In the immortal words of Kermit the Frog, “It’s not easy being green.” It’s also not cheap.
When it comes to renewable energy, we’re inundated with promoters' claims, cost analyses, and news stories that always contain a dollop of objective truth, but encourage imaginative idealists to make flawed assumptions that lead straight to magical thinking. So, learning how renewables fit into the electric power landscape and what they can realistically contribute to supplying needed power while reducing CO2 emissions should be the first order of business for serious investors who want to understand the renewable energy space. The next order of business should be to question everyone's assumptions because the failure to do so will invariably lead to poor if not catastrophic investment decisions.
For the last few weeks, I’ve been analyzing several months of hourly power production data from the renewables and emissions reports webpage maintained by California’s Independent System Operator, or CAISO. It’s a treasure trove of hard facts that demonstrate useful principles without requiring assumptions. While the full download includes hourly data on system-wide power production from geothermal, biomass, biogas, small-hydro, wind, photovoltaic solar, thermal solar, nuclear, thermal, imports, and large-hydro, the rich complexity of the data can be overwhelming. So, for purposes of this article I’ve consolidated the 11 power resource classes reported by CAISO into three power dispatch categories as follows:
The following graphs summarize Hourly Power Production by Dispatch Category for April 1, and April 20, 2019, the two days in April that had the lowest and highest power production from Opportunistic ZE resources.
Now let’s have some fun seeing what assumption free-analysis of the graphs can teach us!
First, the graphs show that Opportunistic ZE is highly variable from hour-to-hour and day-to-day. On April 1, Opportunistic ZE resources produced 91 GWh in 24 hours, but on April 20, the same Opportunistic ZE resources produced 186.5 GWh, more than twice as much power.
Second, the graphs show that Dispatchable FF capacity must be sized to accommodate the minimum expected Opportunistic ZE contribution to peak power demand. At 7:00 pm on April 1, the power output of Opportunistic ZE resources was 980 MW, and without 18,680 MW of Dispatchable FF capacity on standby, there would have been service interruptions. In practice, the minimum Dispatchable FF capacity in a region will be determined by reference to a multi-year demand peak with no offsetting allowance for Opportunistic ZE resources.
Third, the graphs show that nothing beyond CO2emissions would change if power production from Opportunistic ZE resources fell to zero. In that event, Dispatchable FF resources would ramp output to provide the necessary power, and nobody would notice.
Fourth, the graphs show that utilities cannot accomplish their mission of providing electricity on demand, 24 hours a day, seven days a week, 365 days a year, by choosing Opportunistic ZE resources as standalone replacements for Dispatchable FF resources. Instead, utilities must either:
- Choose Dispatchable FF resources with no Opportunistic ZE resources; or
- Choose Dispatchable FF resources with redundant Opportunistic ZE resources.
These four observations lead to the inescapable conclusion that power from Opportunistic ZE resources can eliminate fuel and variable operating costs while Dispatchable FF capacity is on standby, but Opportunistic ZE resources cannot eliminate the capital and fixed operating costs of:
- Keeping Dispatchable FF on standby; and
- Keeping fuel production and transportation infrastructure on standby.
A recent report from SSR LLC titled “Exploding Duck Curve: What Does It Cost to Achieve 100% Renewable Electricity and What Are the Implications?” concluded that California would need:
- 15 GW of wind,
- 250 GW of solar,
- 177.5 GW / 710 GWh of storage, and
- a 300%-plus increase in electric costs
... to satisfy peak summer demand of roughly 50 GW and achieve its stated goal of a 100% renewable grid.
A subsequent report titled “Exploding Duck Curve 2: Renewables Don’t Raise Power Costs If Penetration Remains Below 80%” concluded that California would only need:
- 25 GW of wind,
- 25 GW of solar,
- 2.5 GW / 10 GWh of storage, and
- a 2% increase in electric costs
... to satisfy peak summer demand and achieve an 80% renewable grid, but only if the entire fleet of non-renewable power plants was kept intact and used for backup.
I think SSR did a fine job of modeling the power generation resources required to give California an 80% and a 100% renewable grid. I’m less comfortable with their $54 per MWh cost estimate because they based their calculations on “Lazard’s Levelized Cost of Energy Analysis Version 12,” and observed that “capacity payments through the resource adequacy market” would be necessary if California wanted to keep its fleet of fossil-fueled power plants on standby. They did not, however, try to estimate the magnitude of those capacity payments.
According to SSR, California has 16.4 GW of combined cycle generating capacity. Assuming those plants currently operate at the EIA’s average capacity factor of 57.6% and have capital recovery and fixed maintenance costs of $32.50 per MWh, the average of the high and low values from Lazard’s LCOE analysis, equipment standby charges in the $2.7 billion range, or roughly $10.50 per MWh, would not surprise me.
In my mind, the bigger and far more interesting question is whether natural gas producers would require comparable or even larger standby fees for keeping adequate fuel supplies standing by and available for delivery to California utilities on demand. Since there are plenty of domestic and export markets that will happily buy stable daily volumes of natural gas or LNG on long-term contracts, I have a hard time believing that gas producers will give California utilities the time of day if they don’t pay up for standby fuel supplies. If Atlas ever looks at California and shrugs, the outcome will not be pleasant.
For purposes of this article, I’ve refrained from voicing my skepticism over the likelihood that California’s ambitious renewable energy plans are possible in the real world. On May 5, a 5,700-word investigative report in Der Spiegel examined the likely failure of Germany’s Energiewende and referred to the €160 billion initiative as “A Botched Job in Germany.” An English translation of the Der Spiegel article is here. Then on May 9, the International Energy Agency reported that total renewable energy deployments in 2018 stood at about 180 GW, which was the same as the prior year. I grew up in Arizona, and I was living in Switzerland when Germany's Energiewende was adopted. Based on my experience with these very different cultures, I can’t put much stock in the suggestion that California will do a better job of implementing renewables than Germany has.
It’s easy to read about the wonders of renewable energy and imagine a world where renewables plus storage make fossil fuels a thing of the past. But it’s impossible to map a path to that world that doesn’t drive electricity costs to stratospheric levels. Since the law of economic gravity says that the cheapest solution wins, investors are well advised to check their assumptions at the door when discussing the future. There's no credible scenario where renewables plusstorage will replace fossil fuels and relegate conventional power systems to the ash heap of history.
My conclusions do not bode well for the lofty market valuations of companies like Tesla (TSLA), the poster child for this era's renewable energy mythology, and a host of lesser lights like First Solar (FSLR) and Vestas Wind Systems (OTCPK:VWDRY).
Surprisingly, I think my conclusions are bullish for a host of natural gas producers that regularly read about their imminent demise in the mainstream media. No matter how big renewables get, natural gas is going to be the only option for filling the inconvenient and wholly unavoidable gaps in power production from Opportunistic ZE sources,
In closing, I’d like to clearly state that I'm neither a denier nor an alarmist when it comes to the issue of climate change. While I once described myself as an agnostic, a friend observed that I’m a fatalist. I know that CO2 emissions aren't climbing because of activities in the West. They're climbing because billions of people in developing economies are increasing their carbon footprints as they try to catch up with the West. I also understand that virtue signaling in wealthy economies won’t change behavior in poorer economies where heat and light always will beat freezing in the dark. Frankly, if climate change alarmists are right, we’re already well and truly __________ (pick an expletive that suits you) and humanity will either evolve and adapt or face extinction, just like every other apex species in the history of the planet.
Disclosure: I am/we are short TSLA THROUGH LONG-DATED OUT-OF-THE-MONEY PUT OPTIONS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.