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When cheap doesn’t cut it: Why energy buyers should look at value, not just cost
"New Record Set for World’s Cheapest Solar." A headline like this makes for great social media fodder. The downward trend in renewables prices is fantastic — it's the most important driver for the growth of solar and wind energy.
However, when your business or utility is comparing energy projects, looking at cost alone is not enough. Even energy projects at very low costs can be "out of the money" if the value created by a project is less than its cost.
Choosing among renewables options
Rocky Mountain Institute’s Shine program experienced this in our work in Texas. We are helping a handful of Texas electric cooperatives (co-ops) and a university to procure distribution-scale solar power and battery storage by acting as a buyer’s representative.
For 1 megawatt (MW) projects, the top power purchase agreements (PPAs) were priced below $45 per megawatt-hour (MWh). This price is fantastic — more than 25 percent below investment firm Lazard’s $60-119/MWh estimate of prices in this segment and below the record-breaking results RMI achieved in New Mexico (when corrected for New Mexico’s stronger solar irradiation).
However, we noticed that some utility CEOs were not impressed.
"$45/MWh? I can buy wholesale power at $30/MWh in Texas."
The problem here is that the comparison is flawed.
Sure, the $45/MWh distribution-scale solar PPA costs more than $30/MWh wholesale power. But the distribution-scale solar PPA provides more value per MWh. In addition to offsetting wholesale power, distribution-scale solar in Texas reduces transmission costs, generation amortization and hedging costs, as we explained in a previous blog. The two comparisons are illustrated in Figure 1.
Figure 1: Distribution-scale solar costs more than wholesale power, but it costs less if you fairly value all benefits.
Comparing different types of energy projects (distribution-scale solar vs. wholesale power) exclusively on price is like comparing a $30,000 Toyota Sienna minivan to a $14,000 Ford Fiesta compact without acknowledging that they are different cars.
The right way to compare these two cars is to ask, "What does the costlier minivan get me that the cheaper compact car does not?" The minivan allows you to take the whole family, to use the car for moving goods, and to put your kids’ bikes in the back. These are real benefits that you’ll evaluate against the difference in costs. If you have a big family, a large car will be of good use and it will allow you to avoid additional costs, like renting a trailer. If you do not, getting a minivan will be paying for capacity that you will not use, and the Fiesta will be a better deal.
These are real benefits that you’ll evaluate against the difference in costs.
When you compare different energy solutions, you need to tally not just their costs, but also all their benefits. How did RMI do this in Texas?
Naming all benefits
First, we created an overview of all possible benefits, listed in Table 1. We qualitatively evaluated each value category for four types of energy projects. To make sure we did not overlook any benefits, we used RMI's May 2017 report, "A Review of Solar PV Benefit & Costs Studies (PDF)." This report lists a comprehensive overview of all solar power's possible benefits on page 13. For more information on each benefit, please see Appendix C of our Shine Texas Request for Proposals (PDF).
Table 1: Different energy technologies at different locations create different benefits.
After reviewing this table, you might think, "This is a nice overview, but it doesn't tell me which of the four energy options is best. Single-axis tracking plus battery storage has the most value, but it also has the highest cost. How do I choose the best option?"
To choose which energy option was best, we next quantified the financial value of every category.
Quantifying all benefits
To quantify the benefits, we created a financial model that calculates the net present value (NPV) for each of the four potential energy project types listed in Table 1. Our model is publicly available here. Figure 2, from the model's dashboard tab, shows annual cashflows by value category, with all costs in red below the x-axis and all savings in green above the x-axis.