Evaluating New Water Projects In California

The Sacramento Bee ran an infographic I liked showing the cost and benefits of proposed water infrastructure projects in California. I reposted it below. These estimates appear to be quite rough, but they give a useful indication of the value of different projects. I did some simple division to make the bar chart below comparing the costs of the various projects. The bar chart is made by dividing the cost estimate ($) by the increased water supply in dry years (acre-ft/year). It appears clear that if our goal is increased water supply in drought years, Shasta Dam raise and Sites Reservoir are the most cost-effective options. The other projects appear to be much more expensive drought mitigation projects. For water supply in average rain years, the San Luis Dam raise looks much more attractive. Having said that, San Luis Dam raise should not be sold as a drought supply measure. Los Vaqueros dam raise and Temperance Flat Dam aren't worth doing at all.

Water Should Have a Price

The California drought has been taking over the news recently, and it seems to be a topic of conversation everywhere I go.  People already love to talk about the weather.  Now they get to include novel terms like mega-drought, water seizure, and ridiculously resilient ridge. (The water seizure appears to be a false alarm).  It is clear that collectively we want more water than we have, and that many trade-offs will have to be made.

In my view, it would be easier to evaluate the various trade-offs being discussed in water policy if water was priced more transparently.  For example, this article mentions that Westlands Water District recently offered to buy water from Oakdale Irrigation District for $400/acre-ft of water.  Last spring, Westlands offered $100/acre-ft.  For comparison, water from ocean desalination plants currently costs roughly $2,000/acre-ft.  Westlands is the largest agricultural water district in the US, and produces iconic California produce like almonds and pistachios.  The price numbers help illustrate the challenges Westlands faces.  Apparently farmers in Westlands can afford to buy water at a price four times what they paid a year ago.  Would they still be able to produce if prices quadruple again?  I'm not sure, but I personally would be willing to pay a bit more for tasty almonds if the price of water increases.  Under that logic, the drought seems to be painful but not catastrophic for the long-term future of California agriculture.

The need for water prices is also apparent when looking at water conservation and recycling.  While some consumers are facing increasing costs for water, others don't even know their own usage.  In Sacramento, only about 25% of homes have a water meter.  Residents without meters pay a flat rate, and increased water consumption is essentially free.  The reason for the limited metering?  The city doesn't want to pay for meters.  As a result, governments have ask people to conserve based on the honor system.

Prices are not a panacea.  Prices miss all kinds of market externalities.  They also can fluctuate widely in markets, like water, which are relatively illiquid.  Still, when attempting to make trade-offs and conserve water, prices are a good place to start.

Distributed Solar is the Real Threat - Trends

This is part 5 of a series on disruption of electric utilities.

Disruption of Electric Utilities
1.  Background on Utilities
2.  Why Utilities have Avoided Disruption Thus Far – Reliability
3.  Why Utilities have Avoided Disruption Thus Far – Financial Metrics
4.  Community Choice Aggregation is a Red Herring Disruptor
5.  Distributed Solar is the Real Threat - Trends
6.  Distributed Solar is the Real Threat - The Difficult Position of Utilities
7.  A Survival Strategy for Utilities

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While CCA is not a true disruptive threat to utilities, I will argue that distributed solar is.  Solar industry skeptics may argue that solar is propped up by government subsidies and therefore not a sustainable threat to utilities in the long-term. In reality, however, unsubsidized distributed solar is already cost effective for many consumers looking to reduce their utility bills.  While utility rate structures can change, regulators are unlikely to give utilities carte blanche to eliminate solar.  For example, one can imagine a utility promoting a new structure in which consumers pay a large fixed charge for utility interconnection, while the price of electricity consumption is near zero.  Such a rate would negate the benefits of solar, but would infuriate consumers who have already invested in solar as well as energy efficiency advocates.  State utility commissions, which must approve utility rates, will not allow this to happen.  Utilities are in a tough spot, and it is useful to see how we have gotten to this place.

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As the cost of PV solar power has decreased, solar power from solar leasing companies has become a low end disruption relative to electric utilities.  Solar leasing companies are firms that do not manufacture solar panels, but rather purchase panels and install and lease the panels to consumers.  In the past 5 years, the price of photovoltaic solar panels has plummeted due to competition of Chinese solar panel manufacturers, and leasing companies are now able to offer solar panels to consumers at rates below the marginal cost of retail electricity.

