How & Why Utilities Make Solar Look Expensive

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Originally posted at

In February, I visited the folks at Sustainable Tucson in Arizona who are puzzling over their monopoly electricity provider’s attitude toward solar energy. Tucson Electric Power acquires just 4% of its electricity from renewable resources (and over 70% from coal), despite being at the heart of the best sunshine in the country. The red arrow shows Tucson on this map of the nation’s solar resource:

us solar resource

Despite a world-class solar resource, the Tucson utility intends to install far more power plants using natural gas than solar over the next 15 years. Might it be due to their inflated cost of solar?

The utility’s 2014 resource plan suggests that it hasn’t grasped (or refuses to seize) the opportunity. Although it forecasts growth in renewable energy by 600 megawatts (MW) in the next 15 years, it’s only half the capacity increase it intends for natural gas (1200 MW).

It all comes down to numbers.

In TEP’s integrated resource plan for 2014, the utility estimates the cost of new natural gas generation between $88 and $119 per megawatt-hour (or 8.8 to 11.9 cents per kilowatt-hour, the unit of measure for residential consumption). For solar generation, it suggests, the cost is over 16 cents per kilowatt-hour (kWh).

But for a sunshine resource, TEP’s calculation is a bit shady.

For starters, it includes a component for “system integration and backup costs” of 5.2 cents per kWh. This means that TEP implies it must build or buy backup generation for any moment that the sun is not shining at maximum capacity.

Here are several reasons that this line item is—to put it mildly—problematic:

  • Traditional power plants are also unavailable at times––these are “unplanned outages” in utility-speak––but the utility doesn’t build two power plants for every one it uses. It has a “reserve margin”––power plants available on standby in the event of a major outage. The reserve margin for the regional grid (the Western Electricity Coordinating Council) is over 33% of the system peak demand. In other words, there are loads of power plants already built and available for backup. [note: TEP suggests that its transmission line connection to other utilities are constrained, and that it operates more like an island. It did not disclose what its own backup/reserve margins are.]
  • Utility systems are already built to handle a large amount of minute-to-minute variability. If intermittent clouds over solar could bring down the grid, then so could the cycling of refrigerators or air conditioners.
  • Utility systems are already built to handle variability from day to day, but much of solar’s variability is predictable. After all, we know when the sun rises and sets.
  • Solar’s output tends to follow system peak usage––its best output is on hot, sunny, summer afternoons when the electricity system is near its peak utilization. Half of the output from a solar array with a tracker (e.g. it follows the sun from east to west) comes during summer peak load on TEP’s system.
  • Grid engineers agree that there may be a moment in time when grid integration costs are non-zero for solar, but it will require unprecedented amounts of solar on the grid (upward of 15% or more of total energy supply). Even at this level, simple solutions like geographic dispersion of solar arrays can cut integration and backup costs by 100-fold.

In other words, TEP’s integration and backup costs have inflated the cost of solar by up to 45%.

Cutting that single line out, we have a remarkably different picture. Now solar at 11.1¢ per kWh is competitive with the proposed natural gas plants at 8.8-11.9¢. Keep in mind that almost all of the solar costs are upfront and that fuel costs are a guaranteed zero, whereas any volatility in natural gas prices will be passed through to ratepayers. See below for a retrospective on natural gas price volatility (with Energy Information Administration price forecasts) and solar price volatility. The irony is that TEP is completely upfront about a forecast doubling of gas prices by the end of the 15-year planning horizon (p295), but since those costs pass through to ratepayers….

Natural gas price volatility

natural gas price volatility

Solar price volatility

solar price volatility

The solar cost hijinks don’t stop with backup and integration costs.

A price of 11.1¢ seems more reasonable, but compare it to the System Advisor Model from the National Renewable Energy Laboratory. This software package models the solar resource and cost for the entire country, and its default values incorporate years of data tracking on solar costs. Not including any incentives, and with a capital cost that’s 15% higher (per Watt) than the $1.99 used by TEP, the model spits out a levelized cost for solar of 7¢ per kilowatt-hour. Throw in the federal 30% tax incentive and the model suggests that the breakeven price for a 1 megawatt solar array in Tucson is 4.5¢ per kilowatt-hour, 60% lower than TEP’s figure!

But don’t rely on cost modeling. Five years ago, Pima County signed a power purchase agreement for a solar array at the Roger Road Wastewater Reclamation Facility for just under 10¢ per kWh. It has another contract for the 5 MW Prairie Fire Solar Plant to buy electricity for 9.3¢ per kWh. In 2014, Chief Contracts & Procurement Manager Terry Finefrock says the county signed another purchase agreement for solar at Green Valley for 5.7¢ per kWh (which compares to the the 4.5¢ figure from the model above plus a small margin). In other words, Tucson residents and businesses can already buy solar for one-third the cost the utility suggests in its official resource plan!

The following chart illustrates the remarkable gap between the utility’s solar cost estimate and the real world cost.

tucson TEP solar cost v reality

By now, it should be clear how utilities make solar look expensive. They obfuscate, they hid behind “grid stability” and “variability,” they exaggerate.

