Solomon Off Target – Part II

Commentary, Energy, Les Routledge

Quote from Solomon’s Article:

Smart-grid additions have no economic justification – they merely support large-scale wind and solar generation, which also have no economic justification. The National Post

The above is a very strong categorical statement that reminds me a lot of the dogmatic insistence of global warming advocates that the “science is settled.”  In this case, the insistence is that the technology has failed, the markets have spoken.

The problem with Lawrence’s assertion is that technology does not stand still and markets are dynamic when they are allowed to function.  Producing oil from oil sands and natural gas from shale formations was once uneconomic.  Today, those energy production techniques produce billions of dollars of profits and offer us a secure supply of energy.  Is it possible that renewable production techniques might follow that path?

What would happen if renewable energy becomes less expensive to produce than conventional alternatives?  Would we welcome Smart Grids then or would we dogmatically insist on locking ourselves into brittle and rigid networks that renders us reliant on monopoly producers?

While the idea that renewable energy may be less expensive sounds like an outlandish prospect, remember that I indicated in a previous post that the cost of deploying renewable production systems has a trend line going down.  In Manitoba, recent experience with northern dam construction suggests that conventional power systems have a cost line trending up.  The difference in Manitoba is that investors take the risk of construction cost inflation with renewables but ratepayers or taxpayers pay for cost inflation of conventional hydro and fossil fuel plants that are deployed by the government-controlled utility.  Given the recent experience with the Wuskwatim dam / Bi-Pole III link and its ever increasing cost, at least renewable power is being purchased at a known and fixed cost.

Perhaps the future where renewable is less expensive than conventional energy is emerging sooner than we may expect.  A recent regulatory filing by Southern California Edison appears to indicate that they can purchase solar energy at a lower cost than adding to natural gas generation capacity.

Southern California Edison noted in its submission letter that the 20 projects — which will generate between 5 and 20 megawatts — will produce electricity at a cost below what utility industry wonks call the “market price referent.” The MPR, as they call it, represents the levelized cost over 20 years of a combined cycle gas turbine like those typically found in natural gas power plants in the Golden State. Grist

Digging a bit further, a letter send from Edison to the regulator does appear to confirm that they have secured agreements that feature a price below the MPR (market price reference).

The RSC Contracts have levelized prices below the 2009 MPRs, which are the most current MPRs available.  The RSC Contracts, moreover, have no firming and shaping costs, so the total prices remain below the 2009 MPRs.

While I require more evidence before I can believe that the cost of solar has already fallen below the cost of natural gas power, I can see that point arriving someday.  Maybe these 20 contracts in California are an aberration, but they could also be a harbinger of the future.

In the last 10 years, it appears that the cost of getting power from northern rivers to southern markets in Manitoba has increased by about 3.5 cents per kwhr.  If that trend continues over the next 10 years while to cost of constructing wind continues to decline, it may very well be less expensive for southern customers to buy local instead of importing power from north.

I can envisage a situation emerging in Manitoba where a combination of wind and bio-mass thermal power production could compete head-to-head with new hydro projects or new natural gas plants.  The combination of wind and bio-mass thermal offers the potential for the independent producer to do their own firming and shaping, thereby producing power that can sell at a premium price instead of a spot price.

Currently, wind production costs about 9 cents / kwhr, and that price is falling.  If bio-mass thermal can produce at Ontario’s FIT cost of 13 cents, then the combination may cost about 11.4 cents/kwhr.  By this time next year, that cost may look attractive compared to the ever increasing costs of producing hydro electricity in the north.

In rural areas, buying local power has one more potential benefit.  In our municipality, the potential increase of property assessment values attributable to renewable energy development could reduce average property tax rates by 25% to 50%.  Even before renewable energy prices decline below conventional rates, it could be a rational economic decision for local land owners to buy power from local producers.

If and when that future arrives, I really hope that Smart Grids have arrived in Manitoba, because I want the option to switch my supplier to independent operators who offer me lower all-in costs.  I do not want to be a captive customer of monolithic utilities that do not appear to have a handle on dealing with construction cost inflation or governments who dictate expensive routes for long distance transmission lines.

Twenty years ago, I remember dealing with monopoly-affiliated people who claimed there was no future in the Internet.  Videotex services that charged $0.30 per minute was what the market needed.  The Internet was the “smart grid” of that day that created an open and dynamic market for content services.  Who knows what types of innovation smart grids might unleash in the energy sector?