The chart "Solar vs. Utility Costs in California" shows how consumer costs for solar have changed over time. The unsubsidized installation cost of solar is measured in dollars per watt on the left axis.  However, when customers lease solar, they do not pay this value upfront but rather pay a monthly bill for the electricity they receive.  This equivalent $/kWh paid for monthly electricity is shown on the right axis.  Years 2007-2013 of solar cost data are based on historical data from the state of California.  As solar prices have declined, more and more consumers are able to lease solar panels and pay for solar electricity at a lower rate than the marginal rate for electricity.

Solar vs. Utility Costs in California

Sources and Assumptions:

• Historic residential install cost of solar – Based on California state database (CSV, accessed 4/11/2013) of all completed residential solar installations in California.  Install cost calculated by dividing Total Cost ($) by PTC Rated Capacity (kW).  The cost figure includes parts, labor, permitting fees, overhead, and installer profit, but does not include tax credits.
• Implied solar LCOE – Takes as input the installed solar cost from left axis and converts to a levelized cost of energy (LCOE) using the following assumptions: 20 year system life, 16.6% capacity factor, and 5% discount rate.  16.6% capacity factor comes from NREL PVWatts calculator assuming Fresno, CA solar insolation, fixed tilt panels, and 77% DC-AC derate factor.  Accessed 4/20/2013.
• Residential max marginal retail electricity price – PG&E Electric Schedule E-7, Residential Time-Of-Use Service, summer on-peak, tier 5 rate.  Accessed 4/20/2013.
• Residential average retail electricity price – EIA average residential retail rate, California.  (PDF File, accessed 4/20/2013)

While solar in 2013 remains above the average price paid for residential electricity in California, the marginal price is the relevant metric consumers use to calculate the savings from solar.  Marginal costs vary based on a consumer’s local utility, the consumer’s specific tariff, the consumer’s monthly usage, and the time of day.  For example, many tariffs charge for electricity based on time-of-use rates, where the rate of electricity is higher during the day and lower at night, in order to encourage a reduction in peak time usage.  In addition, many tariffs are inclining block rates in which the marginal rate increases based on higher monthly usage.  Inclining block rates encourage conservation and keep rates low for low income consumers using minimal electricity.  When a residential customer on a time of use rate installs solar power, the avoided cost of electricity is the higher daytime marginal rate.

The "Solar vs. Utility Costs" chart shows that the highest marginal electricity rate faced by consumers is $0.531/kWh by high consuming customers on PG&Es E-7 time of use rate.  In reality, few customers regularly face the $0.531/kWh marginal rate, but many customers regularly pay marginal rates in the $0.25-0.35/kWh range.  Therefore, there are many parallel horizontal lines on the chart which represent the various marginal rates of electricity that different consumers pay.  Even as solar subsidies expire, the unsubsidized cost of solar will continue to remain below marginal electricity rates for numerous consumers.

As customer bills increase and solar panel installation costs decrease, the market size increases for residential customers that can save money by leasing solar panels.  The "Residential Solar..." chart below shows the increase in residential solar panel installations that has occurred in the past decade as more and more consumers find solar power to be cheaper than their marginal electricity rate.  In 2012, approximately 75% of the solar power installed in California was done by third-party companies that leased solar panels as opposed to consumers who bought the panels outright.  Residential solar in growing quickly, and is unlikely to stop anytime soon.

Residential Solar Installed Market Size in the United States

Source: Greentech Media

San Onofre Nuclear Power Plant Shut Down

San Onofre Nuclear Generating Station

Source: NRC

Southern California Edison announced it will permanently shut down the San Onofre Nuclear Power Plant in California.  The plant has been closed since early 2012 due to a leak, which upon further investigation revealed significant maintenance problems.  San Onofre, located on the coast in Pendleton, California between Los Angeles and San Diego, joins four other nuclear power plants in California that have been shut down over the years.

• San Onofre; Pendleton, CA (San Diego County); closed 2012
• Rancho Seco; Herald, CA (Sacramento County); closed 1989
• Humboldt Bay; Eureka, CA (Humboldt County); closed 1983
• Santa Susana Sodium Reactor Experiment; Simi Valley, CA (Ventura County); closed 1964
• Vallecitos Nuclear Station; Pleasanton, CA (Alameda County); closed 1963

The only remaining nuclear power plant in California is PG&E's Diablo Canyon, located in Avila Beach, CA (San Luis Obispo County). 

The downside of the closure of San Onofre is that Southern Californians will consume higher cost, higher carbon electricity in the immediate future.  Nuclear does not count as renewable under California's Renewable Portfolio Standard (RPS).  Therefore, with California's 2020 RPS target of 33% renewable power, the utility owners of San Onofre will replace the output of San Onofre with 67% fossil fuel generation.  

