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Is The U.S. Solar Boom In Jeopardy?

The Trump administration is weighing…

Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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The World’s First 24/7 Solar Power Plant

The World’s First 24/7 Solar Power Plant

Solar Power’s biggest problem is predictably simple – the sun does not shine all the time. To combat this issue, power companies have traditionally relied on peaker power plants to supply electricity at times when demand is high but solar generation is not available – such as in the evening.

Another alternative is to use grid-scale battery storage from the firms like Tesla. But that market, while potentially game-changing, is still in its infancy. There is a less well-known third alternative though that is toiling away in the Nevada desert – thermal solar.

Solar Reserve recently unveiled a thermal solar plant set in the middle of the Nevada desert which will supply power for roughly 75,000 homes. The plant operates by using more than 10,000 mirrors arrayed around a 640 foot central tower. The tower holds more than 3 million gallons of liquid salt which is heated to a balmy 500+ degrees by the solar array and then used to heat water which in turn becomes steam and spins a turbine. Related: Crude Crushed As Production Freeze Hopes Thaw

The whole project cost slightly under $1 billion and Solar Reserve holds a 25-year contract to supply power to NV Energy for $135 per megawatt hour. The tower produces 110 megawatts of energy for 12 hours a day according to the company, which works out to roughly 1 million megawatts per year. This in turn implies a gross ROA of ~13.5% (before SG&A expenses) – not bad as investments go.

Still, it’s less clear if thermal solar will be a long-term solution. At present natural gas prices, a new natural gas plant can supply power for around $52 per megawatt-hour. Solar Reserve’s deal with NV Energy was signed several years ago when natural gas prices were much steeper. In today’s climate, even with the environmental benefits, it’s less clear if the deal would still be done. Related: Saudi Policy Tied to Weak Economy

Nonetheless, the plant is noteworthy for what it accomplishes – it is the first truly 24-7 solar plant in the world. For many applications that is a very big deal. Having to build a second power plant to back up a solar array is not an ideal solution to say the least. Thermal solar resolves that issue all while letting facilities like Solar Reserve’s store 1,100 megawatt-hours of energy.

The other benefit to thermal solar is that it does not rely on any type of fuel to generate power. As a result, it should be a good source of energy in niche applications and in areas where conventional fuels are very expensive. For instance, in Japan natural gas is much pricier than in the U.S., which until recently had led the country to be an avid user of nuclear power. Since the Fukushima disaster though, Japan has turned away from nuclear, which may leave thermal solar as an attractive option. Similarly, in places like France and Spain which already have robust solar incentives, thermal solar may be an attractive addition to the renewables portfolio. Related: As Net-Long Positions Near Records, Is The Oil Rally Overdone?

All things considered, thermal solar is probably too expensive to become a wide spread mainstream source of power – the industry seems to be moving away from the type of large megaproject that thermal solar would entail given upfront capital costs. In addition, the plant has only just begun operations, which means there is certainly a proving period that is needed to show that the technology works on a commercial scale without hiccups reliably day after day and week after week. If thermal solar can achieve that kind of reliability though, then over time it might become an attractive supplemental source of renewable energy.

By Michael McDonald of Oilprice.com

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  • EdBCN on April 03 2016 said:
    I think you're underestimating the potential of this technology. If they can really produce fully dispatchable, clean power at $135/mWh with 1100 megawatt-hours of storage thrown in free, there could be a really big market for that. The cost is dependable, unlike gas or coal. And if this pioneering plant can do this for $135, there should be a lot of room for cost reductions going foreward. I think its biggest downside is that it is difficult to site. It needs a lot of space a long way from people, and a lot of sun. Not every country has a big open desert.
  • Jim Decker on April 03 2016 said:
    They can't produce power for $135 mWh. The plant revenue is $135 million on an investment of $1 billion. This is basically a source of steam to run a generator. Subtract operations, maintenance, depreciation, interest on the $1 billion, taxes- OK forget taxes- we can't expect the Democrat's favored projects to actually pay any taxes. You get the idea. The output is twice as expensive as a natural gas fired generator and it will lose money by the truck load.

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