◊ This is part of the ‘solar energy’ series of articles ◊
This article will look at the Levelized Cost of Energy, carbon pricing, some current real-world solar energy prices and a selection of tax incentives available in the U.S. and Canada. If the content gets too dry, skip to the takeaway at the bottom of the page for a summary of the findings.
There are a large number of factors that warrant consideration in the economic assessment of an energy source. Fortunately there are credible sources that have done most of the work to provide a reasonable perspective on relative energy costs and trends. I will be referencing information from the U.S. Energy Information Administration and reporting from Lazard Asset Management in their Levelized Cost of Energy Analysis – Version 12 throughout this article. I will not consider the Levelized Avoided Cost of Energy or the marginal cost of existing conventional generation since this subject is complex enough and it won’t add much value for most readers.
The levelized cost of energy (LCOE)
The energy industry has a vested interest in having access to a standard way of estimating the cost to generate electricity. This need drove the development of the approach used to determine facility costs and energy output called the levelized cost of energy. The LCOE provides a way to consistently calculate the cost of generating energy by considering the lifecycle cost divided by the total energy output of a facility. It provides a cost per unit of energy that may be used in economic assessments. The LCOE is regarded as the average minimum price at which electricity must be sold in order to break-even over the lifespan of the facility. Various reputable organizations have developed the complex methodology required to perform the analysis for the complete range of generating technologies and graciously share the results annually for public consumption. The National Renewable Energy Laboratory (NREL) provides a simplified LCOE calculator on-line should anyone want to see what the inputs are for the analysis.
LCOE is not representative of any specific jurisdiction’s market price of electricity because of the wide variation in utility structure and regulation around the world. It is most useful for showing cost trends and relativity.
Here is a summary of the 2018 energy comparison:
With an established standard approach to calculating energy costs over many years it becomes possible to see the trend of solar.
Positioning solar energy for carbon emission reduction
As the global community continues efforts to reduce carbon emission the economic position of solar energy improves. The industry needs a consensus on the cost associated with carbon production in order to quantify the carbon reduction benefits. Different jurisdictions have adopted unique carbon pricing approaches with cap & trade, carbon tariffs and tax incentives. Every approach has sparked backlash as everyone wants to enjoy the benefits of using fossil fuel but no one wants to be accountable for the impact it has on our environment and society. As long as there is no financial accountability for the impact of carbon emissions, fossil fuels will have an implementation cost advantage over renewables. Bear in mind that fossil fuel generators behave differently than solar generators and fulfill different roles on the electrical grid.
Based on data from the U.S.EIA it is possible to determine the amount of carbon dioxide generated by coal and natural gas power plants.
Table 1: Carbon dioxide created by fossil fuel sources generating electricity
| Fuel | Tons of CO2 per MWh Generated |
| Coal | 1.2 |
| Natural Gas | 0.46 |
Carbon abatement and the economic implications
The term ‘carbon abatement’ refers to the reduction of the amount of carbon dioxide produced by burning fossil fuel. There are different approaches to achieve this including carbon abatement technology (CAT) and using renewable energy. CATs are about achieving reductions through technological improvements in the use of fossil fuel whereas using renewable energy is about displacing them. We will be examining the latter approach in this article. Once a price is established for carbon emission it can be factored into the value of producing energy from a non-emitting source such as renewable energy. Internationally, carbon reduction targets are supported by countries that signed the United Nations Paris Agreement.
The price of carbon
Pricing carbon emissions is intended to capture the costs that society pays which are attributed to emissions, such as:
- damage to crops
- health care costs from breathing disorders, heat waves and droughts
- loss of property from flooding and sea level rise
The pricing can send signals to implement carbon reduction strategies. The World Bank has additional information on carbon pricing. Observed carbon pricing according to the World Bank has a wide range from under $1 US up to $127/tCO2e.
The value of carbon avoidance
Knowing the amount of carbon produced using fossil fuel and setting a carbon price we can place an economic value on avoiding it.
Generating electricity with coal produces the greatest amount of carbon. If you lived in Liechtenstein, the carbon price is $96.46 per ton. From the Carbon Avoidance chart, generating 1 MWh of energy from coal would cost $120 as a consequence. The LCOE for coal generation is $102 per MWh. In this case the penalty for creating the carbon more than doubles the generator’s cost. Using solar to generate that same 1 MWh of energy creates no carbon and avoids the economic cost of $120. Various publications use different terms to describe the principles involved, however the concept is the same. Paying a price for carbon sends economic signals for society to seek lower carbon alternatives for energy.
Examples of actual solar energy prices
It is always useful to look at some actual pricing in order to provide context for the economic analysis. According to Forbes, in July of 2019, Los Angeles Power and Water is likely to set the record for the lowest cost solar and battery storage project in the world. A 400MW capacity, 25 year contract at 1.997 cents per kWh for solar and 1.3 cents per kWh for battery sets the bar at a new low price. That pricing is below the LCOE break-even level for 2018. There is currently no other energy source available for new construction that can compete with this. I am not going to speculate on how these prices can be achieved, however it does present an interesting case study for the industry.
In Alberta the government recently signed a 20 year contract for development of 3 utility-scale solar farms. According to CBC News, a total of 94MW of capacity is planned with an average price of 4.8 cents per kWh for energy. This represents the lowest cost solar generation in Canada. Without knowing the details of the agreement it is impossible to determine whether this price creates a legitimate benchmark for other jurisdictions.
Tax incentives
Tax incentives can have a significant impact on the economic case for solar energy development. I’m not an expert in this area and given the diversity of jurisdictions it is unlikely that I’d ever be able to cover it adequately. I will highlight some of the cases for Canada and the U.S.