But why?

Like many incumbent monopolies, TEP sees its business model about to founder on the rocks of distributed power. Conservation and energy efficiency are reducing revenues. Distributed solar is giving customers unprecedented opportunity to diversify their energy supply, undercutting sales and demand for new power plants (the latter is the revenue and profit lifeline for shareholder-owned utilities). The impending fiscal crisis is the result of a utility regulatory system that pays TEP to play the wrong game. TEP can’t maintain profits for its shareholders if its customers can slip from the monopoly grasp.

But rather than explore business models compatible with low-cost solar, TEP implies that solar is too costly and doubles down on last century’s business model. Its resource plan will commit billions of dollars to new fossil fuel infrastructure that will take decades for Tucson customers to repay. It will require approximately 1.7 billion gallons of water per year for new natural gas power production. And finally, it will undermine the city’s hope to reach net zero greenhouse gas emissions by 2040 because the new power plants will be operated until 2070 or beyond.

New since I originally wrote this: TEP is proposing to reduce compensation for customer-owned solar.

There’s almost no place in America where solar is cheaper than in Tucson, but its electric utility seems poised to deliberately ignore the opportunity for clean, local, and cost-effective energy production. And we know why.

This article originally posted at For timely updates, follow John Farrell on Twitter or get the Democratic Energy weekly update.

Assumptions for System Advisor Model

  • 4 kW DC system, with 1st-year output of 7,078 kWh
  • $3.29/Watt installed cost
  • $20/kW-yr maintenance costs
  • 0.5% annual panel degradation
  • 70% debt at 5% for 10 years
  • 2.5% inflation
  • 2.5% real discount rate (5% nominal)
  • Other settings are the system defaults

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John Farrell

John directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development.   Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (, and articles are regularly syndicated on Grist and Renewable Energy World.   John Farrell can also be found on Twitter @johnffarrell, or at

John Farrell has 518 posts and counting. See all posts by John Farrell

27 thoughts on “How & Why Utilities Make Solar Look Expensive

  • Over a 30 year time period that solar system will generate 30×7000 kwh = 210,000kwh. It will cost $13,000. That comes in at 6 cents kwh. All the other numbers are variables that each person will work out differently. borrowing costs, inflation rates, maintenance cost, etc. The only real number is 6 cents. Of course next year those panels will go in at $3 watt, in 3years $2 watt (like Germany and Australia are now!) then the basic number will be 4cents kwh. No matter how one fiddles with extra cost in the formula it will beat the grid by a mile.

    • The cost of solar is already low and falling rapidly, 1/200 th of the price per kWh in 1975, the cost of construction for natural gas power is low, but fueling costs, will soon be much higher than solar. So put in solar, build gas plants, when there’s cloud cover use gas, this saves a fortune in fueling costs for gas, which is the main cost, so electricity companies stop whining about intermittency and plan, for solar costs to come down, at an even faster rate, than historically. In Australia, we have achieved 40% efficiency, with 1/700 th of the surface area of photoelectric material, using concentrated cooled, part reflected, to secondary low frequency cell technology, backed by the White House, Obama’s renewables fund, is already in profit. Australia 75% deserts, less than 10% of the population of the US, continent sized country, 1/4 of our dessert, could supply 2,500 times as much power as we need, so we could become a liquid hydrogen energy exporting Ultra power. 1% of the world’s deserts could supply all the energy needed globally at the moment, 25%, 25X the current usage, equals an industrial revolution.

      • Yes, that sounds all quite realistic. What we probably need is a green site exclusively devoted to examining “the true cost of solar” in every conceivable use, from garden lights to industrial scale. “Solar Love” which is an affiliated site is wonderful, but this one single question is where fog appears “what does it really cost?” determined by competent and unbiased financial people.
        You see, we suddenly hear that some commercial scale solar array in Texas or Saudi Arabia is able to sell PV electricity at a profit for 6 cents per kwh. Now tell me exactly the figures of the cost of installation per watt. Once that number is known, the fog of distortion and persuasion and plain bad arithmetic can be cleared up.

        • For exact coatings, consult university of NSW Australia, re 40% efficiency reflected secondary photovoltaic solar panels and Ray Gen Resources re concentrated solar. Actually my city’s (Newcastle,) biggest industry is the university, that taught the thin film solar guy his PHD in solar physics, he went home to China, became a billionaire, hired his own professor to run his plants. For a simple video, see YouTube, Super Solar Cells, 15/3/15, or in US calendar 3/15/15, Catalyst. The Chinese have already started to invest in Ray Gen Resources, in terms of industrial revolution, peak decades 2nd IR 1915-25

        • Second section of reply, start below, won’t let me edit, peak decade of 2nd IR 1915-25, 3rd IR 2015-25, remember the 2nd IR. 10 times as many cars, electric light, alternating current, in a single decade, from Faraday’s and Maxwell’s work, to Ford, Edison, Tesla. Now Larry Elisson’s Tesla’s work on electric cars, now preparing to build a 5 billion dollar battery plant, to back his vehicle and home battery sales. Soon mass liquid hydrogen production, with spare gigatons of oxygen, high rise agriculture, with more spare oxygen. Here in Australia, we could build a trillion square metres of solar power, in just 1,000 kms by 1,000 kms, enough for a trillion tons of liquid hydrogen a year.

