What follows is an email dialogue between Tam Hunt, a renewable energy attorney and developer who contributes regularly to GTM, and David Victor, professor of international relations and director of the Laboratory on International Law and Regulation and co-author of a recent U.N. report on the cost of mitigating climate change. A piece in the New York Times by Andy Revkin prompted Hunt to initiate this dialogue.

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Tam: I was surprised to see your comments on the cost of carbon mitigation in relation to renewables in the New York Times. My view, supported by experience and a lot of good studies about the current and future costs ofsolarand wind, is that renewables are already cost-savers in many contexts and will increasingly improve in terms of cost savings vs. fossil fuel energy sources. I'm curious what data you base your conclusion on high costs for renewables when compared to fossil fuel sources? And what geographic scope are you considering in your analysis? 

David: Thanks for your note, Tam. I am thinking globally and attentive to renewables at scale. In some special circumstances -- usually with very expensive rival power and very good physical conditions for renewables, such as in Hawaii where rival power is costly oil and there is a lot of sun -- renewables can scale a bit on their own. But the vast majority of modern renewables don’t scale on their own without massive policy support, including grid integration rules that hide the full cost. That doesn’t mean we shouldn’t “do” renewables -- that’s not what I am saying. But what it does mean is that renewables are still being improved and they are far from ready for scale applications, and when you are talking about cutting emissions it is scale that matters.  

I am mindful that there are various studies making (wild in my view) claims about the ease of quickly (i.e., a few decades) shifting almost fully to renewables. But reality is setting in, even for places in the world that are committed to this vision. Look at Hawaii where the power company has had to suspend new solar installations because of grid integration issues. Look at Germany where they are re-installing a massive investment in inverters because most of the old installations could not integrate at scale into the grid. Worse, in Germany even Angela Merkel -- a huge renewables fan -- has signaled that the current feed-in tariff (FIT) policy is totally unsustainable. Indeed, the latest Energy/Environment White paper from the EU with targets for 2030 has set a soft 27 percent goal for the EU for renewables and adamantly refused to allocate that goal to individual nations -- which would make it enforceable -- because the EU has no clue how it can reach those high levels.  

The problem is scale, and it doesn’t mean that the industry can’t be competitive in special markets where customers are wealthy and nobody really notices the cost -- California is an example, where an aggressive RPS along with other investment policies drive investment in renewables that probably wouldn’t happen [otherwise]. 

Tam: While I certainly agree that getting to high penetration of renewables around the world won't be easy, I don't think it will be costly. Rather, I think it will be a substantial cost-saving opportunity for the large majority of jurisdictions that do it. You mention Hawaii and Germany, so I'll focus on those in my response as examples of this transition. I'm actually living in Hawaii now (I split my time between Santa Barbara, California, and Hawaii), so I've followed Hawaii's trajectory pretty closely. 

HECO and HELCO, the utilities on Oahu and the Big Island, respectively, are indeed claiming issues with high penetration of net-metered solar, and they have slowed down approvals for new net-metered solar projects. This highlights the remarkable growth rate in solar in Hawaii, which has resulted in some of the highest solar penetrations in any jurisdiction in the world. 

However, the utility slowdown in processing interconnection applications will be a temporary delay, and this is a technical issue, not a cost issue per se. The policymakers and the public are fully behind Hawaii's solar tax credit program and the retail price credit that net-metered systems receive for excess power that is sent to the grid. Moreover, and more importantly for this discussion, Hawaii's other programs for renewables, its renewable portfolio standard wholesale procurement program and its new feed-in tariff program, which is also focused on wholesale procurement, have been found recently to be highly cost-effective for ratepayers. A recent report by E3 for the Hawaii PUC found the following: "We find that renewable energy provides a significant opportunity for Hawaii to reduce electricity costs to customers. There are many renewable technology types that provide net value to ratepayers. These include various sizes of wind energy and solar photovoltaic generation on each island, as well as in-line hydroelectric generation. Given the high costs of purchasing petroleum fuels for energy on the islands, these approaches can lower utility costs."

I've been told personally by HELCO representatives that they view renewables as a substantial cost-saving opportunity for ratepayers, and they are looking to procure new renewables at far less than avoided cost of diesel-powered generation (which is well above $200 per megawatt-hour and rising). The islands already have substantial backup capacity in the form of existing diesel-powered stations, so balancing variable renewables is not really a technical issue in Hawaii. The issue is how to deal with excess power backflowing from distribution circuits. But there are many technologies, including smart inverters and battery storage, that can and will solve these issues in the coming years. 

