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Updated Cost Structures Improve Utilities’ Relationship with Renewables

Renewable energy must be expanded to reduce greenhouse gas emissions and prevent the worst impacts of climate change. When considering a new renewable energy project, electric utilities will evaluate capital costs, fuel costs, and capacity factor, which is the amount of power produced divided by production capability.

In this article, we explore capacity factor for renewables and suggest methods of improving capacity factor by both revising cost structures and implementing energy storage technologies. First, let’s take a closer look at considerations for new electric energy projects.

Essential Considerations for Electric Energy Production

When electric energy production facilities are proposed, expected earnings are a primary consideration. Capital costs, the initial expense of constructing a facility, are a significant factor in new solar and wind facilities. Fuel costs are a significant factor in traditional fossil fuel facilities.

Capacity factor, the amount of power produced divided by production capability, is another consideration. If a 100 MW production facility produces 100 MWH in one hour, the capacity factor during that hour is 100%. Today, capacity factor is used by electric utilities to determine cost recovery on an hourly basis.

Hourly costs increase as capacity factor decreases. Energy production facilities recover their investment much faster when capacity factor is high, above 90%, than when capacity factor is low, below 70%, using the current cost structure.

Capacity Factor: A Closer Look

Take nuclear powered production facilities, for example. These facilities have remarkably high capital costs, usually around $30 billion for a facility with 2,200 MW capacity. The advantage of nuclear power is that it is reliable, with a capacity factor of 95% or more. With this level of reliability, the investment could be considered worthwhile. Today, however, new nuclear construction is often avoided because of the high capital costs, especially when other options are available.

Popular renewable energy sources like solar and wind have much lower capital costs than nuclear, though the initial investment on a project can still be daunting. These renewables also have a much lower capacity factor than nuclear. The capacity factor of solar panels is only around 50%. Wind turbine generators have lower capital costs than solar panels and higher capacity factors, around 65%.

Although the return on investment may take years for new solar projects, the capital costs of solar are so much lower than that of new nuclear projects that full recovery of capital costs will take far less time for solar projects.

Revise Cost Structures, Improve Renewable Capacity Factor

The method of recovering costs on an hourly basis presents an issue when renewable energy sources are considered. New solar, wind, and nuclear projects, among others, will be required to provide enough energy to meet consumer demand and meet the US goal of 80% renewable energy generation by 2030.

However, some new projects may be overlooked because of electric utilities' outdated, hourly cost structures. Electric utilities will need to revise their cost structures so that energy production facilities are reimbursed on a yearly basis rather than on an hourly basis.

Energy Storage Improves Performance of Renewables

It may seem like renewable energy facilities will lose money due to their mid-range capacity factors. However, this perspective is skewed due to both the hourly cost structure in use today, and the lack of implementing energy storage technology alongside renewables.

Using renewables to charge energy storage facilities increases their capacity factor. Intermittent production facilities like wind and solar should include the cost of constructing energy storage facilities in their capital costs, as they will be needed when the facility is unable to produce energy. Consistently recharging energy storage facilities will increase the return on investment for renewable energy facilities.

Update Cost Structures, Models for Reliable Energy

To implement reliable and cost-effective renewable energy projects, electric utilities must update their cost structures and implement battery storage technologies alongside renewable projects. By improving their modeling strategies, electric utilities will be able to ensure the implementation of cost-effective renewable energy projects.

Another key aspect of improving accessibility to renewables is to update electric utilities’ modeling strategy. In our next article, we will present updated models that show energy production capability and energy consumption. These types of models will be vital to developing future cost structures that are based on yearly cost recovery.

Politics vs. Science

As we were preparing to publish this blog, a news feed crossed our screens to announce that “Texas is on a crusade to kill the state’s stunning renewable energy progress”. This leads us to wonder, should politics be more important than science?

Perhaps it is time for politicians to embrace the philosophy of President John F. Kennedy as expressed in the following memorable quotes:

“Leadership and learning are indispensable to each other.”

“There are risks and costs to action. But they are far less than the long-range risks of comfortable inaction.”

“Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not seek to fix the blame for the past. Let us accept our own responsibility for the future.”

Want to keep the conversation going? Follow along with our blog and contact us with questions!

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