United States (ref. EIA)
The following is a excerpt from the EIA’s 2019 Annual Energy Outlook. The credits apply to wind and solar where specified.
Production Tax Credit (PTC):
New wind, geothermal, and closed-loop biomass plants receive 24 dollars per megawatthour ($/MWh) of generation; other PTC-eligible technologies receive $12/MWh. The PTC values are adjusted for inflation and applied during the plant’s first 10 years of service. Plants that were under construction before the end of 2016 received the full PTC. After 2016, wind continues to be eligible for the PTC but at a dollar-per-megawatthour rate that declines by 20% in 2017, 40% in 2018, 60% in 2019, and expires completely in 2020. Based on documentation released by the Internal Revenue Service (IRS, https://www.irs.gov/irb/2016-23_IRB/ar07.html), EIA assumes that wind plants have four years after beginning construction to come online and claim the PTC. As a result, wind plants entering service in 2021 will receive $19.20/MWh while those entering service in 2023 will receive $9.60/MWh (inflation-adjusted).
Investment Tax Credit (ITC):
In June 2018, the IRS issued Notice 2018-59 (https://www.irs.gov/pub/irs-drop/n-18-59.pdf), a beginning of construction guidance for the ITC. EIA assumes all solar projectsstarting construction before January 1, 2020, have four years to bring the power plant online (before January 1, 2024) to receive the full 30% ITC. Solar projects include both utility-scale solar plants—those with capacity rating of 1 megawatt (MW) or greater—and small-scale systems—those with capacity rating of less than 1 MW. Projects starting construction in 2020 have three years to enter service and receive 26% ITC, and those with a 2021 construction start year have two years to enter service and claima 22% ITC. Al l commercial and utility-scale plants with a construction start date on or after January 1, 2022, or those placed in service after December 31, 2023, receive a 10% ITC. ITC, however, expires completely for residential-owned systems starting in 2022. Results in this levelized cost report only include utility-scale solar facilities and do not include small-scale solar facilities. Both onshore and offshore wind projects are eligible to claim the ITC in lieu of the PTC. Although EIAexpects that onshore wind projects will choose the PTC, EIA assumes offshore wind projects will claim the ITC in lieu of the PTC because of the relatively higher capital costs for those projects.
A reference to these tax subsidies in the Lazard Report indicates that they will result in approximately a 10% reduction in the LCOE of solar when they qualify.
Canada
Tax incentives provide a favourable environment for solar energy growth. Canadian businesses may claim expenses for renewable energy capital costs to reduce federal tax. Please refer to CRA’s accelerated Capital Cost Allowance (CCA) terms. Solar PV systems are eligible as described in the NRCan Technical Guide and illustrated here:
Provincial level solar incentives
Here are some of the incentives which I was able to find through online searches. It is by no means complete and will change over time. Be aware that some jurisdictions require solar installations to be net metered which should be considered a disincentive for generators. I explain net metering in my Ontario Perspective article.
Alberta had the Energy Efficiency Alberta Residential and Commercial Solar Program however it has been closed. There may be municipal incentives available. You may check the following links for information.
- Banff Solar Photovoltaic Production Incentive
- Brazeau County Municipal Energy Efficiency Rebate Program
- Change Homes for Climate Solar Program
- Medicine Hat Solar Electric Rebate
- Equs Solar Incentive
British Columbia sponsors various initiatives under their Community Energy Leadership Program, however the capacity is extremely small and there are no large scale plans for the future.
Labrador, Manitoba, Newfoundland, Nunavut and Prince Edward Island do not have any solar incentives which I’m aware of.
New Brunswick doesn’t offer any solar-specific subsidies, however, homeowners can claim under the Total Home Energy Savings Program (THESP) for a rebate. A 10kW system would be eligible for approximately $2,600 in rebates.
The Northwest Territories has multiple rebate and incentive programs in place. Programs are provided by the Arctic Energy Alliance (AEA) . A 10kW solar system would qualify for a $5,000 rebate.
Nova Scotia has ongoing solar electricity programs for community groups and individuals. Funding for the program comes in part from the federal Low Carbon Economy Leadership Fund.
Ontario has no incentive programs but allows a similar tax write-off as the federal level.
Quebec offered the RénoVert Tax Credit however it closed March 31, 2019.
Saskatchewan has a significant solar rebate program that would provide $0.61/watt up to $20,000.
The Yukon offers a $5,000 subsidy for small-scale commercial or residential installations. They also have a standing offer program where investor-owned generators can sell power to the utility.
The takeaway
Too much information? What does all this mean?
The global position of solar energy is extremely favourable. The large scale installations have a lower lifecycle cost than any other form of generation supplying our grids. Rooftop residential is still the most costly form of solar to operate, however regional financial incentive programs can make them attractive investments.
In North America in 2019 there are utility-scale solar energy projects being contracted at pricing between 2 and 4.8 cents per kWh. No other new generation can compete with that pricing.
From a socioeconomic perspective solar energy is an effective means to reduce carbon emissions where fossil fuels are used to generate electricity. Quantifying the value of avoiding the carbon varies by jurisdiction. In locations which suffer from serious air quality issues solar energy has the lowest combined cost when you consider the offsetting carbon price.
Tax incentives and rebates are on the decline in North America but some areas still have programs in place. When you combine the decreasing installation cost with incentives, solar energy may be a good investment. Check your local programs and consult with reputable installers to assess your circumstances. If your area requires net metering, proceed with caution as it will take much longer (if ever) for this kind of installation to pay back costs unless there are rebates available.
Globally, solar energy is a good investment for now and the near future.
Derek
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