Solar power adoption in Illinois: market prices and energy economics

Solar Power

An Analysis and Discussion of how Solar Prices and Externalities of the Energy Industry Will Influence the Adoption of the Illinois Solar Power Total Output

This research is based on a hypothesis that was constructed relative to identifying the market energy prices that might be needed for local businesses to consider investing in alternative energy sources such as installing solar panels based on purely economic considerations. For example, the average costs of energy can be calculated and there are many sources that compile data relative to these trends that are available for businesses to use decision-making tools such as a cost-benefit analysis. Yet, there are many businesses that make the decisions to integrate solar that are not the result of a pure economic comparison. For example, if the company wants to be perceived by their customers, or potential customers, to be progressive and environmentally friendly in an effort to add a perceived value to their products and/or services, then they may attribute a value to solar power that is much higher than what the markets currently dictate. Furthermore, other models have also tried to integrate the economic externalities that are associated with the costs of pollution, but for the purposes of this analysis, the pure economic market data will be the focus.

Although oil prices have been considerably low in the last year, it is likely that they will rise again in the short-term. New technologies have allowed the extraction of the oil that still remains in the U.S. Offshore drilling and oil reserves that are only accessible by hydraulic fracking represent the two best examples of controversial extraction methods which have revitalized the U.S. oil production which has in turn reduced the dependence on the cartels and Middle Eastern oil (Doshi & Corrigan, 2015). Yet, the use of fracking is a debated political issue that is likely to undergo significant regulations in some areas. Because of increased competition, OPEC has tried to stifle the growth of its competitors by increasing production and lower the global energy price. However, Saudi Arabia has more access to capital that everybody else in OPEC and it plans to continue with its long-term plan to undermine rivals and secure its market share (Raval & Kerr, 2015).

At the same time, the cost of solar technologies has dramatically fallen. However, OPEC's decision to keep oil prices artificially low in the global market also stifles the development of alternative and renewable fuel sources. For example, an investment in solar or wind energy may have made financial sense at $100 a barrel, however at $50 a barrel these investments cannot compete. Yet, McKinsey recently released a report that details that renewables are continuing to show promise despite the low oil and gas prices which indicate a number of changing market dynamics.

"In the first quarter of 2015, many clean-tech funds handily outperformed the S&P. Moreover, the sector did not see a wave of bankruptcies and pullbacks like the one that scarred it a decade ago, when a glut of Chinese manufacturing drove dozens of solar companies into oblivion. In fact, global clean-energy investments increased 17% in 2014, reaching $270 billion, reversing two years of declines. While government policy support remains crucial, renewable companies also did well-raising money in the markets; equity investment rose 54% in 2014. (McKinsey, 2015)"

Therefore, it would be interesting to investigate these developments with respect to the local market. For example, the price of alternative energies could be the independent variable and could be measured in different ways such as the price per watt, the return on investment, and the payback period necessary.

Thesis Statement

This analysis is focused on the role that solar generated energy production can play in efforts to mitigate the ecological degradation that is becoming more salient as the science around such issues continually advances. It is thus investigated whether individual solar power installation will represent a finically viable option for local businesses in the next ten years. Although there will undoubtedly be financial decisions that must be made relative to how to finance the installation of solar PV project, the average cost of solar power is expected to be competitive with traditional methods at some point in the near future.

Although solar energy is far from being cost effective (in a strictly economic sense) as traditionally energy sources that are based on fossil fuels, there are many opportunities for the price of alternative sources to continue falling based on innovation and quantities of scale that can be achieved. This research paper will provide a background about solar power, investigate why this question is important, and test the regression trend of rising energy prices generated from fossil fuels and the total energy consumption of solar power in the state.

Literature Review

Within the last five years, the market for solar powered electricity has gained significant momentum due to the fact that there have been government subsidies provided by many nations trying to maintain their own emission targets that were set in efforts to become more sustainable. However, these efforts have also culminated in an international agreement that has been forged between nations in what is referred to as "COP 21." Parties to the U.N. Framework Convention on Climate Change (UNFCCC) reached a landmark agreement on December 12 in Paris, the largest ever single-day gathering of heads of state in history, as well as an exhausted list of other interested parties including array of "non-state actors," including governors, mayors and CEOs, and the launch in Paris of major initiatives like the Breakthrough Energy Coalition announced by Bill Gates and other billionaires (C2ES, 2016). As French President Francois Hollande summed it up:

"In Paris, there have been many revolutions over the centuries. Today it is the most beautiful and the most peaceful revolution that has just been accomplished -- a revolution for climate change (C2ES, 2016)."

