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Natural Gas Loses to Solar Energy on Costs, A First

Lewis Milford's picture
Clean Energy Group

Lewis Milford is president and founder of Clean Energy Group (CEG) and Clean Energy States Alliance (CESA), two national nonprofit organizations that work with state, federal, and international...

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  • Jan 9, 2014

Natural Gas and Solar Costs Change

For those who already think natural gas will win out over renewable power, a judge has said, not so fast.

In what may be the first time a U.S. solar power project has been declared cost-competitive against natural gas in a competitive bidding process, a judge has said solar is cheaper than natural gas. The ruling could be a road map for avoiding a new fossil fuel age dominated by big natural gas.

On the last day of 2013, an administrative law judge for the Minnesota Public Utilities Commission, Eric Lipman, issued a decision about competing energy investments for Minnesota’s future. The state utility Xcel offered up several proposals to fill a 100 megawatt power need. The two main competitors were a new fossil fuel plant powered by natural gas and a series of many distributed solar projects to be built around the state, the so-called Geronimo $250 million solar proposal.

This decision wrestled with competing visions of the U.S. energy future. Will it be dominated by new, large fossil fuel plants powered not by coal but by natural gas, as gas continues to replace coal – even though gas still emits significant greenhouse gas emissions? Many of the energy pundits say that is where we are heading. They argue that gas will be the cheapest fuel, beating out more expensive solar, so let’s just ignore the climate impacts of gas. That’s the conventional wisdom.

But as with most conventional wisdom, it rests on a pile of unexamined assumptions. When this independent judge looked at the facts, rather than the hype, he found that solar wins and gas loses. He gave several reasons why solar is the preferred choice when all potential costs are considered.

First, he said that future electricity demand is uncertain, at least in the next five years. In that, he echoes what we are seeing around the utility industry. Power demand is flat or declining. There are many reasons for the fall, but they suggest trouble for the electricity sector. Will electric utilities be able to survive as power demand drops? And most important, what kind of power plants will they invest in, to replace the smaller amounts of power they need – big ones or smaller, distributed ones?

Second, he turned to the current and future carbon regulations that might apply to new fossil plants, including those using natural gas. Minnesota’s existing law says fossil plants should not be built unless all renewable power is exploited first. The state’s law also says the utility can obtain credits for solar purchases from new solar plants. He then examined how future carbon regulations could add to the price of power from a natural gas plant that would last for fifty years, as compared to a solar plant that has zero fuel costs.

Third, he asked whether it was better to install smaller solar projects to avoid new transmission and distributed lines to serve electric customers. Those avoided lines would save the state over $33 million as compared to a new natural gas plant that would not avoid those costs.

And then last, he asked the most important question, one that might foretell the future of energy policy in the competition of gas and renewable power. And that question was about scale – with the uncertain future of electric load, with the potential for added carbon costs and the real carbon emissions from natural gas, with the costs of new power lines for large plants, would it make more sense to approve funding for a large, central power plant powered by fossil fuel, or to make incremental, scalable investments in solar?

This is how the judge put it when endorsing the solar proposals:

[T]hese proposals offer competitively-priced energy generation; at firm prices; the fewest new environmental impacts; and significant protections against the imposition of project cancellation costs….[I]t bears mentioning that this procurement represents an important turning point in Minnesota’s energy resource planning process. Since 1991, Minnesota has had a statutory preference in favor of renewable energy sources. Yet, that preference is overridden when the nonrenewable source has a lower total cost. Notwithstanding the statutory preference, it seemed that nonrenewable energy sources always won the head-to-head cost comparisons. Not anymore. Geronimo entered this bidding process as the sole renewable technology and beat competing offerors on total life-cycle costs.

The judge added that the utility “could avoid overbuilding generation facilities by deploying a scalable solution to meet future needs.”

So, in this new world of declining power needs, when the future costs of significant natural gas emissions, carbon controls and the scalable nature of solar power are considered – solar wins on hard costs.

That rationale is far reaching beyond one state. Many states have the same kind of pro-renewable procurement rules as Minnesota, but they have not been enforced. For example, New England is now facing many new natural gas pipeline and power plant proposals, but the public officials have not figured out how to square their enthusiasm for gas with their own carbon reducing mandates for the power sector.

This is a ruling that, if upheld by the full Commission on appeal, could provide a new way to think about the coming “age of gas”. It says that, if the right costs are considered, gas might well lose to renewable power both now, and in our uncertain energy future.

Photo Credit: Natural Gas Loses?/shutterstock

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Bob Meinetz's picture
Bob Meinetz on Jan 9, 2014

Lewis, how could gas possibly “lose” to solar energy when solar is completely reliant on gas for backup?

As the Trojan Horse for the gas industry, solar performs an immense service for the advancement of fossil fuels, and any notion there’s a rivalry is marketing hype – for both industries.

Josh Nilsen's picture
Josh Nilsen on Jan 9, 2014

For the 100th time, solar PV usually does not compete against base load power.  This power plant was a peaking asset to meet future demand.  Solar PV is awesome because it’s always peaking when the grid needs electricity the most (hot, sunny days).

Bob Meinetz's picture
Bob Meinetz on Jan 9, 2014

Josh, you’re wrong on all accounts.

First of all, I never suggested solar competes with baseload power (at .5% of America’s generation, it’s not really competitive with anything).

