So why aren't renewables a slam-dunk investment?



Published:

Editor's note: This is the final installment in a series of articles on renewable energy.Logic says that, given the free nature of sun and wind, once a plant is built the costs must be lower than for fossil fuels. Logic would be wrong because fuel costs comprise a relatively small component of overall costs.Last column, we noted that the cost benchmark is determined by calculating the levelized cost of energy, or LCOE. Due to the complexities and disparate inputs no definitive formula for LCOE exists. This allows various approaches to "put their best foot" forward, but it also hinders the ability to derive accurate costs.The main drivers in LCOE are capital costs, operating and maintenance costs and system efficiency.Let's tackle efficiency first. Unlike fossil fuels, solar plants cannot consistently produce energy. Factors such as tracking the sun, shading and location reduce a typical solar plant's efficiency to about 20 percent. Translation: annually, solar only produces 20 percent of the power fossil fuel plants generate.That puts a crimp in costs, since energy output is the denominator for determining cost per kilowatt.Equally problematic are the capital costs. Solar plants can cost upwards of $1 billion to build. That means financing and debt burden. And with the exception of photovoltaic, the unproven nature of many approaches adds a risk premium to the cost of capital.Government subsidiesBeyond capital costs, there's the small matter of guarantees. In the United States, power purchase agreements, or PPAs, are used to buy and sell large-scale power. With a PPA, a utility agrees to buy a prescribed amount of power for a prescribed time, at a prescribed price. To protect the purchaser, PPAs include warranties and performance guarantees that require the delivery of a minimum amount of power. If a producer fails to achieve the minimum power generation, penalties ensue.Operating and maintenance costs make up about 25 percent of total cost. Cleaning solar mirrors is no trivial endeavor, but the larger issue for pioneering technologies with limited installed bases is that estimates for operating and maintenance costs are more a guess, and that adds further to the financial risks.Getting the picture of why renewables are not a slam dunk? These factors make investing private capital in renewables a dicey proposition.Government subsidies have helped level the playing field. A common form of subsidy is the feed-in-tariff, or FIT, which basically force utilities to buy power under long-term agreements at a price usually above market rates.Germany allowed even "mom-and-pop" power producers to leverage FITs and the result was a world-leading position in solar deployment. But since the financial crisis, every country has scaled back these subsidies. Consequently, momentum toward renewable energy has slowed.So what role should the government play? The answer is an active one. America should own the renewable energy market because it will eventually become a lucrative growth industry with high-paying jobs that could eliminate our dependence on foreign energy.Today, renewable energy is where computer technology was in the mid-1970s, and think of the explosion in that market since then. To lead the way we need to adopt the same mentality as we did with our early space program.The government's investment in Solyndra was the right strategy. Solyndra was just the wrong company. Ensuring that the government makes wise decisions is a separate matter, but there is no question that we should focus on this burgeoning industry.Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso of Wilton is a marketing, management and macroeconomic expert. His website is tonyparadiso.com. Edit ModuleShow Tags