Carpenter, Paul R.

Taylor, Gerald Alan

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THE ECONOMICS AND REGULATION OF USER-OWNEDPHOTOVOLTAIC SYSTEMS: A PRELIMINARY ANALYSISPaul Carpenter and Gerald TaylorMIT ENERGY LAB WORKING PAPER No. MIT-EL-77-030WPSeptember 1977Solar photovoltaics has been considered for several years to be a leadingcandidate in the crusade to find a renewable-resource alternative to fossilfuels. In the few years since the Energy Research and Development Administrationhas directly promoted the development of the technology, considerable strideshave been made toward reducing the costs of photovoltaics, thus increasing itsattractiveness relative to other energy sources. Nevertheless, costs must still fall20 to 40 fold before it can directly compete with the present exhaustable energysources. The singular goal of the federal government R&D efforts, as a result,is to drive down the cost of photovoltaic cells by promoting the developmentof a mass-production photovoltaic industry. It is hypothesized that the creationof a demand for photovoltaics will provide an automatic stimulus to the supplyindustry. Since the present cost of photovoltaic cells requires governmentsubsidy for any application other than those that are remote, such as satellites,ocean buoys, etc., the question of where the demand for PV will exist between nowand the time when cost becomes competitive is largely a question of governmentpolicy. The cost of conventional energy supply is, of course, different fordifferent types of applications. As a consequence, the relative economic valueof photovoltaic energy will vary from one application to another. It is thepremise of this paper that the governmental policy decision with regard to wherethe demand for photovoltaics is to be stimulated is vital to the future economicmerit of photovoltaics as an alternative source of electric energy. The purposeof this paper is to discuss the issues behind potential applications of photo-voltaics. The appropriateness of photovoltaics to the economic structure ofpublic utilities will be assessed, the current emphasis of the ERDA Photovoltaicsprogram will be described and an alternative application which might merit furtherinvestigation will be suggested. Finally, a plan of proposed research by the-2-authors will be presented.The economics of conventional power generation has until the very recentpast mandated a n-competitive approach to electricity delivery systems. Earlyattempts to provide electric power on a competitive basis inevitably led to con-solidation of companies within a service area or to collusive divisions of themarket. The regulated monopoly came to be seen as the most advantageous methodof providing reasonably priced power.There are two economic bases which underpin the validity of the publicutility scheme as we know it today. The first is the simple fact that dupli-cation of transmission and distribution lines is a wasteful proposition. Linesand equipment for transmission and distribution represent a major portion of thecost of providing electricity, and naturally it is more efficient to avoid theparallel installations that occur when two companies try to service the same area.The second basis for today's monopoly approach is the fact that electrical powerproducers have in the past enjoyed declining marginal costs. There were twofactors involved here. First, since a large percentage of a utility company'scosts are fixed, increases in production levels up to a company's capacity (ornear it) resulted in decreased unit costs. Second, there were economies ofscale in conventional production. Technologies for producing large amounts ofpower could be installed at a price which yielded lower unit power costs thanthose resulting from technologies producing smaller amounts. Thus, becauseduplication could be avoided and economies of scale could be realized, utilitieswere recognized as natural monopolies. Utility monopolies, as long as theirprofits were properly regulated, could meet the power needs of society at mini-mum costs.-3-Present trends are changing this traditional view of electric utility eco-nomics. Rapidly increasing capital and construction costs are diminishing thegains available from scaling up capacity. Skyrocketing fossil fuel prices haveinflated operating costs and electric bills. Increasing concern over the envi-ronmental impacts of fossil and nuclear fuels raises questions about the truesocial cost of present methods of power production. The national security valueof conserving fossil fuels causes another alteration of circumstances.Further doubt about the traditional view has resulted from the emergenceof renewable resource technologies which are attractive because of their verypositive environmental and fossil fuel conservation characteristics. Photovol-taic systems, for example, are very modular: they produce small amounts of poweras efficiently as they do large amounts. Thus, they offer few if any economiesof scale, and there is little or no advantage in aggregating units. Since photo-voltaic devices are so modular, generating capacity can easily be installed wherethe load is located. Such load center applications preclude the necessity fortransmission systems for locally generated power. Thus, the two principal pillarsof the regulated monopoly approach to energy delivery systems, distribution andscale economies, may become dated by emerging technologies which offer efficienton-site electrical power generation.There are several alternative configurations of photovoltaic systems for thegeneration of power assubstitutes for or as additions to electric utility systems.In the initial stages of its research and development program, ERDA let threemajor contracts to study possible photovoltaic conceptual designs. While each-4-of the contractors, General