What Does Clean Energy Cost? Investing in AECOM, Covanta

Renewable Electricity cost estimates from a California transmission study and the investment implications.

The seemingly simple question, "How much does wind / solar / geothermal / etc. cost per kWh?" can be surprisingly difficult to answer. Advocates often cite particularly low figures, but they are often based on particularly favorable conditions, or analyses that don't include all the costs (for instance, costs of permitting.) Opponents do the opposite, often assuming particularly unfavorable conditions, or adding in costs which they would never consider adding in for their favored technology. Adding to the confusion, levelized cost of generation calculations are very sensitive to the interest rate used to discount capital cost and the lifetime of the investment.

A couple of years ago, I put together some slides meant to give a visual comparison of transportation fuels, and another set for electricity generation technologies. These slides were intended to be more qualitative than quantitative, and were based on my personal synthesis of a large number of reports, rather than using a single methodology for each. More recently, I brought you an economic comparison of energy storage technologies (and alternatives to storage) based on a quantitative review of the literature.

Costs of Electricity Generation

Recently, a friend who invests in cleantech startups asked me for an update of comparisons of electricity generation technologies. I have not done an update, but I have found more studies that take fairly impartial looks at the available technologies. The most comprehensive one I've found is the one Black and Veatch [B&V] did for the California Renewable Energy Transmission Initiative [RETI]. B&V looked at the costs of generation of various renewable energy resources in the California region, as a first step in planning new electricity transmission to the best resources.

The Phase 1A report is available on the RETI website (large PDF), and is excellent reading for anyone interested in a relatively unbiased view of the real costs of renewable energy. It is a regional report (similar to, if much more comprehensive than, the Arizona Resource Assessment I wrote about in late 2007,) so people living in other regions should adjust the numbers to reflect resource availability. California and the surrounding area have good wind, hydro, and biomass resources, as well as world-class solar and geothermal resources. In the Southeast US, biomass based power would probably be cheaper, but wind, geothermal, and solar more expensive, while in the Great Plains, wind would be cheaper, but solar, hydro and geothermal would be more expensive. You get the idea.

Here are some highlights:

Levelized Cost of Generation:

It's interesting to note that the five least expensive renewable energy resources in the list are either baseload resources (Geothermal and Biomass cofiring) or have some potential to be dispatchable (hydropower, and landfill gas, if used in conjunction with storage for the methane.) Although wind is a variable resource, there are inexpensive potential sources or renewable electricity that are easy to integrate into the grid.

Although many of these are relatively small in terms of the total amount of energy produced, they can still be profitable investments, since most investors focus on the better-known renewables such as wind and solar. Charles Morand recently brought you two articles highlighting investments in Geothermal and Biomass cofiring. Covanta Holding (NYSE:CVA) is an owner and operator of waste-to-energy facilities including both landfill gas and biomass. For hydropower investments, you can look at several of the Clean Energy Income Trusts, or suppliers of parts and services for hydropower projects such as AECOM Technology Corp. (NYSE:ACM).

Performance and Cost Summary

Click to enlarge

Resource Size and Industry Maturity

To the extent that the California region is representative, B&V's comments about the size of the resource will also be interesting to investors. Although companies such as the ones discussed above can be very profitable, a limited resource will place future constraints on growth. Investors hoping for growth will want to focus on companies focused on types of renewable energy with the largest resources.

They said:

• Solar photovoltaic [PV] is unique among renewable technologies, as it can be located almost anywhere, and scaled to virtually any size.

• "There is several hundred MW of potential small-scale (>10 MW) hydro generation available in California, Washington and British Columbia. ... This potential is small compared with other resources assessed.

• Wave and Marine Current

  – These technologies offer substantial technical potential but are unlikely to achieve a commercial level of development sufficient to contribute to California’s RPS goals within the planning horizon [before 2020].

Hence, it will be no surprise to anyone that solar PV is the greatest past and potential growth story of all renewable electricity technologies. Hydro, in contrast has substantial potential for profitable investment, but investors should focus on the current profitability of the companies in the sector, not on the limited growth potential.

Investors considering purchasing Wave or Marine Current stocks should take a deep breath and consider other sectors. Such development stage technologies may have great potential, but research stage technologies are not usually great investments for retail investors: most of the companies are still private, and so there is very little chance that the few public companies are going to be the ones that succeed in bringing the technology to market.

DISCLOSURE: Tom Konrad and/or his clients own CVA and ACM.

Comments

[Fred Linn:]

I don't understand what is meant by "levelized" cost. Is that installation cost? How can that even be predicted? The cost in $/Mwh will only be known when the entire lifetime of the project is finished. Total cost/Mwh generated = cost per Mwh

For instance. Coal costs less to install than wind. However, when I lived in Europe, I saw windmills that have been operating for 300 years---still in use and still doing the job they were originally designed and built to do. The fuel costs the same today as it did 300 years ago---nothing.
Coal on the other hand requires, well, coal. It has to be stoked continously. Coal costs money. No coal, no electricity. How can you predict the price of coal even one year from now, let alone 20-30 years from now? Or availability? We were once told over and over that petroleum would always be plentiful and cheap.

The same situation for solar. However, PV is not the only source of power from solar----solar thermal is relatively easy to tap, does not require any complex technology to tap or store, and is readily usable for many applications. Generation of electricity, transmission losses, and then using electricity to generate heat back again is inefficient and in most cases, not needed----particularly in some operations such as air conditioning. The same panels that generate PV would also shade roofs that absorb solar heat the air conditioning is working against. Even just where the PV panels are located would make a big difference in the cost and amount of power needed.

The same situation for geothermal, once installed, no need for fuels. There is even a potential to use abandond oil wells rather than drill new holes.

It looks like comparing apples and oranges to me----or maybe more like comparing oysters and watermelons.

Jun 08 01:33 PM

[Tom Konrad:]

Levelized cost is an accounting concept which incorporates time value of money. It tries to answer the question: if money were borrowed to pay for a solar installation at a given rate of interest, with the agreement that X cents would be paid for each kWh generated towards interest, return of capital, and operations and maintenance, what would X have to be to pay off the loan over the lifetime of the installation?

The answer, X, is the levelized cost of electricity.

It is like comparing apples to oranges, but levelized cost is a tool to make this comparision more meaningful.

Comparing apples to oranges is something we all have to do in real life... In general, I may prefer apples in general, but if, when I go to the market, the oranges are fresh and on sale, while the apples are bruised and expensive, I'll buy the oranges.

Jun 08 05:33 PM

[Fred Linn:]

Thanks Tom---sort of what I thought, but I don't see any fuel cost factor in there anywhere---although I suppose it might fall under the heading of operations.

Jun 09 02:31 AM