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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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The Real Cost Of Renewables In The U.S.

On July 23, if all goes well, one of California’ large municipally owned electric utilities, the Los Angeles Department of Water and Power (LADWP) will sign a contract with a combined solar power farm and storage battery operator. This proposed power purchase would provide enough electricity to supply 7% of the city’s needs beginning in 2023. LADWP will pay (per KWH) less than 2.0 cents for the power and 1.3 cents for the battery storage. Those prices are below the cost of fuel alone if the power were produced by natural gas. With costs that low we believe other electric power generating companies with access to comparable amounts of solar plus storage will find it hard to ignore this trend.

A complete decarbonization of the electric grid, however, will cost $4.5 trillion according to a Wood Mackenzie study—a rather large sum. Let us, however, attempt to put it into perspective. Assume that the existing grid continues to operate more or less as it does now over the next twenty years. But does the industry have or require twenty years for a carbon lite policy implementation?

Two thirds of the US electric industry carbon emissions come from coal-fired plants which currently account for less than one third of electricity output. And this percentage is likely to continue to decline, perhaps dramatically. Replacing those aging coal fired plants with renewables, first, would permit the industry to reduce emissions by two thirds well before the twenty year mark. Furthermore most of these plants have seen decades of service, are mostly old and original capital investment has largely been recovered. Bottom line? If you have to say goodbye to an otherwise productive asset, better it should be one that is mostly depreciated. That way the utility industry’s balance sheet hit will be relatively modest and regulators and investors will fuss less when plants of this sort are retired.

But there is always something. The US electric utility industry would be required to spend an additional $225 billion a year to replace these possibly retired coal plants. That amount would triple annual industry capital spending.

It is likely that most of this capital spend is done either by regulated utilities or by independent producers who finance their plant with contracts from the utilities. In other words, the additional cost of this new environmentally benign equipment will be passed along to consumers via higher utility bills. Present, modest levels of customer growth alone won’t be adequate to permit this level of cost recovery. We calculate the added cost of capital plus depreciation adds up to about $23 billion per year. Minus the fuel costs saved reduce these costs to about an incremental $20 billion per year. It is also likely that increased utilization of renewable power generating equipment is likely to have lower operation and maintenance expenses as well. Related: Why Is U.S. Demand For Solar Panels Booming?

Today the US electric industry has revenues of $400 billion. In other words, an incremental $20 billion of decarbonization costs might add 5% per year to what the industry seeks to collect from customers. Assuming that customers and KWH sales will grow, albeit modestly, the actual electric rate increase experienced by customers might be closer to 3-4%. Contemplating rate requests of this magnitude before state regulators is not good but it is not necessarily terrible either.

The prospect of imminent cost pressure will likely lead some to consider foregoing carbon mitigation altogether while pursuing another worthy goal of keeping customer bills to a minimum. Unfortunately, at the same time the industry is likely to face another source of cost pressure—an ongoing need to harden critical infrastructure against an increasingly hostile operating environment. Utility managers seem to face a Hobson’s choice— take seemingly radical steps to reduce emissions or harden all systems against the impact of major change in global climate that may be aggravated by inaction. Utility managements are already working feverishly to protect the grid against rising water in some places or drying rivers in others—power plants are prodigious users of water. In other words, not doing anything in terms of carbon remediation will not be cost free either.

In short, non-fossil power generating technology costs have become too low to ignore. Hence they will be employed more. Replacing legacy fossil-fueled infrastructure will be expensive. But if all these capital equipment costs to replace aging coal plants are stretched out and dealt with on a utility-regulated basis it might not prove disastrously difficult, either.

By Leonard Hyman and William Tilles

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Leave a comment
  • Keith Kempton on July 24 2019 said:
    This article seems quite misleading. Do the quoted costs factor in the many subsidies, direct and indirect, for renewable installations?

    If, in fact, these are the actual numbers, it follows that all subsidies should be immediately halted as unnecessary.
  • Brian Gentry on July 25 2019 said:
    These costs mentioned in the article pale in comparison to the costs to mitigate future climate change.

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