Electric, Westinghouse and Aerospace Corporation,identified three design types - residential, independent load centers (shoppingcenters, industrial parks, etc.) and central power applications - the evaluationof the economics of each application was performed from the perspective of their"value" to the utility. As a result, there was a built-in tendency to avoidthe possible advantages of residential ownership of photovoltaic-utility inter-active systems.Despite the focus of the conceptual design studies, it is not clear thatthe central power application of photovoltaics is the most efficient of thepossible alternatives. The fact that PV generators are sunlight-dependantcreates problems for utilities concerned with system reliability. Only now aresystem planners able to evaluate the contribution a PV plant could make in atotal utility system. Studies by General Electric and Westinghouse2 haveresulted in evaluation methodologies which demonstrate the "effective capacity"of a photovoltaic unit, that is, the real value of a PV plant to the utilityin terms of capacity, to be reduced by its quasi-random nature to a smallfraction of its rated output. The complexity of the methodology itself, inits attempt to compare photovoltaics to conventional generation, belies theintrinsic difference between the methods of power generation. It is necessaryto "force-fit" photovoltaics into the current generation mix through complexstochastic simulation techniques in order to compare them on similar eco-nomic grounds. Furthermore, use of PV as central generation wastes possiblesavings in transmission costs resulting from on-site configurations.ERDA has recently postponed the near-term construction of planned resi-dential demonstration projects, replacing them with larger load-center andcentral utility demonstrations. These developments have sparked public cri-ticism, most notably the article by Hammond and Metz in Science which argues-5-that "one consequence of this R&D emphasis on large-scale, long-range systemsis to distort economic and policy assessments of solar energy based on thecurrent program, both within the Energy Research and Development Administrationand in higher levels of the government." 3 This criticism may be justified inthat none of the conceptual design studies, and no other study to date, hasevaluated the economics of user-owned, on-site photovoltaic systems.If a market is singled out for emphasis which is inappropriate for photo-voltaics both historically and economically, then larger government subsidiesand more regulatory constraints will be required than otherwise would benecessary. The country would be paying more than is necessary to achieve itsconservation and security goals. Recognizing the potential costliness in thecurrent approach, we should be convinced that there are nnt nther applicationalternatives more appropriate to the modular, time dependent nature of photovoltaics.The discussion above has indicated that photovoltaic power generation issomewhat at odds with the historical regulated monopoly structure of publicutilities. The characteristics of photovoltaic systems give them a comparativeadvantage in small, on-site applications. Residential applications appear parti-cularly promising for several reasons. First, they take full advantage of photo-voltaic modularity. Residential systems of 7KW, according to the Office of4Technology Assessment , produce power nearly as cheaply on a unit cost basisas do 200 MW systems. There are no transmission losses since the photovoltaicoutput is used right where it is generated. Second, maintenance on a smallscale is a simple problem compared to those faced by utility companies con-templating central power applications in the 200MW range. Module failures,difficult to detect and even more difficult to locate in several square milesof arrays are readily apparent on a roof top scale. Washing arrays, whichmay become a major concern for utility companies,requiring expensive equipmentand a great deal of time in presently conceived utility installations, is-6-reduced to a homeowner hosing down the roof in a residential system. Third,the economics of residential ownership of photovoltaic equipment are verydifferent from those which confront the utility company. The homeowner fi-nancing a photovoltaic system along with a home purchase mortgage faces a lower5interest rate and hence cost of capital than does a utility company . Thehomeowner need not pay dividends nor offer rates sufficient to compete for riskcapital. Nor must the mortgagor/homeowner worry about payback periods so longas the life cycle cost of the photovoltaic system is positive. Similarly the6discount rate of the homeowner (which is arguably the mortgage interest rate,)is much lower than that faced by the utility. Because of the differences incapital costs photovoltaic systems may be economic from the homeowners pointof view some time before the utilities would consider them a sound investment.An additional factor worth noting is that the user-owned residential unit benefitsthe utility company in the same manner as do utility-owned photovoltaic plants.TheGeneral Electric study recently completed for the Electric Power ResearchInstitute demonstrated that photovoltaic generation does in fact displace con-ventional generating capacity7. A utility serving an area with substantial photo-voltaic penetration would not have to maintain so large a capital investment ingenerating equipment as it would without the solar electric contribution. Thefuel savings recognized in the G.E. study would, of course, continue to accrueto the utility irregardless of ownership. Home ownership could, in fact, maximizebenefits realized by utility companies from photovoltaic generation for the simplereason that it provides the strongest incentives to the consumer to modify8consumption patterns to match photovoltaic output . This could provide theutilities with peak shaving benefits they could only gain otherwise by marginalcost or time of day rates.