          • Elon Musk runs Tesla. Larry Ellison runs Oracle.

          • Right you are Elon Musk, Space X etc.

  • “TEP suggests that its transmission line connection to other utilities are constrained …” How expensive is it to string new high-voltage power lines across the near-deserts of the US Southwest? But that would mean thinking big, like ERCOT in Texas, and not trying to stay an “island”. Arizona should be exporting cheap solar power by the gigawatt.

    • We do, sadly. We export more solar power than we use right now, and the imbalance will only get worse with the intransigence of APS , SRP and TEP. APS bought and paid for the current Corporation Commission, so there’s little hope in AZ right now.

      • What was the name of this politician woman who got shot in the head, a solar champion?

        • Do you mean Gabby Giffords?

          • Yes, thank you. Funny how some disrupting charismatic people end.

          • She was a Congresswoman, not a member of the state legislature, so she wouldn’t have any influence on the laws of the state of Arizona.

          • But she was very active pro-solar no? Politicians port their battles on many arenas. Wasn’t she very influential?

          • I live in Illinois, and I never heard of her before she was shot, so I’d say she was not particularly influential. I think she was in her first term in Congress.

  • The phrase that comes to mind as I read this story is – They are not the sharpest cheddar in the deli case.

    Such old school thinking but the really interesting part of the story is the level of reserves.

  • Thanks, John, for this article and thanks for visiting us in Tucson a few months back.

  • Utilities don’t have managers who are au fait in renewable energy and resist change. Laziness and incompetence at work in human nature.

    Solar is obviously much cheaper than Natural Gas at 88 cents/MWh. 800 MW of Solar PV projects are being installed in Dubai at 60 cents/MWh – and the panel supplier is a US company: FIrst Solar. Similarly Brazil and India are installing Solar at 70-90 cents/MWh. Do the installation locations in these countries have higher sunshine levels (isolation) than Arizona? No. Are the grids of these companies better than the US? No. Is there less competition among suppliers? No. The prices in the US are artificially inflated, because of local players and unnecessarily complicated rules made by them to play the game. The US incentive structure for installing solar, tax equity and capital rebates, is too ornate. Should just set buyer tariffs and let the industry reduce costs to expand the market.

    You also don’t know whether you’ll really get 88 cents/MWh with Natural Gas, because you can’t predict Gas prices for 25 years – whereas with Solar PV you know what you’re getting for the long haul. Long term variability is less than 3%.

  • It sounds as if TEP should upgrade from VisiCalc to Lotus123.

  • Solar “$3.29/watt installed cost”, Germany $2.20, Australia $2.40. So solar should go down significantly. Also the climate change costs associated with fossil fuel use are ignored when utilities choose these fuels.
    Just goes to show how people will ignore the truth to preserve the crappy way things are done to make the $$ they always have.

    • Yes Bob, what you just wrote needs to be repeated again and again, until the hard of hearing get the message.

  • AZ Utilities are fighting for their economic life. They will generate whatever type of lies they deem necessary to keep renewable energy off their systems and keep their hands on their customers throats. When battery storage become economically viable ( in a couple years) they will try to prevent customers from dropping off the grid by assessing some type of grid availability charge even if the customer never uses it. Monopolies die hard. Someone will have to drive a silver stake in their heart.

  • Not certain what parameters you used but I inputed for Tucson and got a levelized cost of 7.9 cents including the 30% rebate which is included by default in the app unless you remove it from the incentives. I also reduced module cost to to $0.65 reduced the debt interest to 4% at 70% and had to increase the IRR duration from 20 years to 30 years. If I leave it default 20 years the levelized cost is $0.0826/kwhr. Increase the rate you are pushing higher.

    • Thank you for that excellent comment and footwork. That is precisely what I want to see, details, exact numbers etc. Only when these things are before the public eye without distortion can Joe Citizen see the facts.

  • John,

    Great article on a very local and current issue in AZ (among all utilities)

    Two questions:
    1. Can you elaborate more on your SAM assumptions?
    2. And did you use an 8760 time series for your calcs or did you import a higher temporal res. dataset? I ask because the integration costs will clearly be different depending on your temporal resolution (and other assumptions).

    Perhaps I’m asking: did you do a sensitivity on some of the variables that drive variability effects on integration costs?

  • I’m not sure why TEP wants to go bankrupt, but it sure seems that they’re hell-bent on doing so. If they have shareholders, they are ripe for lawsuits; if they are run by elected officials, the elected officials need to fire the board.

    In Tucson, fossil fuels just can’t compete with solar. Grid solar (distributing load from house to house) could be cheaper than solar+batteries in every home — if TEP were willing to seriously consider it.

    • It may be in the financing differences between a gas plant and solar. It may also be a bargaining maneuver to eventually get better ratepayer terms building solar.

Comments are closed.