My own position is that despite the benefits nuclear power has provided to California, it was never a good idea in the first place to install expensive power plants without a viable long-term fuel storage or re-processing plan.  In addition, California lost valuable natural coast to the enormous plants, and as Japan has shown, nuclear power in seismically active regions is a risky proposition.  

The closure of San Onofre will undoubtedly lead to more pressure from activists regarding the license renewal of Diablo Canyon.  The licenses for Diablo Canyon's two nuclear reactors are currently set to expire in 2024 and 2025, but PG&E has filed an application to extend the licenses for an additional 20 years.  The Nuclear Regulatory Commission has set up a website specifically for members of the public to learn how they can get involved with the license renewal decision.

A Better Biofuel Law

The U.S. District Court ruled yesterday that California’s low carbon fuel rules must be halted due to violation of the commerce clause in the U.S. Constitution.   I agree the low carbon fuel rules should end, but with the rationale that they are a bad policy choice for carbon emission reduction.

The California Air Resources Board (CARB), which was given authority to regulate greenhouse gas emissions in California under AB 32, designed the Low Carbon Fuel Standard.  The standard is “fuel neutral” meaning that it includes in its ratings gasoline, natural gas, hydrogen, and biofuels such as ethanol and biodiesel.

CARB intended to rate fuels based on a carbon intensity score, which includes both carbon content of the fuel itself and also the emissions generated in the transportation of the fuel to California on a lifecycle basis.  These ratings would then be used to support low carbon fuels, with the current commercially viable option being biofuels.  The CARB lifecycle score would penalize biofuels from other states, such as in the Midwest, interested in exporting their biofuels for sale in California.  While a carbon intensity metric may make sense in the context of carbon emissions, the courts ruled that California is infringing on the federal government’s rights to regulate interstate commerce.

This debate is politically salient for California and Midwestern biofuel producers, but it overshadows the more important debate of whether we should be supporting biofuels at all.  The appeal of biofuels as a climate solution is that they could theoretically be carbon neutral – plants absorb carbon dioxide and use it to grow and then release that same carbon when burned.  However, commercial biofuels production in the United States includes additional carbon emissions from fertilizer, harvesting, and transportation.  In addition, biofuel carbon savings are uncertain due to indirect land-use changes.  Indirect land-use change refers to the unintended impact on carbon emissions of growing more crops for biofuels.

Biofuel policy can unintentionally encourage deforestation

As an example, consider the California low carbon fuel law.  When Californians increase demand for biofuels, the price of ethanol in the US increases.  Ethanol demand increases the global price of corn.  A higher corn price then induces a farmer in rural India to hire workers to clear more land and cultivate more corn this year.  In this example, the low carbon fuel laws stimulate economic development but lead to additional land clearing which causes further carbon emissions.  The carbon emissions from land use changes negate some of the savings from Californians who switch from gasoline to ethanol.

The interconnected global agriculture markets are complex, and it is not immediately obvious whether the simple scenario I described is significant from a carbon emissions standpoint.  Do land use changes negate 1% of the savings or all of them?  The topic requires academic research, such as that by UC Berkeley professor, Dr. Richard J. Plevin.  Dr. Plevin is an expert in land-use change modeling, and joined academia after working for 20 years as a software engineer.  According to his research, lifecycle modeling with indirect land-use changes involves such uncertainty that we cannot determine whether switching to biofuels from gasoline saves any carbon emissions at all.

Dr. Plevin is not an environmental extremist; along with the late Dr. Alex Farrell, he supported the original California Low Carbon Fuel Standard in 2007.  Since 2007, he has spent his time researching the most detailed information available on indirect land-use changes from biofuels.  He views his conclusion as an unfortunate result.  Disappointing though it may be, the research result is significant and should put immediate brakes on the Low Carbon Fuel Standard in California, as well as other biofuel legislation nationwide.

Indirect land-use changes are not a factor when considering non-agricultural biofuels, such as the algal fuels grown in tanks.  I have yet to see any evidence that algal fuels can be produced commercially, but from a carbon policy perspective they make more sense to support than biofuels from products requiring agricultural land use.  California should therefore create a law that distinguishes not on distance traveled, but on method of production, requiring that all low carbon fuels come from non-agricultural feedstock.  Such a law would pass the tests of both the commerce clause and sensible carbon policy.

Biofuels grown in tanks are not currently economical but represent better biofuel policy