Based on the E3 and other analyses, I am currently working to build a coalition here in Hawaii to accelerate the renewables transition and to get the Big Island in particular to carbon neutrality by 2030 or sooner. 

Turning to Germany, again I agree with you that there are some temporary technical issues that they are facing from their rapid buildout of renewables. However, the proof is in the pudding: Germany has transformed itself from almost no renewables twenty years ago to over 25 percent of its electricity coming from wind, biomass, solar and hydro. This is remarkable. Not only has Germany transformed the global renewables market (particularly solar) by spurring huge reductions in the cost of equipment, the country has transformed its own market to the point where solar is now a net cost saver for almost all customers. A recent study found that solar is very close to being cheaper than coal EU-wide -- and credit for this remarkable development can be laid at the feet of far-sighted German policymakers. 

This study found that solar power already costs as little as 8 euro cents per kilowatt-hour and will likely fall to about 6 euro cents in coming years. Wind power is already 5 to 11 euro cents/per kilowatt-hour. Current costs for coal and natural gas range from 5 to 10 cents per kilowatt-hour, and these costs are surely going to increase. So the economic benefits of renewables are already apparent, and they grow increasingly positive over time. Even when we add integration costs, in terms of backup power to balance variable renewables, and new transmission as required, renewables still come out looking very good on cost alone. 

I was surprised to see the EU's watering down of country-specific renewables goals, but I am very optimistic that the EU will, as a whole, far exceed these goals based on market incentives alone. Natural gas is expensive in the EU, and coal isn't much cheaper. Wind, solar and biomass are looking very attractive to more and more countries based on economics alone, and this trend is set to explode in the next decade or two.

So, yes, there will be technical problems in reaching higher penetration of renewables in every jurisdiction. These problems will add to the cost of generation from renewables, but on balance, renewables will still [represent] a net cost savings in the large majority of jurisdictions around the world in the coming years. And this is the key concept to keep in mind: while renewables can be cost-effective even today (on an apples-to-apples basis, even accounting for subsidies), this cost-effectiveness is on a dramatic, long-term upward arc, because renewable energy costs are getting cheaper and cheaper, while fossil fuel costs are generally getting more and more expensive. Yes, natural gas in the U.S., as well as oil production, has experienced a recent renaissance, but this is a short-lived phenomenon. Natural gas costs are back at $6 (up from $2 just a couple of years ago) [since the time of writing, natural gas has fallen back to $4], illustrating not only the wild volatility of fossil fuel costs but also their unreliability in terms of long-term planning. 

Solar is booming, both in terms of installations and in terms of company stock valuations (SolarCity, First Solar, etc.). The TAN solar ETF is up 25 percent year to date. Solar installations surpassed 40 gigawatts in 2013, up from 28 gigawatts in 2012. 2014 promises to be bigger yet. Wind installations now exceed 300 gigawatts worldwide (solar is catching up and is now over 100 gigawatts) and still growing well, though slower than solar. 

We are already seeing solar and wind at scale. So we can in fact sit back and enjoy the ride, because exponential growth trends in these industries are clear and will very likely continue in the coming decades. We're not out of the woods on climate change because the transportation industry is the tough nut to crack, but in terms of electricity, I'll happily wager that by 2030 half of the world's electricity will come from non-fossil sources. 

The bottom line is that wind and solar are well on their way to growing very well without any government support in many jurisdictions around the world. And this is unequivocal good news. 

David: Thanks for your note. I’d like to clarify three things. 

First, I expect that Hawaii will be cost-effective for lots of renewables for one simple reason: thanks to oil-fired generators (which are typical when you have relatively small, island-based power networks), it has the most expensive electricity in the nation by a long shot. What happens in Hawaii in terms of relative competitiveness tells us basically nothing about the rest of the world. Given the high cost of incumbent electricity in Hawaii, you could generate electricity from starlets riding bicycles and it might be cost-effective. Sure, the buildout in Hawaii and Germany (and Denmark and a few other places) is remarkable. But the key questions revolve around whether these are typical places and whether the policies (notably in Germany) are sustainable at scale. We clearly have different points of view on this.    

