from Energy, Security, and Climate and Energy Security and Climate Change Program

Is Solar Really “Cost-Competitive” with Fossil Fuels?

January 7, 2014

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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A finding last week by a Minnesota judge that a proposed solar project is a better way to meet the state’s electricity demand than several competing natural gas facilities has been making news. The decision has been reported as a “landmark” declaration that solar is “cost-competitive” with fossil fuels.

It seems that few of those who have been reporting on the ruling have actually read it. A deeper dive reveals that solar got the nod because of state policy rather than superior standalone economics. It also points to some tricky decisions ahead for regulators.

The 48-page opinion is long and complicated but can be summarized pretty straightforwardly. Several developers submitted proposals for meeting incremental electricity demand. A consultant to the government conducted a series of modeling exercises, which all concluded that various proposed gas plants were the most economic ways to meet Minnesota’s electricity needs. The judge pointed out, though, that Minnesota will need to add a substantial amount of solar in the coming years to meet a statutory mandate for solar power. He also argued that the state will need less incremental electricity than some others have claimed. Once that mandated solar power is added, he claimed, the state will need very little additional electricity generation. Hence the proposed gas plants would likely be superfluous, making them almost entirely a waste of money. The solar proposal, at least, would meet the mandate.

On top of that, the judge cited an expert analysis as determining that solar would deliver the lowest levelized cost of electricity (LCOE). But that expert analysis appears to incorporate revenues from sales of renewable energy certificates (RECs) by the solar project in determining its net cost. (I write "appears" because I can’t track down the analysis; I’ve only read filings that refer to it.) Those RECs, of course, only exist because of the mandate.

None of this means that the judge made the wrong decision or that the supportive policies are bad. (I don’t know enough about this case or the details of electricity modeling and regulation to have a view on that.) It does mean, however, that it’s wrong to take this as evidence that solar is cost-competitive absent policy support. Policy support (beyond the federal investment tax credit) was central for the judge’s findings.

This episode also suggests a quirk that needs to be grappled with. The judge’s logic around the state solar mandate seems to have essentially disqualified all the non-solar competition. Ultimately, then, this “competitive” bidding process seems to not have really been competitive, with only one viable project considered. Perhaps the judge is correct that solar is the only way to go – but, in that case, Minnesota consumers presumably should get to play some competing solar bids against each other. As mandates become increasingly important in shaping the country’s electricity system, predictably and transparently integrating them with the utility sector’s peculiar mix of regulation and competition will be of paramount importance.

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