit order. In particular, solar displaces peakers and some intermediate resources.

If anyone were to search for criticism, s/he might argue that solar is deficient because it does not serve the grid's super peak, which would be correct. The economic and environmental impact is small.

Show Me the Money

Translating the two curves shown in the chart above into money is not so obvious. If we use the same solar production curve and superimpose an hourly price curve, we see the money.

Look at the next chart below.

The money is as plain as day. The silver line represents hourly prices for wholesale power. Superimposed on the price curve is the same solar production curve shown in the first chart (the orange bars).

Notice how solar power production suppresses wholesale power prices. In fact, a small amount of solar power provides a large amount of price suppression.

Doing a back-of-the-envelope crunch, it appears that the solar installed to date is saving approximately $10 million a day for this one grid. That $10 million a day adds up to over $3 billion a year. This is just for one large state. Imagine if the whole country did this.

It turns out that 35 other states see the light. They are implementing programs to encourage renewable energy, including solar power. According to the Solar Energy Industries Association, the top states today are as follows in the table below.

Looking ahead at each state's plans, it appears as though huge investments in new wind and new solar are in the works. In "Solar Is the Hands-Down Winner," I argued that the equivalent of 25 new nuclear power plants will be invested in solar, wind and other renewable energy resources.

I also argued that the big winner should be development companies such as SunPower (SPWR). While First Solar (FSLR) should do well, SunPower has the real estate advantage. It takes SunPower less real estate to produce the same amount of power.

Once the solar facilities are developed, however, the owners take over, and they are the ones who make money on energy production. They include Berkshire Hathaway (BRK.A/BRK.B), NextEra Energy (NEE), NRG Energy (NRG), Duke Energy (DUK), Consolidated Edison (ED), Sempra Energy (SRE) and just about every other utility with a strong balance sheet.

At this point, it should be clear. Solar is not only a cost leader, it is a price suppressor. Solar's economic impact is huge.

Oh, another thing. Solar also helps the environment.

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