Second, I also suspect that when we look closely that the integration issues we are seeing in Hawaii (or California or parts of Germany or many other places) that these will turn out not just to be “temporary delays” for mere “technical issues.” There are fundamental problems in managing a grid at very high reliability with large amounts of variable and intermittent power. Some of that might get addressed with incentives to build storage (as we are seeing to some degree in Texas) or mandates to build storage (as now unfolding in California and other places). But the fundamental properties of that grid are totally different from the “normal” grid. Add into that a large role for distributed energy resources -- such as rooftop solar or onsite self-generation at industrial sites -- and the challenges for grid management and planning are huge. This is why the Electric Power Research Institute’s new “Integrated Grid” initiative is important, [as are] lots of complementary efforts. These are surmountable challenges, but they require lots of rethinking and planning and huge room for error if rushed. 

Third, I have not done the detailed spadework that is needed on the Fraunhofer study that you linked to, but I’ve seen a lot of these studies over the years, and I’d urge all of us to look closely at the key assumptions that drive the outputs. Usually, the most important assumptions are a) the assumed cost of capital and financing structure; b) the assumed cost of fuel; and c) the assumed costs of integration. Very quickly, look at table 2 (page 11 in the linked study) and you’ll see what drives the analysis, which is the combination of very low financing assumptions for renewables (and high assumptions for fossil plants). Those aren’t real, market numbers -- they must be a fiction that reflects other policy incentives at work. Does anyone really believe that the market by itself would finance small PV with an 80/20 debt/equity ratio where the acceptable risk-adjusted return on equity is 6 percent and debt pays only 4 percent, while radically different financing assumptions are used for central power stations?  And then look at the operation costs -- notably high numbers for brown coal and even for gas. I am not arguing in favor of brown coal -- quite the opposite, as I think it is bizarre that an environmental leader still burns brown coal, but such is the power of the coal unions -- but [rather pointing out] that we need real apples-to-apples comparisons.  

A few more wrinkles to the analysis just to make it clear how problematic the case will be. The out-year assumptions on gas prices are really high (see table 5 on p. 15), which is probably hard to sustain if you think the rest of the world is in the midst of a gas revolution that will (as in the U.S.) bring down prices. But those assumptions make fossil fuels look unattractive. And the Fraunhofer study, as far as I can tell, hasn’t yet seriously reflected the grid integration costs -- which is hardly surprising since everyone in the analyst community is still trying to get their heads around that question. (Chapter 6 of the Fraunhofer study basically outlines some long-term visions for how that might unfold, rather than actual analysis.) Again, I am not criticizing the Fraunhofer study -- in fact, they do some of the best work on this topic in Europe -- but simply drawing our attention to the kinds of assumptions that drive analyses and raising serious questions about whether those are scalable. 

Indeed, I suspect it is exactly those kinds of concerns that help explain why the new EU white paper envisions massive cuts in emissions, massive expansion in renewables, and big reductions in power costs all simultaneously -- without a clear vision for how that will be implemented in reality. The reason is that so much of the work done on competitiveness of existing renewables doesn’t grapple with grid integration seriously and does somewhat simplistic levelized cost of electricity (LCOE) calculations within power markets, like Hawaii, where the fossil incumbent is terrifically expensive. 

Tam: You raise a number of additional points and I'll address them one by one. 

1. You argue that success with renewables in Hawaii is irrelevant to the broader issue of scaling of renewables. Scaling of particular technologies will, I agree, be necessary for renewables to be a big part of the solution to climate change. I discussed Hawaii because you raised Hawaii in your previous email as an example of problems with integrating high levels of renewables. The integration issue is why Hawaii is very relevant to the scaling discussion. Yes, Hawaii's electricity rates are very high, helping to make renewable energy more competitive than in other jurisdictions. But Hawaii is actually very relevant because it is a laboratory for showing how jurisdictions around the world can deal with high penetration. We can both look forward to watching Hawaii's integration efforts unfold in the coming years.

On the cost issue, Hawaii's cost differential between high-cost diesel power and low-cost renewables will in fact be mirrored increasingly around the world because of the two major background trends that have become quite clear in recent years: 1) increasingly low-cost renewables as they reach scale (solar panels, for example, have come down in cost over 50 percent in the last few years alone); 2) increasingly high-cost fossil fuels. Oil costs have stayed remarkably high even as the world struggled economically, which suggests that when the global economy recovers fully, we'll see far higher oil prices. As I mentioned in my last email, natural gas costs in the U.S. were quite low for a few years after the U.S. economic crisis, due to [recently developed] fracking techniques and lower demand, but we are now seeing costs shoot up again. Prices for natural gas are far higher in Europe and Asia. This increase in natural gas costs will make renewables increasingly cost-competitive in the large majority of jurisdictions where natural gas is prevalent in power generation. 

