Solar electricity production: first-come, first-served Can Switzerland make a difference?

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1 S W I S S F E D E R A L I N S T I T U T E O F T E C H N O L O G Y Z U R I C H Solar electricity production: first-come, first-served Can Switzerland make a difference? Marcelo Ito Parada ETH number: imarcelo@ethz.ch Energy Economics and Policy Term Paper Professor Thomas F. Rutherford

2 Introduction Coal fired power plants are often referred as dirty because of the carbon dioxide they emit. But carbon dioxide in itself is not dirty; it is colorless, odorless and toxic only in high concentrations. It can be even used to grow plants (Pacheco and Helene 1990) or to make your soda taste better. At the same time the electricity produced is reliable and cheap; as long as climate change externalities are not considered. Here is where it gets dirty. A 1GW hard coal power plant emits 4 million tons of CO 2 per year (Radgen 2010). The emission of carbon dioxide that has been trapped for millions of years increases the concentration on Earth s atmosphere and therefore causes the notorious greenhouse effect (IPCC 2007). Unfortunately, the externalities of climate change are not easy to calculate. There are many uncertainties about the mechanisms behind global warming, about the probabilities of natural disasters and about their impacts. What we know is that these disasters can be pretty costly and some damages may be permanent. What we also know is that just because a problem is difficult we shouldn t avoid tackling it. Not taking a decision is also taking a decision. One solution might be the renewables. Renewable technologies for power production are some of the weapons used by men to fight climate change. Among those weapons there is solar photovoltaics. How effective this weapon can be depends on cost benefit analysis and the government s policies. Even in a country not famous for its sun like Switzerland the right policy can make solar photovoltaics have an important impact on the battle's result. Photovoltaics The photovoltaic effect is the emission of electrons by special materials when exposed to radiation, like sunlight. After absorbing radiation with a sufficiently high frequency the free electrons can be captured in an electric circuit producing a current. A photoelectric panel is built with pieces of this material connected and stacked in a plate. When mounted on a surface irradiated by the sun (e.g. rooftop) and connected to converters the PV panel can produce power that can be fed in the grid like any other power plant. When compared to coal power plants, solar photovoltaics have high investment costs and 1

3 low yearly generation. The production of photovoltaics cells is energy intensive (Blakers and Weber 2000) resulting in high production costs while daytime and weather strongly restrict the yearly generation. Operation costs on the other hand are much lower in PV panels There is almost no maintenance cost and the fuel is for free. Using the sun as fuel gives freedom to the panel s owner because the generation costs do not oscillate with oil prices. Another advantage is that the sunlight can be obtained everywhere. The New York Times (2010) reported that the US army is already using solar panels instead of oil after realizing that too much oil was burned just to carry the fuel to the front. One main disadvantages of solar power is the uncertain availability. Unlike gas pipelines, electricity can't be stored on the transmission lines, therefore the production must match the consumption all the time. An electricity generation plant is considered dispachable when its output can be increased or decreased on demand. Photovoltaics are not dispachable and are, therefore, not reliable unless its production variance can be hedged somewhere else. Some of the technologies that can fill this gap are gas power plants and hydro power. Why Switzerland? Switzerland has a yearly electricity production around 66TWh and consumption around 60TWh (BFE 2008). The two main sources are hydro power (55%) and nuclear (40%), the rest being conventional thermal and other renewables. Although the power produced in Switzerland is almost CO 2 free there is a high dependency on nuclear power which is not renewable and carry high risks. At the same time the share of renewable energies other than hydro power is very low. The stochastic nature of solar energy is one of its majors drawbacks. For good utilization of the solar input one must have ancillary power plants that can adapt the supply to the demand in a 15 minute gap. Switzerland has 55% of its electricity coming from hydro power plants, from which 69% are from storage plants (the rest coming from run of river plants), these are highly flexible and can cover the variance of the solar input (BFE 2011). 2

4 Swiss power generation mix Total: 65.9 TWh Conventional Thermal and Others, 3.16 Hydro, Nuclear, Figure 1: Swiss generation by plant type Source: BFE Switzerland is a small part of a large structure which is the European grid. According to the IEA (2008) the European electricity infrastructure (OECD countries) is characterized by 26% of coal power plants, 27% of oil and gas, 25% nuclear, 15% hydro power, 3% wind, 3% waste and biomass and only 0.21% solar. From a total of 3400TWh Right, more than 50% of the electricity is produced from fossil fuels and 75% in non renewable ways. OECD Europe generation mix Total: 3636 TWh coal, nuclear, other, 2.86 biomass/waste, wind, solar, 7.48 oil/gas, geothermal, 9.93 hydro, Figure 2: OECD Europe generation by plant type Source: IEA