- 7-The philosophy underlying the National Energy Plan is that energy conser-vation will reduce national dependence upon foreign oil and help to insure againstthe economic dislocation which would result from a severe scarcity of fossilfuels. Certainly this same conservation philosophy is at the root of presentprograms to develop renewable energy technologies. It follows directly, then,that if the country is willing to pay a positive premium to develop energyindependence and allay economic dislocation, then programs should aim to mini-mize that premiumor conversely, to maximize the conservation value of dollarsspent. Within a narrowly defined program such as the Photovoltaics Program atERDA this concept clearly requires careful decisions as to where program fundsshould be spent to maximize impact. Consideration must be given to all likelydevelopment alternatives. Given the apparent advantages of residential, user-owned photovoltaic applications, it would seem prudent to fully investigatesuch applications before reaching a final decision on a long term developmentplan.-8-On the following pages is the preliminary outline of a proposed effortto investigate the economic and regulatory issues involved with the on-siteapplication of solar photovoltaics. It is proposed that this task be approachedfrom a utility-specific, case-study perspective, in order to attempt touncover some of the key variations in the results by region.-9-O. Intro & Initial HypothesesI. Selection of Regions & Utility CompaniesA. Regional Analysis1. Methodology2. RegionsB. Utility Selection1. Generation mix2. Load Profiles3. Data availabilitya. Utility informationb. Quality of insolation dataII. Residential SimulationA. Methodology - Tatum Model1. Model description2. Data inputsa. System configurations(1) Array size(2) Storageb. Rate structurec. Consumption(1) Appliance ratings & use patterns(2) Behavioral assumptions3. Sensitivity AnalysisIII. Life Cycle CostingA.Methodology1. Operating costs - Tatum Model2. Capital costs - SAMICS model3. Maintenance Costs - FIOM4. Degradation & Failure Comment - Assumptions5. Taxation assumptions6. Other necessary assumptions - JustificationB. Results1. Regional Life Cycle Costs for optimized system2. Comparisons to base case3. Sensitivity Analysis implicationsC. Policy Assessment1. Duration & Magnitude of subsidies necessary, if any2. Penetration implications of various policy scenariosIV. Utility ImpactsA. Technical considerationsB. Penetration scenariosC. Interface simulations1. Methodologya. Total cost approachb. Model descriptionc. Assumptions and base case description2. Inputsa. Utility datab. Residential load-Tatum Model Output- 10 -D. Simulation Results1. Presentation2. Sensitivity Analysis3. Economic analysis & implications for utilities-Comparison with central power studies done to dateE. Regulatory implications and scenariosV. Comparison of Results with Initial HypothesesVI. Policy Assessment - Comparison of residential sector applicationsto other possible funding alternativesA. ERDA and National energy goalsB. Generalization of methodology to other onsite renewable resourcetechnologies- 11 -FOOTNOTES1 "Requirements Assessment of Photovoltaic Electric Power Systems" undertaken by General Electric Company for the Electric Power ResearchInstitute, Palo Alto, California, contract RP651-12 "Utility System Reliability Assessment Techniques" a Westinghouse ElectricCompany follow on project under ERDA Contract E(11-1)-2744,"Conceptual Design and Systems Analysis of Photovoltaic Power Systems"3 Hammond, Allen and Metz, William, "Solar Energy Research:Making SolarAfter the Nuclear Model", Science, Vol. 197 No. 4300, July 15, 1977.4 "Application of Solar Technology to Today's Energy Needs", Office ofTechnology Assessment, Washington, D.C. (June 1977) (prepublicationdraft) p. I-115 Mortgage Interest rates are presently hovering around 9% or just below.In a recent study by MITRE Corporation' "Solar Energy Applications- AComparative Analysis to the Year 2020" July 1977 (Draft) the figuresused to approximate the utility sector yielded a capital cost of 13.2%.6 Since the most common scenario will probably be the new home purchase,the purchasers opportunity cost is reflected by the mortgage ratebecause the investment alternative is not to incur additional debt topay for the photovoltaic system.7 "Requirements Assessment of Photovoltaic Power Systems", op.cit.In each of the three utility systems covered in the study the additionof photovoltaic generating capacity increased system reliability thusallowing the retirement of some conventional generating equipment. Theamount of displacement varies from utility to utility and is dependentupon the correlation between incolation and peak load, utility gener-ation mix and other factors8 Work with experimental rate structures such as that recently completedfor Central Maine Power indicates that consumers modify their con-sumption patterns markedly to minimize energy bills when given theopportunity to do so. Photovoltaic systems then might prompt customersto shift consumption to take advantage of "free" solar electricity.Such behavior would be promoted by the very character of the photo-voltaic systems so long as back up rates do not discourage it. Marginalcost or off peak pricing would be necessary otherwise if the utilitywanted to promote conservation of centrally generated power.

The economics and regulation of user-owned photovoltaic systems : a preliminary analysis

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The economics and regulation of user-owned photovoltaic systems : a preliminary analysis

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