2. You argue that integration of renewables at high penetrations will raise major long-term issues. Time will tell on this one, but numerous reports, cataloged by Lawrence Berkeley Lab and others, have found that the costs of integrating high penetrations of wind and solar are not actually that high. For example, the 2012 LBL annual wind power market report stated, with respect to U.S. markets: "Recent studies show that wind energy integration costs are below $12 per megawatt-hour -- and often below $5 per megawatt-hour -- for wind power capacity penetrations of up to or even exceeding 40 percent of the peak load of the system in which the wind power is delivered." This is about a 10 percent premium over the cost of energy from wind, which is entirely affordable and does not represent a major economic or technical challenge. Even with these integration costs, wind power is highly competitive in most U.S. markets. 

Germany again provides a good example with respect to its integration of wind and solar. This analysis, again from the Fraunhofer Institute, found that changing just one grid parameter in Germany would allow far higher penetration of renewables at lower cost. (Changing must-run thermal power plants from 25 gigawatts to 20 gigawatts, the technical lower capacity, allowed variable renewable penetration to go from 25 percent to 40 percent -- a remarkable change with one technical tweak to the system). My broader point is that we are already witnessing the renewables tsunami break (beneficially) over the world's power systems, and we are managing collectively very well in dealing with higher penetrations in those jurisdictions like Germany, Denmark, Hawaii, etc., where issues have arisen. Again, I'll happily wager that we'll see the world's electric power system 50 percent or more fossil-free by 2030. 

As we reach half or more of our power coming from variable renewables, in the U.S. and globally, which will likely start to happen by 2030 or even sooner in many jurisdictions, battery storage and smart inverters (to handle reactive power issues) will become increasingly important. For this reason, I strongly support jurisdictions like Texas, California and Germany, which are incentivizing or mandating new energy storage procurement programs. I note also that California's new 1.3-gigawatt energy storage mandate is a cost-effective mandate, which means that it can't lead to any net cost for ratepayers. 

3. Regarding the Fraunhofer report on solar and wind becoming cheaper than coal power in the EU, you argue that the financing cost assumptions are off for renewables vs. fossil fuels. I believe these are in fact accurate assumptions based on real-world costs, which stem from the feed-in tariff policy that Germany has had for over a decade for renewables. The feed-in tariff requires utilities to offer twenty-year contracts to renewables, at a set price. The low cost of money for renewables, expressed in the Fraunhofer report, is a key benefit of feed-in tariff policies. The predictability and low risk that the feed-in tariff creates, along with the low risk of solar and wind due to zero fuel costs, leads to much lower cost of financing. The same can't be said of fossil fuel power plants, which don't enjoy a feed-in tariff and of course have highly volatile fuel costs. 

You also argue that the out-year fossil fuel cost assumptions in the Fraunhofer study are unrealistic. I'd argue, again, that we're already seeing a much higher price regime for fossil fuels in 2014. I think their cost projections are entirely realistic, and we may well see much higher prices. A major benefit of renewables is that we don't need to deal with such speculation, because there's zero fuel cost for wind or solar, and the prices paid for power can be known with certainty for literally twenty years or more. This is a major and unsung benefit of renewables. 

David: On gas prices, in a very cold winter, we always see price spikes, especially at trading hubs on the demand side of transportation bottlenecks. But the markets settle, and January/February is always a bad month to use as a base for making long-term predictions. Indeed, the markets themselves think gas will be settling around $4. (See NYMEX futures, for example, summarized monthly at: http://www.eia.gov/naturalgas/.)

Regarding integration costs, there are lots of studies -- some say costs are high, some low -- but my fear is that the studies that point to low integration costs don’t rigorously look at these issues in the context of guaranteeing very high reliability. There’s a world of difference between a power grid that works about as well as our internet connections (most of the time, except during periods of congestion) and one that is reliable almost all the time, as is required for modern grids.  

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Tam Hunt is the owner of Community Renewable Solutions LLC, a renewable energy project development and policy advocacy firm based in Santa Barbara, California and Hilo, Hawaii.