Last week (11/26/2011), a guest commentary was submitted to the Herald and News on behalf of the board of directors of the Klamath Basin Power Alliance (KBPA). The KBPA was formed to address concerns about power production and how future power rates will impact the agricultural community. The commentary mistakenly assumes and promotes some basic misconceptions about free markets and profitability, especially in relation to renewable energy production. A paragraph in the commentary reads:
Finally, KBPA will be in a position to invest in renewable energy projects where the profits will buy down the overall costs to its members, the irrigation community. These funds will be made available through the Klamath Basin Restoration Agreement
The critical hinge for supporting this door to the new world of renewable energy is “profits.” The assumption is that “with profits” there will be sufficient economic resources to accomplish the desired goals.
This is good logic and I have no complaints with this line of reasoning. My questions actually come from a practical or pragmatic approach to the problem, ie., “Is this really do-able? How readily do renewable energy projects generate profits?”
As a qualifier, hydro and geothermal projects are generally profitable. This means, the price of a unit of energy, in the marketplace, is higher than the cost of producing and delivering that unit of energy. For example, if the market demand has established a going rate for a kilowatt of power, then the production goal would be to produce a kilowatt of power at a cost lower than that prevailing market rate. This would allow a producer to freely sell his energy units at the going rate and completely pay for the energy production process. This revenue, in excess of production costs, is known as “profit.”
Pretty simple stuff...
There are actually two facets to the cost profile for power companies. First, is the ability to generate the power; second, is the ability to transmit that power to the end-users. In the case of small, localized production, distributed power would be enormously beneficial because the cost to transmit the power would be close to zero. If one can generate power at the needed location then there would be no need to transmit the power and therefore, there would be no transmission costs. This is a fantastic model because small solar facilities could meet this onsite requirement with little hassle.
Great..., we lowered our transmission costs, but now, back to first things. Can we generate the power at a cost lower than the going market rate? (Remember, we are looking for profits...)
Unfortunately, the answer is - NO!
Let’s say you pay 10 cents per kilowatt for your PacPower electricity. For this illustration, I’ll call that the going market rate. So, let’s try to imagine warming ourselves in the glowing profits shining upon us in the Pacific Northwest. The chart below uses 2008 costs by source, with the right-most columns representing kilowatt-hour prices paid at the net Volumetric Incentive Rate for Small Scale Systems (≤10 KW).
I apologize for any information overload caused by this graphic. There is a lot of information, but suffice it to say, you cannot generate a profit when paying three, four, or five times more than the going market rate for the same product. So far, the Public Utilities Commission has authorized cost deferrals estimated to be near $3.5M for the current series of unprofitable decisions by the legislature, in concert with Pacific Power. No doubt this will grow as the program gains momentum and rate-payers will continue to pick up the tab.
Today, there are no profits and there are no projections for profits.
The only thing the environmental activists can hope for is either the public will be too enamored with centralized government solutions, or, they will be too busy earning a living so that they won't ask hard questions about ratepayer subsidies in the energy marketplace.
This pilot solar program represents a bankrupt policy. It promotes solar energy via fictionalized profits at the expense of not pursuing real hydro, real coal, or real natural gas efficiencies. Unfortunately, this program relies solely on emotional momentum for conjuring up profits to the detriment of ratepayers everywhere.
Be forewarned, without a heartfelt emotional preference for all-things-green, this will be a disappointing energy adventure – for all of us, including the KBPA.