Although the deal that was reached was unprecedented in many regards and was able to overcome many obstacles and boundaries that prevented many generations of previous agreements from being reached (for 21 years actually in regards to COP agreements), many people feel that the deal that was made does not go far enough. Given the drastic implications that climate change presents the state of humanity as a whole, the following four criteria was proposed as a metric of its success or failure (Chivers, 2015):

1. Catalyze immediate, urgent and drastic emission reductions;

2. Provide adequate support for transformation;

3. Deliver justice for impacted people;

4. Focus on genuine, effective action rather than false solutions;

Therefore, there is at least the potential for further generations of international targets to usher in new rounds of more restrictive policies that are more demanding and further restrictive. Any such policy that is enacted in any part of the world will have the effect of increasing prices of energy and fuels produced through the use of fossil fuels by increasing costs related to the production of these goods and services as well as by limiting the supply. There are also many other trends that are also influencing the current energy prices such as the fact that energy prices have gradually increased with the depletion of the fossil fuels that are effectively "easy to get to" (Gordon, Kinsey, Nayaak, & Garboushian, 2010). Oil companies have depleted the sources of fossil fuels that were the easiest to extract long ago. The majority of the remaining sources require new practices and new technologies to extract and are also far riskier in general. For example, offshore drilling in the arctic regions is a clear example of this due to the massive risks that are involved and the inability to be able to provide effective cleanup response should an accident take place.

In the current state of the solar market, there currently exist four overall methods of reducing the overall costs associated with solar powered electrical generation; system innovations, system optimization, system reliability, and system efficiency. Many advances in each of these categories of cost improvements are currently unknown due to the fact solar companies must work within a system based on competition rather than a more collaborative atmosphere. Figure 1 - Sub-System Optimization vs. Efficiency Gains (Gordon, Kinsey, Nayaak, & Garboushian, 2010)

Currently most commercially available PV solar panels are based on inorganic semiconductors-particularly silicon, which is the second most abundant material in the earth's crust; such materials can produce electric and are affordable, yet they are far from efficient in their capacity to capture the power of the sun. Some of the new generations of solar cells and technologies being developed are promising and include the advantages of low-cost materials, high-throughput manufacturing methods, and low-energy expenditure; among these emerging types of PV cells being developed are PEC or dye-sensitized solar cells (DSSCs); organic (molecular and polymer) solar cells; hybrid organic-inorganic solar cells; and colloidal quantum dot (QD) thin-film solar cells (Kafafi, et al., 2015). However, even with all the different advances in solar technologies that have been made, as well as those proposed, they have yet to make it a cost-effective alternative to fossil fuel.

Most of the solar projects that have been implemented thus far have been based on some broader metric than simply considering the market prices alone; with the rare exception that infrastructure requirements and prohibitions that can actually make solar power cheaper than the alternatives in remote locations and specific applications. There have also been many research efforts that attempt to identify all of the different value added benefits gained from solar power that a community could expect to reap from a diversified energy portfolio in the long run (Makridis, 2011). If it were somehow easier to quantify all of the externalities that were related to the different types of power production, then it is likely to suspect that more organizations would consider these benefits in their power decisions and this would further boost the solar energy in general.

Yet, even with the advantages, solar power has in regards to being a clean and sustainable energy source, there are even further obstacles that will be present in any attempt to further accelerate solar implementations. Challenges to solar energy, as well as other renewable energy technologies (RET), include many factors that relate to storage challenges, higher research and development costs, and energy intermittency for example that will likely prevent this technology from being able to completely replace alternative choices. Still, when viewed only as a single piece to a more comprehensive energy strategy that is viewed from a long-term perspective, using solar power to meet future energy demands has many intangible benefits associated with it since it does not produce any significant pollution as well as suffer from any resource depletion from its use. Such considerations have been the primary drivers that have led governments around the world to incentivize solar projects into their existing grid systems.

The best case study of this so far, in terms of its overall potential impacts, is definitely China. China has been installing more renewable power capacity than fossil fuels for several years, a gap that's growing; in 2015, China will install 15 gigawatts to 18 gw of solar power alone, double the solar deployment in the U.S., according to an analysis by Bloomberg New Energy Finance (BNEF) (Randall, 2015). Many believe that China will have more renewable energy capacity in following years than the entire energy production needed to fill the total demand for the entire United States collectively.

Although solar may still be cost prohibitive at present, its future contribution to global energy needs is readily recognized by many of the largest U.S.-based corporations. In fact, Apple Inc., one of the U.S.'s most recognized companies, has been one of the forerunners in investing in solar technology production in China. Apple has made a recent investment of a 40-megawatt solar power generating facility in China that is one of the biggest individual projects based on foreign capital planned in the world. Yet, by comparison, this massive solar power plant will only produce what could be described as a mere drop in the bucket when it's compared to China's domestic solar power industry capacity in total.

For example, some research has indicated that every day in China there is about 41mw capacity added to the total solar energy production capabilities. The scale of this industry in China will make this one of the key factors in developing a global market for solar power, as well as in regards to the sustainable development of the world's future power production technologies in general. Still, it should also be noted that China is also the world's largest carbon emitter, it burns more coal than any other nation, and its solar capacity is only a small fraction of its total energy portfolio in total (Martin, 2016). Furthermore, it's also because of the country's intense air pollution levels that have resulted from the overuse of dirty fuels that has led to its dedication to sustainable technologies. Yet, whatever the case may be, China will be the likely key player in the future of solar power who will drive the costs down and develop an export market for these goods. Figure 1 - China's Estimated Capacity

For example, an econometric model could be developed that determines the amount of effective tax would have to be charged to make solar electricity a feasible alternative. However, if externalities are factored into the equation, it was found that solar will, in fact, be cost-effective in comparison to traditional energy production; if they are not already. Thus it is necessary to identify the actual scope of the various externalities involved with electricity generation that is based upon the use of fossil fuels.

