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Solar Economics

Natural Gas Prices in Colorado

Compared to the rest of the nation, we in Colorado have long had access to cheap natural gas (methane) from Xcel Energy, with rates ranging from $3-4 per thousand cubic feet. Compare this price range with the current trading price of natural gas on the New York Mercantile Exchange (NYMEX), which sits at $5.90 as of today, and you begin to see how lucky we’ve been!

However, it appears Colorado’s relationship with cheap natural gas is about to come to an end. With the upcoming completion of the first phase of the $4.5 billion Rockies Express pipeline (REX), natural gas will begin to be shipped to eastern states as soon as January, 2008. The result of the natural gas shipments eastward will undoubtedly decrease the supply available to Colorado.

As the Denver Post reports :

“The problem for natural-gas companies is they’ve been too productive for their own good. Since the gas drilling boom began earlier this decade, energy firms have produced more gas than consumers in the Rockies can use, too much even for pipelines to export all of the surplus gas.”

REX’s capacity is pegged at 1.8 billion cubic feet per day, equivalent to 2x Colorado’s daily consumption of natural gas. The new pipeline will add roughly 30% to the Rockies’ existing pipeline export capabilities.

With increased exporting of natural gas and anticipated price increases in the Rockies comes an incentive for local energy producers to invest more money into exploration and drilling.

However, covering the gap on the anticipated supply reduction will not save Colorado from increasing prices.

Speaking with the Denver Post on the subject, Tim Carter, Xcel’s director of gas supply said, “We expect our prices to move up next year”.

All of this should be music to the ears of solar installers and manufacturers. One of the primary arguments against solar installations in the Colorado area concerns the reality that electricity in the state (roughly 35% of which is created through natural gas generators) has been relatively cheap, especially relative to other states such as California ($0.07/kwh compared to $0.12/kwh, respectively). Cheap electricity makes it difficult to justify the capital outlay in many solar installations where electricity derived from utility companies is more cost competitive.

Of course, rising electricity costs (whether the result of increasing coal or natural gas prices) will bring solar installations to the forefront of choices Colorado energy consumers have on the table.

Light Shines on Solar Stocks

Today, solar stocks found new highs and incredible one-day gains on news of new production contracts by First Solar, Inc.

Thin-film solar panel manufacturer First Solar Inc. announced five new contracts totaling $1.28 billion in revenue. Shares of the company hit an all-time high today at $115.87, for a one-day increase of $19.50, representing a 20% gain in heavy volume trading. Shares of First Solar have nearly quintupled since shares started trading in November of 2006.

The new contracts for First Solar constitute 685 MW worth of solar modules for EDF Energies Nouvelles, Sechilienne-Sidec, RIO Energie GmbH & Co. KG and SunEdison LLC.

First Solar’s sales grew from 146% to 392% year over year the past four quarters. Earnings rose 188% to 220% the past three quarters. The company beat analysts’ profit estimates by 100% and 271% the past two quarters.

First Solar also announced the approval of constructions plans for a new plant in Malaysia that will add 120 MW of production capcity per year.

Elsewhere in the solar sector:

JA Solar shares rose $5.51, or 14.8 percent, to $42.76.
Suntech stock gained $1.57, or 4.1 percent, to $39.56.
Solarfun Power Holdings Co. Ltd. shares added $1.28, or 11.4 percent, to $12.53.
Shares of Evergreen Solar Inc. were up 59 cents, or 6.1 percent, to $10.27.
Yingli Green Energy Holding Co. Ltd. moved up $2.46, or 15.9 percent, to $17.96.
LDK Solar Co. Ltd. stock advanced $2.84, or 8.5 percent, to $36.37.

Solar and Modern Electric Utility Economics

When determining the cost of a residential or commercial solar installation (as opposed to a centralized, utility-based installation) many of the traditional economic metrics must be reconsidered, as distributed, on-site solar generated electricity changes the cost analysis due to the fact that less longer-term investment should be required to maintain the overall system.

In this article, we’ll take a look at some of the common metrics used to estimate the costs of electricity generation. These metrics include cost per peak kW installed, cost per kWh generated, as well as external costs.

Cost per peak kW installed

The cost per peak kW installed refers to the cost required to generate a given amount of peak capacity electricity, where the peak capacity is defined as the maximum output an electricity generation source can produce at a given point in time.

When we’re talking about cost per peak kW installed (for any electrical generation installation, not just solar), operating costs such as financing, maintenance, fuel, and dismantling are intentionally excluded.

For an example calculation using the cost per peak kW installed method, Google’s solar panel project has a peak capacity of 1.6 MW (1,600 kW). If we assume Google spent $9,600,000 on their solar power system installation (note: this cost is merely a guess), the cost per peak kW installed would come out to:

$9,600,000 / 1,600 kW = $6000 per peak kW installed

This estimation gives a cost of $6 per Watt installed, which is probably slightly lower than the current industry average in the United States.

When discussing peak capacity electricity, it’s important to note that solar installations operate, on average, at a lower capacity than peak capacity during most of their operational hours because the sun’s rays are not always hitting the PV panels at full strength.

Some additional notes on peak capacity:

  • As of 2005, approximately 4,000 GW of peak capacity exists globally
  • An average of 150 GW of peak capacity have been added annually since 2000

Cost per kW/h generated

The cost per kW/h generated refers to the costs incurred to generate a given amount of electricity over the lifetime of the generator’s production. Cost per kW/h is often difficult to estimate because some uncertain variables come into play. For example, future fuel costs for a natural gas fired generator must be estimated well into the future, and costs related to construction financing methods are also assumed.

For larger-scale, centralized generators for which electricity must be transmitted from the production site (usually a utility company) to the consumption sites (residential homes and commercial buildings), there is an additional cost of maintaining the infrastructure (power lines, transformers, etc.). Some analysts, such as Travis Bradford, President and Founder of the Prometheus Institute for Sustainable Development, argue that utility industry deregulation has resulted in significant under-investment in this power transmission infrastructure. As a result, the real costs per kW/h generated (which would include maintenance costs of the current infrastrcture) have been under estimated among utility power providers.

It’s also important to note that on-site, distributed electricity generation (such as residential solar or wind-powered generators) do not necessarily incur the costs associated with larger-scale infrastructure maintenance typical of coal, natural gas, and nuclear power. However, we must note that solar power in particular cannot meet the demand for base-load energy consumption (a topic for another article), so consumers still depend on this infrastructure for at least some of their power consumption.

External costsĀ 

External costs, which are typically not included in traditional cost estimation methods, include costs to the environment and welfare of the people. Some examples of external costs include the costs of:

  • Pollution (clean up, carbon taxes, property damage, health care)
  • Environmental damage resulting from activities such as strip-mining, deforestation, and reservoirs, which can displace many inhabitants and incur costs associated with resettlement and rehabilitation, as in the case of China’s Three Gorges reservoir
  • Security required to protect vulnerable sites such as nuclear facilities, oil pipelines, etc.
  • Power disruptions, such as the rolling blackouts experienced in California and elsewhere, which resulted in many millions of dollars lost in productivity

The True Cost of Solar

According to projections published by Photon Consulting, the fully-loaded cost of manufacturing, R&D, selling, installing, and operating a solar power system for a vertiaclly integrated solar power supplier will likely decrease to $0.12/kWh, or roughly $1.85/watt installed by the year 2010. In sunny areas, the cost of solar could drop below $0.10/kWh. The report, titled “The True Cost of Solar”, puts the current cost of solar (2006 estimates) at $0.25/kWh, or roughly $3.60/watt installed.

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