The Market Value and Cost of Solar Photovoltaic Electricity Production

[OKIsItJustMe]

http://www.ucei.berkeley.edu/PDF/csemwp176.pdf

The Market Value and Cost of
Solar Photovoltaic Electricity Production

Severin Borenstein
January 2008

This paper is part of the Center for the Study of Energy Markets (CSEM) Working Paper Series. CSEM is a program of the University of California Energy Institute, a multi-campus research unit of the University of California located on the Berkeley campus.

Abstract: The high cost of power from solar photovoltaic (PV) panels has been a major deterrent to the technology’s market penetration. Proponents have argued, however, that typical analyses overlook many of the benefits of solar PV. Some of those benefits are in the realm of environmental and security externalities, but others occur within the electricity markets. In this paper, I attempt to do a more complete market valuation of solar PV. I incorporate the fact that power from solar PV panels is generated disproportionately at times when electricity is most valuable due to high demand and increased line losses. I find that the degree to which the timing of solar PV production enhances its value depends very much on the extent to which wholesale prices peak with demand, which in turn depends on the proportion of reserve capacity held in the system. In a typical US system with substantial excess capacity, I find that the favorable timing of solar PV production increases its value by 0%-20%, but if the system were run with more reliance on price-responsive demand and peaking prices, the premium value of solar PV would be in the 30%-50% range. Solar PV is also argued to have enhanced value within an electrical grid, because the power is produced at the location of the end-user and therefore can reduce the costs of transmission and distribution investments. My analysis, however, suggests that actual installation of solar PV systems in California has not significantly reduced the cost of transmission and distribution infrastructure, and is unlikely to do so in other regions. I then bring together these adjustments to the valuation of solar PV power with calculations of its cost to analyze the market value of solar PV. The market benefits of installing the current solar PV technology, even after adjusting for its timing and transmission advantages, are calculated to be much smaller than the costs. The difference is so large that including current plausible estimates of the value of reducing greenhouse gases still does not come close to making the net social return on installing solar PV today positive.

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9. Conclusion

To fully understand the costs and benefits of solar PV power requires a careful analysis of all of its market and non-market attributes. The first goal of this paper was to present a method for analyzing the market value of solar PV power recognizing that it produces a disproportionate amount of its output at times when the weather is sunny and system demand is high. Applying the method to California, a summer-peaking system, suggests that correctly accounting for the time-varying electricity production of solar panels could increase its value substantially compared to a valuation that does not adjust for the favorable time pattern of production from solar PV.

Using actual real-time prices, the change in value is between 0% and 20%, but using prices from a simulation model, which assures that peaking gas capacity covers its fixed costs through high energy prices, the increased value from real-time valuation of solar power could be in the 30%-50% range. Unfortunately, simulation of a wholesale electricity market in which capacity costs are recovered through a flat per-kilowatt-hour fee so that wholesale prices are substantially less volatile–a much more common institutional setting in the United States today–lowers the premium value of solar PV power to 0%-20% again.

While that analysis also takes into account the savings on time-varying line losses of electricity when the power is produced on site by solar PV panels, it does not account for potential savings from reduced need for transmission and distribution capacity. A separate analysis of these effects, however, indicates that they are very unlikely to amount to more than one to two percentage points in solar PV valuation.

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