Solar Energy Costs and Impacts

By James D. Agresti
November 24, 2014

In articles and columns touting the virtues of solar energy, a chorus of reporters and pundits are claiming that solar panels produce electricity for about the same cost as fossil fuels. These individuals are also declaring that because of this, solar energy will soon provide a major portion of the world’s electricity.

However, official government data from the U.S., Germany, and the International Energy Agency show that solar energy is far more costly than fossil fuels. Furthermore, even if governments continue to mandate and subsidize solar while penalizing competing technologies, solar is on track to supply only 1.2% of the world’s electricity by 2040.

This has important implications for the vast majority of people in the world, because energy costs critically affect standards of living, particularly for the poor and middle class.

Benefits and Costs

The primary benefit of solar and other renewable energy sources is that they emit a fraction of the pollutants and greenhouse gases of fossil fuels. Hence, for decades governments have been enacting regulations and taxes that charge consumers for the environmental impacts of energy sources. As explained in a 1992 report by the U.S. Energy Information Administration (EIA):

The effort to deal with environmental concerns has become a central feature of Federal energy policy. Substantial costs which were formerly outside the market mechanism have, through the implementation of a series of taxes and regulations, been internalized to energy markets.

Nonetheless, it is often impossible to assign objective dollar figures to these environmental impacts, and thus, some argue that fossil fuels are overtaxed and overregulated, while others say just the opposite.

For instance, when the New York Times conducted an analysis of corporate taxes and found that large oil companies pay an average effective corporate income tax rate of 37% as compared to 29% for other large corporations, the Times added “some economists argue that the high rates do not cover the pollution costs imposed on society.”

Beyond corporate income taxes, governments also impose excise, sales and other taxes specifically targeted at fossil fuels in order to restrict their production and consumption.

More significantly, the costs imposed on fossil fuels by energy regulations far exceed the costs of taxes levied upon them. Even before the regulatory growth of the past two decades, EIA reported, “There are so many Government regulations concerning energy that it is difficult to identify and analyze all of them.”

Despite all this, fossil fuels are still generally less expensive than green alternatives like solar, wind, and biodiesel. In fact, EIA has projected that by 2018, newly built commercial solar capacity will still be more than twice the cost of new natural gas capacity. Furthermore, as detailed below, these projections are based on assumptions that make the cost of solar seem much lower than reality.

Until recently, renewable energy advocates candidly admitted that “going green” will require economic sacrifices. For example, a 2011 report of the United Nations Framework Convention on Climate Change stated that the costs of cutting greenhouse gases “can carry an economic sting,” and “people are going to have to make difficult choices and take painful steps” to stem global warming. Likewise, in 2008, Barack Obama stated this under his plan to address climate change, “electricity rates would necessarily skyrocket.”

However, polls have shown that even though the vast majority of Americans favor green energy, most are not willing to pay a premium for it. For example, only 7% of utility customers are willing to pay an extra 20% for energy from renewable sources. This leaves green energy proponents in a tough position, because the energy sources they are promoting are at least 20% more expensive than their fossil fuel equivalents—and sometimes much more. Faced with these circumstances, many environmentalists and green energy investors have resorted to misrepresenting the costs of these energy sources.

How Much Does Solar Cost?

According to Los Angeles-based green energy supporter Robert Hunziker, the cost of solar-generated electricity is now “on a Levelised Cost of Energy (LCOE) competitive basis with conventional energy.” Likewise, Vivek Wadhwa, the director of research at the Center for Entrepreneurship and Research Commercialization at Duke, declares that “by 2020, solar energy will be price-competitive with energy generated from fossil fuels on an unsubsidized basis in most parts of the world.”

Contrasting those unsupported assertions with actual data from EIA, the levelized cost of newly built commercial-scale solar energy will be $144 per megawatthour by 2018. This is 2.2 times more than the $66 cost of electricity from new natural gas capacity, and 44% more than the $100 cost of new coal capacity.

Moreover, rooftop solar systems, which comprise most of the solar capacity in the U.S., are more costly than utility-scale solar systems. To quote the National Renewable Energy Laboratory, “rooftop PV [photovoltaic solar] is expensive compared to large-scale, ground-mounted systems.” This is mostly because larger systems benefit from economies of scale.

Furthermore, when calculating levelized costs, EIA uses certain assumptions that have the effect of skewing the results in favor of solar. For example, EIA’s cost figures:

• are computed by assuming that all types of generation capacity have a 30-year financial life. However, solar panels have an expected life of 20-30 years, while nuclear, coal, hydropower, and natural gas power plants commonly last for 60 years or more.
• do not account for the fact that electricity generated by wind and solar is generally less valuable than electricity from fossil fuels. This is because wind turbines only spin when the wind is blowing, and solar panels only produce when the sun is shining. Such discontinuous sources of capacity must be backed up by technologies that can produce a steady stream of power, like fossil fuels and nuclear. These added expenses are not reflected in EIA’s levelized costs.