Second, by definition non-dispatchable power sources like solar are incapable of serving as “peakers”:

In the US peaker plants are generally gas turbines that burn natural gas. A few burn petroleum-derived liquids, such as diesel oil and jet fuel, but they are usually more expensive than natural gas, so their use is limited.

Third: during today’s peak demand at 5PM, solar will be contributing exactly 0 watts of sub-awesome power to California’s energy needs:

Maybe the 101st time is a charm?

Schalk Cloete's picture
Schalk Cloete on Jan 9, 2014

In regions where solar PV output aligns well with seasonal demand and demand peaks in the afternoon instead of the evening, solar PV does deserve some capacity credit. See this report for Nevada for example. It states that, at negligible penetrations, solar PV has a capacity credit of about 57% and at about 13% capacity penetration (probably about 6-7% by actual generation), the capacity credit drops to about 38%.

This implies that, in a region with Nevada’s load profile, 1000 MW of PV at (roughly 7% penetration by actual generation) can displace about 380 MW of gas peaking capacity. These numbers will probably be somewhat lower for California, but PV will still be able to displace some peaking capacity.  

Josh Nilsen's picture
Josh Nilsen on Jan 9, 2014

Explain to me how solar PV is replacing peaking power plants then.


Bob Meinetz's picture
Bob Meinetz on Jan 9, 2014

Josh, where is the evidence that it is?

In Southern California renewables are responsible for building even more peaker plants:

SDG&E President Michael Niggli said renewable-energy production alone cannot replace nuclear energy, even when considering government mandates and incentives.

“Renewables are great, but they’re controlled by Mother Nature,” said Niggli, who announced the plan to resubmit an application for building the rapid-fire, or peaker, Pio Pico natural-gas plant in Otay Mesa. “So you need these solid backups like the (natural-gas) peakers.”


Bob Meinetz's picture
Bob Meinetz on Jan 9, 2014

Schalk, solar is particularly useful in climates like Nevada’s in the summertime. That’s a far cry from

Solar PV is awesome because it’s always peaking when the grid needs electricity the most (hot, sunny days).

It’s also important to make a distinction between “displacing some peaking capacity” and “displacing some peaking plants”. The fact that solar can, and does, fill in occasionally doesn’t obviate the need for dispatchable power to cover all of the other times when solar isn’t available.

Schalk Cloete's picture
Schalk Cloete on Jan 9, 2014

I think it is important to acknowledge that solar will probably not displace any peaking plants, but, if kept to a small penetration, it can possibly defer investment in a small number of future peaking plants (in very sunny regions).

On the other hand, it can also increase the need for more expensive rapid-response generation capacity or load shifting energy storage such as in the case of California’s now pretty famous duck graph. In addition, solar peaks will start to eat into baseload generation already at relatively low penetrations, leading to negative prices. When looking at the entire system, the resulting requirement to replace lower-cost baseload capacity with higher-cost load-following capacity that is forced to operate at progressively lower capacity factors will overwhelm the peaking capacity displacement capabilities already at low penetrations (~5%), thereby valuing electricity from solar VP increasingly below the wholesale price.

This is also the reason behind the conundrum that our two long-term energy options (nuclear and solar/wind) are highly incompatible. A nuclear system is inherently baseload-dominated because of the high capacity factors needed to recover upfront investment, while solar/wind is inherently load-following-dominated because of the intermittency. 

Clayton Handleman's picture
Clayton Handleman on Jan 10, 2014

Your graph shows nicely the synergy of renewables in California.  Just as the solar is ramping down, wind is ramping up.  While not perfect, CA has a wonderful renewable resource with very few overcast days to damp the solar and wind that starts ‘a blowin’ as the sun is setting and the solar ramps down.

Nathan Wilson's picture
Nathan Wilson on Jan 10, 2014

“…our two long-term energy options (nuclear and solar/wind) are highly incompatible.”

Granted, wind and cloudy-town solar are compatible only with a  fossil fuel dominated grid.  But in desert regions, solar (with a few hours of storage) is actually a pretty beneficial addition to a grid that is 60% nuclear.  (Of course, for most of the world, for a 0% fossil fuel grid, the most credible implementation is probably over 80% nuclear with dispatchable fuel synthesis to balance the demand.)

Paul O's picture
Paul O on Jan 10, 2014

Seems  like Lunacy to think Solar Power could be cheaper than Natural Gas in any useful capacity in Minnesota.

I live next door to them in North Dakota, where we are suffering Tremenduosly from The Tyranny and lack of mercy of the POLAR VORTEX,  firing up my Natural Gas furnace in order to keep my family warm.

I didn’t happen to see any  SOLAR when I got home at 6pm tonight.

I think that for the most part, solar power is an Ideal that many people have fallen in love with, while for others it is simply a business opportunity.

Nathan Wilson's picture
Nathan Wilson on Jan 11, 2014

Thanks Willem, I should have said, “if the cost of solar with storage can be brough in line with that of nuclear, then desert solar would be a beneficial addition”.

The European costs you cites are certainly not encouraging, but soon we should have good “Nth of a kind” cost for Brightsource and Solar Reserve CSP technology.  Then we’ll know.

Also, there is some chance long-life liquid metal batteries for PV will fall to $1/Watt for 5 hours.  We’ll see.

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