California's solar solution

As renewable energy nears competitiveness with fossil fuels and nuclear power, California-style auctions of supply contracts may be a better way to drive value for consumers than calculated subsidies.

Germany's solar industry and green groups on Monday protested in Berlin over sharp cuts to support, which guarantee a premium power price over 20 years.

The government's proposals are to cut the support rate (called a feed-in tariff) by about a quarter, allocate a portion of solar electricity at unsubsidised wholesale rates, and eliminate all support for the largest projects.

Developers and environmentalists have similarly criticised a proposed halving of support for small-scale solar in Britain, where the government will announce shortly details of a support scheme for larger renewable energy projects and nuclear power.

That new scheme will protect consumers by trimming support when wholesale power price rise, rather than offering a fixed, risk-free subsidy.

Nevertheless, none of these proposals are based on the true cost of generating renewable electricity: they depend on government bureaucrats calculating that cost, rather than forcing project developers to reveal it.

Clearly it's in the industry's interest to exaggerate their costs and make pleas to the strategic value of green jobs.

Such schemes may learn from an auction approach in California that has come closest yet to revealing the cost of solar power, which turns out to be below calculated support rates.

In one of the world's most suitable (predictably sunny) locations for solar power, California bought power from solar power projects under a 2010 program at prices which compare favourably with US coal-fired power and onshore wind, and are cheaper than new nuclear.

It emerged last year that all developers contracted to sell solar power at below a nominal 10.9 dollar cents per kilowatt hour from 2013, under a program to develop 250 megawatts of solar power capacity.

It's possible to compare the cost of different energy technologies by combining the upfront capital and ongoing running costs per unit of electricity in a so-called levelised cost of energy (LCOE).

Such LCOE estimates can be suspect, given how far they depend on assumptions about fuel costs and discount rates.

Nevertheless, according to data from the US Energy Information Administration, the California solar contracts undercut the estimated cost of power from a new, "advanced nuclear" plant at 11.4 cents per KWh, and in the same range as coal (9.5-10.9 cents) and onshore wind (9.7 cents).

Those EIA numbers are in 2009 dollars (rather than 2013), and for delivery in 2016 (rather than 2013) and so aren't perfectly comparable but give a useful indication.

Only a new gas-fired power plant is clearly cheaper (around 6.5 cents).

The California contracts are already as cheap as or below medium-term forecasts by the International Energy Agency.

The IEA last year predicted solar power generation costs from large projects of 8.1-16.2 US cents per KWh in 2020, in its ‘Solar Energy Perspectives' report (in 2010 dollars).

Such estimates suggest why bureaucrats have repeatedly set their tariffs too high.

The California contracts were agreed before solar module prices fell more than 40 per cent last year (which should make them more competitive in future) and appear to justify Germany removing all support for larger solar projects over 10 MW.

The contracts were for a range of project sizes from 5-20 MW and were awarded by auction starting with the most competitive bid until the full 250 MW were met.

Admittedly the California program was very small compared with Germany's new, installed 7,500 MW last year.

But that's partly the point: by offering inflated subsidies, Germany invited a stampede of developers of all varieties including both competitive and not so competitive.

Berlin would like to see solar capacity of about 3,000 MW installed annually which it could equally meet through auctions as under its new, calculated subsidy.

The European calculated feed-in tariff model has seen repeated boom-bust cycles first in Spain in 2008, and most recently last year in Britain, Germany and Spain (in 2011 the UK installed as much solar power as all of the Middle East and Africa).

That hasn't really helped the industry, which has lurched from shortages to over-capacity: it is now about 100 per cent over-supplied with solar modules as governments pare support, leading to further price falls and manufacturing bankruptcies.

On the bright side, while solar won't dominate the global grid any time soon, contributing less than 1 per cent of world power consumption now, its increasing competitiveness will challenge wind, coal and nuclear power over the next decade.

This story was originally published by Reuters. Reproduced with permission.