It's Too Soon To Predict A Bright Future For Solar Power

This commentary was published in The Straits Times on 14 September 2011.

High fossil-fuel prices and concerns over global climate change have motivated interest among policymakers and ordinary citizens.

Proponents of renewable energy advocate government support for non-fossil- fuel-based electricity generation.

Won over by promises of energy security and the creation of 'green' jobs, many governments have legislated subsidies or other forms of policy support such as feed-in-tariffs (FITs) to compensate producers of renewable energy with guaranteed higher rates.

These include members of the Organisation for Economic Cooperation and Development such as Germany and Spain, and developing countries such as Thailand and Malaysia. But what does the evidence really show?

Take solar energy. This has long been touted as a possible option for Singapore, given its equatorial location and the lack of other renewable energy resources such as hydro, geothermal, wind or tidal energy. Singapore has set up several R&D initiatives that include solar test-bedding by the Housing Board.

The Energy Studies Institute (ESI) recently conducted an economic and technical analysis of the feasibility of solar power in the local context. The results were consistent with those of comparable studies by bodies such as the International Energy Agency (IEA) or the United States Department of Energy's Energy Information Administration.

The conclusion? It is clear that solar power is an expensive proposition when compared to conventional fossil fuel- based power generation technologies.

Using reasonable estimates for key factors such as solar power system efficiencies, local peak sunshine hours and operating conditions, and current solar module costs, ESI constructed a Singapore solar power model. The model calculated the break-even price - the price at which the costs of solar power are just balanced by its revenues over the life of the equipment - to be 60 to 80 per cent more than the average Singapore tariff rate last year.

While solar power is currently much more expensive than technologies such as the combined cycle gas turbine, renewable energy advocates rightly point out that technological progress and increased production scale will drive down module costs.

However, if costs are expected to come down, then this is an argument in favour of delay, not immediate action.

It makes more sense to invest later, at a lower cost.

'Grid parity', when solar power costs come down to levels which make it competitive with conventional fuels, is not imminent either. Our best estimates suggest that grid parity may be achievable around 2020, comparable to the findings of the IEA. Uncertainty as to when grid parity will occur, as a function of key technological and economic parameters, behoves us to handle forecasts of grid parity with caution.

Nor is grid parity a straightforward concept. For example, break-even cost estimates of solar power do not include systemic effects, such as the costs incurred providing back-up for intermittent sources of electricity such as solar power.

Available data suggests that the investment costs needed to integrate fluctuating sources of power into an electricity grid are substantial. A full assessment of the costs of solar power has to take these necessary investments into account.

If these costs are funded by a tariff rate increase, then it would effectively be an implicit subsidy of the intermittent power generation technology. The subsidy would be financed, in the first instance, by electricity rate-payers. Since electricity bills account for a larger share of the budget of poorer households, this implicit subsidy would tend to have an inequitable impact on household incomes.

The ESI study also showed that solar power is not a cost-effective means of carbon emission mitigation. In fact, it is among the most expensive options in abating greenhouse gases. At a CO2 price of about US$30 (S$37) a tonne, the break-even prices for fossil fuel-based technologies such as gas turbines and coal increase, but still remain far lower than solar power.

Solar power in the Singapore model becomes competitive with conventional coal plants only when the CO2 price is about US$315 a tonne. It becomes competitive with cleaner gas turbines, the mainstay technology for power generation in Singapore, at about US$620 per tonne of CO2.

These estimates are likely to be conservative; two well-cited studies on Germany derive break-even CO2 prices of between about US$750 and US$1,000 per tonne.

It is more efficient to use market- based policy instruments such as the carbon tax or tradable CO2 permit regimes to drive carbon cuts.

But it is true that there are informational and 'learning by doing' benefits in installing and integrating solar power systems in Singapore. Hence, there is a case for publicly financed test-beds and local experiments in the adoption of an uncertain and costly technology.

Beyond this modest application, any premature transition in our power supply technologies would not only be a costly option bought at the tax payer's expense.

It would also mean we had not learnt policy lessons from the reversals in Germany and Spain, where generous FITs have cost the public purse dearly.

The writer is a Principal Fellow and Head, Energy Economics Division, the Energy Studies Institute, National University of Singapore

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