Solar power: The killer app

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By Glenn Williams

 

Solar power reduces electricity prices. As more solar is added to deregulated power grids, power prices fall lower. The secret sauce is the markets.

 

Deregulated power markets are invisible to many Americans, yet every few minutes they set the price for much of their electric power. There are 10 separate power markets currently operating in North America. According to the ISO/RTO Council, they serve approximately two-thirds of electricity consumers in the United States and more than half of all consumers in Canada.

While each market works differently, they all set the price for electric power using sophisticated auctions, which repeat every few minutes, 24 hours a day, seven days a week. Market managers forecast expected demand for energy and generators, including solar power producers, bid in prices to meet that demand.

Typically, generators bid in based on their production costs. So if an independent power producer owns a power plant, they will carefully examine their production costs and bid a price slightly higher than those costs. Any amount they receive over their production cost creates gross margin, which can be used to pay other operating and indirect costs.

Many are surprised to learn that the highest bid that clears the market sets the market price for all generators. Many believe the market price should be the average bid, but if that were so, half the successful bidders would lose money and exit the business.

The last generator that clears the market is the marginal unit. In all likelihood, their gross margin would be near zero and they would be considered operating on the margin. It's not a place most independent power producers want to be, so they always hope there is a more expensive generator that will clear the market.

Since there is virtually no oil in North America's electricity, the marginal unit is typically an older and less efficient power plant, which uses either coal or sometimes natural gas as fuel. As daily demand rises and peaks, more costly units clear the market and set higher market-clearing prices.

Even sunlight isn't always free
A big question is cost. Many incorrectly believe solar power is uncompetitive. True, on a levelized cost basis, solar power appears to be expensive. But when tax credits and renewable energy credits are considered, solar's adjusted levelized costs fall below natural gas. That's why private investors flocked to New Jersey, California, Arizona and other solar states to invest tens of millions of dollars in utility-grade solar farms.

It is important to appreciate tax credits are not cash grants. Contrary to political rhetoric, federal agencies are not writing checks to solar developers. All they are offering is reduced income taxes on solar profits, and only for a limited time. After six years, most utility-grade solar farms find themselves at the maximum possible federal and state income tax brackets; all government benefits received are repaid and more.

Yes, state-sanctioned renewable energy credits are ultimately paid by retail consumers. But when the costs of those credits are spread over an entire state and then offset by lower energy prices, the credit's net cost to consumers can begin to approach zero.

The utility-grade solar farm is the killer app. Solar power does the opposite of traditional peaking plants: it lowers energy costs at the same time it lowers the costs of pollution.

 

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