Methodology

Data was collected about the average retail prices, based on total consumption and total revenues, for the commercial sector that were available in Illinois between the years of 1990 and 2014. There is a trove of data collected about all of the United States collected by the U.S. Energy Information Administration that is made available to the public online. Illinois has a surprisingly unique energy profile that includes many items of national importance; its contributions to crude production and nuclear energy for example, as well as its average consumption rates. Although the state does not provide an estimate the average prices of solar over time, it does provide estimates based on solar output in terms as mega-watt hours as well as a proportion of the total energy consumption. Some of the quick facts related to Illinois energy profile include (EIA, 2016):

Illinois is a key transportation hub for crude oil and natural gas moving throughout North America, with eight crude oil pipelines, nine petroleum product pipelines, more than a dozen interstate natural gas pipelines, two natural gas market centers, and two oil ports.

Illinois leads the Midwest in crude oil refining capacity and ranked fourth in the nation as of January 2015.

In 2013, Illinois ranked second in the nation in recoverable coal reserves at producing mines.

With a production capacity of 1.5 billion gallons per year, Illinois is the third largest producer of ethanol.

Illinois ranked first in the nation in 2015 in both generating capacity and net electricity generation from nuclear power. Generation from nuclear power plants in Illinois accounted for more than 12% of the nation's nuclear power.

Annually, Illinois households use 129 million Btu of site energy per home, 44% more than the U.S. average, according to EIA's Residential Energy Consumption Survey.

Data was also collected regarding the average prices of solar power over time. However, this data is far less accessible and was difficult to find. There was only one data set that was found and this set was published by the National Renewable Energy Laboratory (NREL) and only included estimates that dated back until 1998 (NREL, 2015). Furthermore, commercial prices only appear in this data from the years 2002 through 2014 and the data included in the analysis were based on the residential prices from 1998 through 2001. The unavailability of any credible data based on the historical averages of PV prices over time was a major limitation to the study and actually changed the study's design. For example, instead of comparing the solar price and output over time, the study had to instead focus on the traditional energy prices and the total output of solar power. It is reasonable to suspect that, since the average costs related to PV technologies are difficult to estimate, this could explain why such reliable data was difficult to find. The data that was identified was converted from dollars/megawatt to cents/kWh to be consistent with the units of the other variables. The data set that was used for the study is as follows:

Year

mW/hr IL Total

Revenue ($1,000)

Retail cents/kWh

Commercial PV (trillion Btu)

PV cents/kWh

The price of solar has fallen dramatically since 1998 according to the data collected. For example, you could purchase roughly sixteen times as much energy produced from conventional sources in 1998 than you could from PVs, however in 2014 this figure had dropped to a factor of three-to-one (as opposed to sixteen in '98).

The first regression model focuses on the price of conventional fuel as the independent variable and the total output of PV as the dependent variable. It was hypothesized that the higher the price that traditional energy prices averaged in the market, the bigger the total output of PV would be. However, after considering what data was available, it was also hypothesized that a ratio that consisted of the price of PV in regards to conventional sources would more likely explain the trend more accurately that the price of conventional power sources alone and thus a second regression was also conducted.

Results

The regression model based on the price of traditional fuel sources relative to the total output solar output is represented in the following illustration.

Figure 2 - Conventional Energy Prices and Solar Output

The R square value in this analysis is relatively low at .304 which indicates that about a third of the variation would be described by the traditional energy prices; the F value and the P values are well below .05 and therefore the variation explained should be fairly accurate even though it is not a great descriptor. It was believed that running the regression again with the PV/TE (traditional energy $) ration that this would predict more of the variance, however, as illustrated in the following results, this was not the case.

CPV (trillion Btu)

PV/TE Price Ratio

CPV (trillion Btu)

PV/TE Price Ratio

2014

1.37

3.02

2005

1.018

11.35483871

2013

1.266

4.2997543

2004

0.687

12.20159151

2012

1.028

5.381727159

2003

0.13

13.15068493

2011

0.957

5.439814815

2002

0.731

13.96276596

2010

1.22

6.418918919

2001

1.051

15

2009

1.3

8.397790055

2000

0.86

14.6374829

2008

1.228

8

1999

0.927

15.98915989

2007

1.228

8.751458576

1998

0.764

15.95881596

2006

1.173

9.811320755

Figure 3 - Solar Output in Terms of PV/TE Ratio

Using the ratio calculated resulted in a similar r squared figure as the previous regression (also with F and Ps less than .05). This seems to indicate that the economic prices really only explain a portion of the total PV output that is generated in the commercial sector and that there are other variables that have influenced the adoption of solar power in this sector.