5 Policy Switzerland's policy to foster renewable energies is based on cost covering of feed in energy. The producer receives a subsidy on the electricity delivered to the grid. This subsidy will decrease over time to match technological progress and economy of scale. The production facilities eligible to receive the subsidy are hydro power plants (up to 10MW), wind energy, geothermal energy, biomass, waste and photovoltaics. The subsidy amount and period (20 to 25 years) is determined based on reference power plants with same technology and total output (BFE 2007). The subsidy policy is a traditional method of fostering renewable energies based on reducing the investment cost of new facilities. It suits well the high installation costs of photovoltaic power but has an overall high burden on the government. After all the money needed for the subsidies comes from taxes. To better redistribute the extra cost of renewable energies other policies can be used. EWZ, the state owned utility company of the city of Zurich, has implemented since 1995 a stock exchange concept to foster photovoltaic power (EWZ, cited in Nordmann 2003). On the production side EWZ signs 20 year contracts with photovoltaic independent producers that have a solid business and technological plan. For this electricity EWZ pays a premium price. On the consumer side the utility sells Premium Solar electricity to consumers who want to use solar energy but cannot afford a PV installation on their roofs. The extra cost of photovoltaics is transferred from producers to consumers willing to pay a premium for solar energy. Rate based incentives go further in redistributing costs. The money needed in the early stages of photovoltaic production is loaned by the government at very attractive rates. This is the policy used in Germany, where the independent producer pays his loan back in ten years. In the end everybody contributes a little bit with the new technology. All of these policies have different degrees of success and are adapted to different situations but all of them result in an increased share of photovoltaic power in the grid. Market Shift The freshman in economics learned in microeconomics 101 that an increase in production leads to a decrease in price in a competitive market. That statement holds in the liberalized European electricity market as long as one considers unlimited transmission 4

6 capacity between countries. This assumption will be made for the sake of simplicity. To build the supply curve one needs the marginal cost of each power plant. The table 1 summarizes the operation costs for each technology. Table 1: Marginal cost of different plant types Plant type Marginal cost in CHF/MWh Coal 23 Oil/gas Biomass Nuclear Hydro 5.64 Geothermal 8.5 Solar 0 Wind 3.13 The cheaper technologies are switched on earlier while the more expensive ones are used in peak demands. The supply curve based on the marginal costs is called merit order curve and is presented in figure 3. Merit Order Curve: Europe 45 Marginal Cost/Price in CHF/MWh Power in GW Base Demand Peak Demand Supply Curve Figure 3: Merit order curve with peak and base demands A survey on elasticity of demand in electricity markets was conducted by E3Network and shows that, in the short term, the elasticity is very low: around 0.3. The demand curves for 5

7 peak and base is also presented in figure 3. To go beyond microeconomics 101 one needs to analyze the impact of new solar production by considering its characteristics. Solar power is available when it is most needed: during peak hours (figure 5). In EEX the peak hours are defined as between 8 a.m. to 8 p.m. (see figure 4). For the calendar year of 2012 the price of peak hours in the EEX is /MWh while the base power is priced at /MWh (as of 18th of April 2010). The high demand drive the price up as power plants with higher marginal costs are switched on. Source: EEX 2011 Figure 4: European Electricity Index 6

Figure 5: Schematic solar generation for different hours Source: Photons to Watts 2009 Switzerland's rooftop area suitable to PV generation is more than 150km².

8 Figure 5: Schematic solar generation for different hours Source: Photons to Watts 2009 Switzerland's rooftop area suitable to PV generation is more than 150km². The panel's yearly capacity is around 130kWh/m², resulting in a total capacity of around 20000Gwh per year (Swissolar 2007). The European supply and demand curves for the midday peak, with and without solar input from Switzerland, are presented in figures 6 and 7. Marginal Cost/Price in CHF/MWh Supply and Demand: without extra solar generation in Switzerland Power in GW Figure 6: Actual European supply and demand curves Peak Demand Supply Curve 7

9 Marginal Cost/Price in CHF/MWh Supply and Demand: with 20GWh extra solar generation in Switzerland Power in GW 20GWh extra solar generation Peak Demand Supply Curve Figure 7: European supply and demand curves with 20GWh extra solar generation in Switzerland The immediate conclusion is: it changes absolutely nothing! This is expected since Swiss energy generation accounts for less than 2% of Europe's generation. But after looking at it more closely one can find relevant results. Solar energy will substitute power produced by coal plants. From the point of view of carbon emissions coal is the worst technology available. Therefore, every kilowatt hour produced by a solar photovoltaic panel during peak hours will reduce the emissions of CO 2 equivalent to a coal power plant. The fact that the price doesn't change when Switzerland goes solar is not necessarily bad news for the country. All investments can be evaluated using the net present value approach, which discounts the future earnings and compares to the present cost of the investment. As PV panels have high investment costs they strongly depend on future earnings. If electricity prices remain high the net present value of investing in a new solar panel is higher. As an example let's take a 12m² installation in a sunny place in Switzerland. This panel produces 130kWh/m² per year (Swissolar 2003), resulting in a total of 1560kWh each year. Assuming a power price equal to the 2012 Peak Phelix futures (1 = 1.3CHF), the panel provides 145CHF per year. According to an article in Neue Zürcher Zeitung (2008) the installation cost of a new photovoltaic device can be estimated at 0.7CHF/Wp. A 12m² solar panel has a maximum output of 1.7kWp, costing around 1200 CHF. The lifetime of such a panel is around 10 years and there are no operational costs. Assuming there is no 8