In sum, even under these solar-friendly estimates and numerous regulations and taxes imposed upon fossil fuels, the costs of utility-scale solar are far higher than that of natural gas and coal. The situation is even worse for rooftop solar, the most common source of solar.

Such hard realities are precisely why Google has abandoned its Renewable Energy Cheaper than Coal (RE<C) project, which was launched “to develop renewable energy sources that would generate electricity more cheaply than coal-fired power plants do.” In a recent article by two Google engineers who worked on this initiative, they write that RE<C was “Google’s boldest energy move,” and the company committed “significant resources” to launching it in 2007, but:

By 2011, however, it was clear that RE<C would not be able to deliver a technology that could compete economically with coal, and Google officially ended the initiative and shut down the related internal R&D projects.

The engineers also tacitly confess to being hoodwinked by the type of rhetoric debunked above:

At the start of RE<C, we had shared the attitude of many stalwart environmentalists: We felt that with steady improvements to today’s renewable energy technologies, our society could stave off catastrophic climate change. We now know that to be a false hope—but that doesn’t mean the planet is doomed.

The engineers still believe that global warming may “take a terrible toll on civilization” but have concluded that “trying to combat climate change exclusively with today’s renewable energy technologies simply won’t work.” In other words, wind and solar are hopelessly inadequate for this goal. Thus, Google is redirecting its efforts to developing a game-changing technology like nuclear fusion.

But What About Germany?

Green energy supporters often point to Germany as proof that solar can economically generate large amounts of electricity. For example, Amit Ronen, director of George Washington University’s Solar Institute, affirms, “The German experience shows that with motivated leaders and the right policies, even a country with relatively poor solar resources and a large industrial base can reliably and affordably integrate high levels of solar energy into their electricity mix.”

Likewise, the Richard Dawkins Foundation has published a headline declaring that “Germany Now Produces Half Of Its Energy Using Solar” (Hat tip: Robert Wilson). Beneath this headline is a meme that says “I F#I&ING LOVE Science,” and beneath that is the disclosure that Germany does not produce half of its energy from solar. Instead, Germany did this on a certain day at a certain time when the country’s electricity needs were low because of a public holiday.

In reality, only 4.5% of Germany’s electricity came from solar in 2013. This single-digit contribution along with another 7.9% from wind has come at an enormous cost. In the words of a 2014 New York Times article on Germany’s clean-energy programs, the nation’s consumer energy prices “have nearly doubled in the past decade, including taxes and subsidies for clean energy projects that now account for roughly half of households’ energy bills.”

More specifically, data from the International Energy Agency shows that the average consumer cost for a megawatthour of electricity in Germany during 2011 was $351.955 or three times the U.S. cost of $117.837. Unsurprisingly, the same Times article reports “there is growing concern among leaders in Berlin that they may be stretching the limits of what citizens are willing to bear.”

The Human Toll

In October 2014, Bloomberg News published an article claiming that “solar will be the world’s biggest single source of electricity by 2050, according to a recent estimate by the International Energy Agency.”

In truth, IEA said no such thing. Instead, the IEA Secretariat estimated that solar could be world’s biggest source of electricity if governments subsidized and mandated it more aggressively. IEA’s press release stresses that this estimate does “not represent a forecast.”

An actual government forecast for solar energy is presented in EIA’s latest International Energy Outlook. According to this, under current laws and regulations, solar will supply only 1.2% of the world’s electricity in 2040, as compared to 36% for coal, 24% for natural gas, 16% for hydroelectric, and 14% for nuclear.

Those figures are based on the assumption that governments will keep propping up solar and holding back fossil fuels. These actions are not without costs, because every extra dollar that is used to build a solar panel rather than a more cost-effective option is a dollar that cannot be used for food, shelter, clothing, healthcare, or any other purpose.

That may not have much of an impact on those who have money to spare, but the global median household wealth is only $3,650, and 1.2 billion people live on less than $1.25/day. For these individuals, affordable energy can mean the difference between prosperity and poverty, or life and death. As explained in the textbook Introduction to Air Pollution Science, “The availability of affordable electric power is essential for public health and economic prosperity.”

The economics of energy greatly affect almost every material element of modern human life, from the costs of food and internet access to wage levels and unemployment. Hence, it behooves every thinking person to critically weigh the pros and cons of different energy technologies and the government policies that affect them.

All too often, journalists, pundits, and educators emphasize the environmental benefits of renewable energy while ignoring or distorting the downsides of these technologies. That may enrich green energy investors and gratify the feelings of environmentalists, but it is a disservice to the vast majority of people whose lives are directly impacted by the real-world consequences of these matters.