New Study Evaluates How Unpredictability Affects the True Cost of Solar

TUCSON, Ariz. – Sept. 16, 2016 – Clean energy has been a hot topic on the campaign trail, and recent research by Eller College economists, published in the University of Chicago’s Journal of Political Economy, one of the foremost research publications in the field of economics, offers some important news for that debate. What many think of as a major problem — the unpredictability of sunny weather — is actually a minor factor in the true cost of widespread solar adoption. The study finds that the biggest expenses of adding solar to the U.S. grid are simply the costs of installation. In contrast, the cost impact of unpredictability is relatively small.

Central to the study by the College's Gautam Gowrisankaran and Stanley Reynolds, working with UA-PhD Mario Samano, now of the HEC Montreal Business School, is the concept of true cost or “social cost,” which quantifies direct costs plus the costs from effects without an explicit market price. In this case, the true costs of solar energy differ from direct costs because of two factors: First, potential cost increases due to the fact that solar electricity is only produced when the sun is shining (which could lead to more electricity outages or require additional preventive measures to avoid outages); and second, potential cost reductions since solar energy reduces carbon dioxide pollution compared to electricity generated from fossil fuels.

Based on 2011–2012 industry data and local data from 58 sites in the Tucson area, their analysis showed that if solar were scaled up to generate 20 percent of needed electricity at 2011 prices, that change would result in additional true costs of $138.40 per megawatt hour (MWh). This amount exceeds the additional direct costs of $114.90 per MWh, which reflects the cost disadvantage of energy generation from solar panels relative to fossil fuel generation. Thus, overall, the fact that solar energy is not producing on demand adds $23.50 to its true cost. These figures do not account for the benefits that solar energy brings from lower carbon dioxide pollution.

Interestingly, the study found that the unpredictability of intermittent sunshine accounted for a mere $6.10 of solar's additional true costs. The ability to perfectly dispatch stored power on demand would be a much bigger boon, dropping the social cost by $46 per MWh. However, it's simply the cost of purchasing and installing solar panels that accounted for the vast bulk of solar's high expense. The good news is that the $4.41/watt cost has been dropping rapidly since the 2011-2012 time frame of the study's data collection.

Any serious look at the costs and benefits of solar power has to also quantify the positive impact that solar energy can have on lowering carbon dioxide pollution. Here, the authors found that the average costs of solar installs would have to drop below $1.52 per watt for adoption (again, at 20 percent penetration) to lower true costs, using the EPA’s estimate of the social costs of carbon dioxide pollution. Many experts predict that the costs of solar energy will drop below this point in the near future, implying that the benefits of reduced carbon dioxide emissions will eventually move the needle on large-scale solar into the green of social good.

This study's specific findings were for just one metropolitan area. However, a major contribution of the investigators is their development of a methodology to analyze the social costs of large-scale solar adoption in different localities. This model will allow future researchers, utilities, and policymakers to evaluate where and when solar capacity should be installed. Along those lines, the authors are currently collaborating with researchers at the University of Oulu in Finland to evaluate the true costs of renewable energy in Finland.