10 subsidy and the interest rate is 3% the net present value of this solar installation is 37CHF. To analyze the effect on price the same merit order curve is built but with a solar input of Gwh per year. Marginal Cost/Price in CHF/MWh Supply and Demand: with 200GWh extra solar generation in Europe Power in GW 200GWh extra solar generation Peak Demand Supply Curve Figure 8: European supply and demand curves with 200GWh extra solar generation in Europe The price resulting from this exercise is clearly lower than before. The main reason is that now the price is determined by the lower marginal cost of nuclear power. To recalculate the example used above it is assumed that the total reduction in marginal cost is reflected in the market. The estimated peak price is 80.42CHF/MWh (61.86 /MWh), resulting in a revenue of 125 CHF per year. The net present value of the panel on the example is only 134CHF Gwh solar photovoltaic energy can't be produced in Switzerland but it is feasible for larger countries like Germany (whose electricity consumption is ten times higher than Switzerland's) or a group of countries. Conclusion Solar power, when large enough, can shift the merit order curve bringing down prices and cutting carbon emission. But even for a small country like Switzerland there is space for profit. Although Switzerland is too small to change the whole landscape of European power production, it can profit from its position if it is one of the early adopters of solar 9

11 photovoltaics. Through the right policies the expansion of the solar power generation can not only be economically feasible but can drive economic growth. At the same time the country can solidify energy independence and reduce nuclear risk. The assumption of unlimited transmission capacity is not valid in extreme cases: a very sunny holiday with high inflow into rivers will probably reach the transmission capacity limits. To fully explore the low generation cost of solar photovoltaics in the European power market the country should invest in its international transmission lines. The prices assumed in the calculation were static, but oil scarcity is more likely to raise prices in the long run, turning solar energy more attractive The investment costs and panel efficiency were also assumed to be static, but as with every new technology the costs will probably decline and the efficiencies will probably increase. Even with the clear limitations of this approach the general direction could be outlined: first come, first served. The first countries to commit to solar generation even small ones will be the first to benefit from higher prices and gather the technological know how to lead future energy production, while protecting itself against oil price and nuclear risks. References Blakers, Andrew and Klaus Weber The Energy Intensity of Photovoltaic Systems. Canberra, Australia: Australian National University. E3Network. A review of the literature on the price elasticity of demand for electricity. International Energy Agency Electricity/Heat in OECD Europe in Paris, France. IPCC Contribution of Working Group 1 to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, UK: Cambridge University Press. Neue Zürcher Zeitung Sonnige Zeiten für Solarstrom. 23 May. Normann, Thomas Subsidies versus rate based incentives; for technology, economical and market development of pv. In Conference on Photovoltaic Energy Conversion (May) Osaka, Japan. Pacheco, Maria R. P. S., and Maria E. M. Helene Atmosfera, fluxos de carbono e fertilização por CO 2. Estudos Avançados vol4 n9 (May/August). 10

12 Radgen, Peter Overview and Fundamentals of Carbon Dioxide Capture Technology. In Lecture notes of Carbon Dioxide Capture and Storage. Zurich, Switzerland: ETH Zurich. Rosenthal, Elisabeth U.S. military orders less dependence on fossil fuels. The New York Times. 4 October. Swissolar Welchen Anteil an der schweizer Energieversorgung kann die Sonnenenergie leisten? Zurich, Switzerland. Switzerland. Bundesamt für Energie Cost covering remuneration for feed in to the electricity grid (CRF). Bern, Switzerland. Switzerland. Bundesamt für Energie Electricity consumption in Bern, Switzerland. Switzerland. Bundesamt für Energie Statistik der Wasserkraftanlagen der Schweiz. Bern, Switzerland. 11

8. Confusion About Renewable Energy. Gail Tverberg Energy Economics and Analysis Modeling

8. Confusion About Renewable Energy Gail Tverberg Energy Economics and Analysis Modeling We get free energy from the sun! Physicists describe the situation as a thermodynamically open system! Humans, animals,