Utilities Enter the Photovolatic Market, Why Now?

Utilities have historically played a considerably small roll in the development of solar photovoltaic plants and rightfully so. In the past utility companies have invested heavily in coal fired plants and natural gas plants which roughly produce electricity at four to seven cents/kWh. In contrast solar photovoltaic costs have been somewhere in the realm of 33-50 cents/kWh. With this logic it seems quite obvious why utility companies would avoid photovoltaic installations. However, in the next three to five years, utility companies have projects summing over 4.8 GW of installed photovoltaic electricity. Why?

Multiple factors come into play in a utility’s decision to purchase/install photovoltaic energy. The most recent topic of discussion has been the investment tax credit (ITC) and cash grants provided by the American Recovery and Reinvestment Act of 2009. With this stimulus in place, utilities are able to install renewable energy at 70 percent its’ actual cost.

On top of the ITC, the cost of generating one kW of photovoltaic electricity is constantly falling thanks to developments in thin film technology and increased efficiencies of both single cell silicon and concentrated solar photovoltaic. Also, due to the increase in demand for solar panels, companies like First Solar and Applied Materials have been able to drastically reduce their cost/unit which in turn leads to a drastically reduced cost/kWh.

Another factor, one that is far less talked about, is the fact that many utilities around the country are regulated. Now what exactly does that mean, to be regulated? It means a number of things, but the most relevant point is that utilities prices to the consumer are set by a Utility Regulatory Commission. And this commission essentially asks the utility what their operating costs for the coming year will be. From there they tack on a profit percentage (often between eight and eleven) and tell the utility that they can charge X dollars per kWh.

You might be asking yourself why does this matter? Well, because a utility is regulated, no matter their costs they will still receive their eight to eleven percent profit and the cost increase will be carried by the consumer. Now of course utilities want to keep their customers happy so they still try to keep costs low, but with the ITC and cash grant described above, along with the growing concerns for the environment, utilities are showing their decreased apprehension toward renewable and photovoltaic energy specifically.

Source: Emerging Energy Research

Source: Emerging Energy Research

As you can see from the diagram, many utility companies are entering into power purchase agreements (or PPA’s) with photovoltaic developers. This is an exciting sign of things to come in the world of renewable energy and it goes to show that as we put more of our time and money into innovative solutions, we in turn get an innovative society.

Comments

  1. Geoff Garber says:

    Although regulated (electric) utilities are guaranteed a return on their investment by the rate-setting public utility commission in their state, they are only permitted to build facilities that use traditional technologies and are \used and useful\ for the generation, transmission and distribution of electric power. Regulated utilities are prevented by most state utility commissions from investing in research and development of any non-traditional technology.

    Similarly, they are often required by law to purchase their power solely from the lowest cost producer. A few states now have laws called renewable portfolio standards that require the utility to purchase some (small) percentage of their power from renewable sources regardless of the cost differential.

    In recent years, many large utility companies have created unregulated subsidiaries that invest in the research and development of renewable technologies. My firm designs and builds utility scale wind, geothermal and solar generation facilities for large developers. Lately these developers have included the unregulated parts of major utilites and even several oil and gas companies.

  2. I believe that RPS (renewable portfolio standards) requirements are also forcing utility’s to purchase solar power (small right now but growing into the future). Since utilities now get the same tax break businesses do, they would prefer to “own” the asset than to simply connect the wires.

    Faraz–what you say cannot be true unless energy is subsidized to the equivalent of 1cent/kwh (that level of subsidy is insane–so knock it off! if that is going on). The Middle East has a phenomenal solar resource. You should be developing your solar resource just the way you developed oil 50-60 years ago–quit whining about solar, panel prices just crashed 50% in the past year–that is a decade’s worth of cost reduction. In another decade solar will be at cost parity in most major markets around the world.

  3. Faraz Ahmed Siddiqui says:

    Only increased energy cost can ensure an ROI on PV units e.g. In Europe the ROI can be achieved in a matter of 12~15yrs but in the Middle east, it takes 190+ Yrs! For facade’s beauty and tax purposes Europe is driving the PV market but in terms of real value and a ROI/value for money scenario, PV is still in its infancy stage given the regular cleaning costs associated with the units.
    We really have to see some major cost optimization with PV units. Unless the industry does not become competitive in PV, it will become limited to only some parts of the world and consumers will question the rising cost of energy given the increasing taxes on energy raw materials.

  4. Neeraj Srivastava says:

    Solar technology, Global Warming and availability & prices of oil and Coal are primarily three reasons for delayed interest of utility. Solar Technology has improved which cut the cost of production dratically. Global Warming is hot topic in eavry world forum and countries are now willing / forced to cut down the carbon emission. Reservs of Natural Resources of oil and coal are depleting fast. Mining of Coal and Oil from new reservs which are burried deep in to earth has become costly. Over that enviromental concerns make it difficult to mine in new areas.

    Still costly, PV market has to be government driven. Hence the utilities being government controlled entering the market.

    Solar energy which is abundant will fullfill the requirement of Energy Hungry Human Civilization. Nations which mastered the PV technology will be future super power.