The Free Market in Alternative Energy

We so like letters to editors that grumble about government incentives for green designs. Typical buzz: 'Hybrids are a waste of money. They'd drop from the market without those express lane invitations'. Or how about this one? 'Wind power can't work in a free market. Take away the tax incentives and loan programs and only hippies would buy the power'. Suppose that these claims have a glimmer of truth; how is it that government support of coal gasification projects does not get the same cycnism? While we thought about his we saw the Duluth News Tribute of December 30th 2005 with the headline: "Developers of energy plant want to force Xcel's business" A few exerpts explain: "Developers of a $2 billion coal-gasification electrical generation plant proposed for the Iron Range are asking the Minnesota Public Utilities Commission to require Xcel Energy to purchase electricity from the plant... The plant would create synthetic gas from coal. The gas would be burned to make steam for steam-powered turbines that generate electricity. The plant's first power-producing unit would produce 603 megawatts".

...Excelsior Energy has secured an $800 million loan guarantee from the federal government....In exchange for allowing Xcel Energy to extend storage of spent fuel from its Prairie Island nuclear plant, state lawmakers in 2003 cut a deal making Excelsior entitled to enter into a contract with Xcel.

However, Xcel hasn't been quick to reach a power-purchase agreement with the Wayzata, Minn.-based Excelsior...Without an agreement with Xcel, Excelsior would have to find other customers.

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Back of the Envelope

603 MW equates roughly to 402 wind turbines of 1.5mW output capacity each. When the wind is blowing. We're talking about maybe three to five big wind farm projects here. Think the Western Minnesota prairie could handle that?

Lets hold off with the NPV and ROI stuff for the time being. $2billion dollars of total capital, if allocated instead to wind turbines, would be nearly $5 million per turbine install. With numbers like that, Enron could have stayed in business. Note that, in this imagined scenario, the $800 million dollar government loan would provide only 40% of the per turbine allocation. We have no clue how much, on average, one of the 1.5 MW turbines actually costs to site and install, but a 40% position would certainly reduce the financial risk of the project, what with escalating interest being a trend. And the green power might be pretty attractive to the citizens of Minnsota.

Now let's compare the coal gasification project to a solar equivalent. We'll assume each home would need a SPV system rated at 3kW. The 603 MW sum capacity would power 201,000 homes. Let's further assume that homeowners would pay for part of the capital cost of their systems and that the utility would own the remainder. In this second imaginary scenario, the utility gets to resell the unused electricity from each home. and they also are responsible for scheduled maintentance.

Divide the total $2 billion coal project budget by 201 thousand homes. That would let the utility allocate almost $10,000 to each individual home's solar system, $4,000 of which is federally backed loan. The total allocation is probably at least a third of the total installed system cost per home. That would shorten the individual homeowner's payback period considerably. To even out the comparison you'd figure in the cost of electricity that needs to be bought over the design life to make up for down time and so on. And the homeowner could also figure in some tax deductions.

Both envelopes look like some more detailed calcs would be interesting.

Per our opening statment, a larger question emerges. Why, if government incentives are acceptable for a coal gasification project, which is still an experimental technology, are not detailed cost comparisons made for a wider range of proven alternatives, including a mix of renewable and non-renewable options? And if Minnesota should act with urgency to add more generating capacity, as some have indicated, why not get rolling on the fast stuff? Wind farms need only a year from start to finish.

Just wondering.

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