Some recent announcements from Southern California Edison (SCE) appear to warrant more than a little head scratching. SCE recently announced contracts for the purchase of energy from two different sets of sources. On January 31, 2011, SCE filed the contracts it had announced in November for 239 MW (567 GWh/year) of solar PV projects resulting from its Renewable Standard Contract (RSC) program. The 20 projects are all between 4.7 and 20 MW, are for 20 year terms, are scheduled to come on line between April 2013 and April 2014 and are all priced below the 2009 Market Price Referent (MPR) ($108.98 for contracts starting in 2013 and $112.86/MWh for contracts starting in 2014). This would certainly appear to support assertions that PV prices are coming down dramatically and could soon be competitive without massive subsidies.
Also in January, SCE announced that it had executed seven contracts totaling 831 MW for solar PV resources between 20 and 325 MW each, coming on line from 2103 through 2016. These contracts are all priced ABOVE the very same MPRs that the smaller RSC contracts are below. How could it be that smaller projects using the same technology are less costly on a per unit basis than larger projects? I’ve no idea, and not being privy to the confidential pricing terms of the contracts, I can only guess.
The first issue is one of scale – PV installations in the multi-MW size range all pretty much use the same panels, inverters, transformers and other equipment. A larger project that interconnects at transmission voltage (115-230 kV) will require an extra step of transformation and more costly interconnection facilities than a smaller project that interconnects at distribution voltage (12-33 kV). Review of SCE’s filing of the RSC projects does show that they are almost all interconnected at distribution voltage. Since distribution facilities cannot handle anything much larger than 20 MW (if that), larger installations would have a “dis-economy” of scale based on interconnection voltage.
Another issue relates to parcel size and permitting. At roughly 10 acres per MW, a 200 MW project requires a huge tract of land – over three square miles! Such a project is likely to get much more attention in the permitting process than a 10 MW project that “only” needs about 100 acres. It is also more likely to have a significant environmental impact and require both more complex permitting and greater mitigation costs. Here again size is a dis-economy.
Then there is the cost of capital. A 200 MW project will cost upwards of a billion dollars. Raising that much capital probably incurs a higher cost and may also require a higher percentage of equity to secure debt financing. Both would tend to increase the unit cost of the project compared to smaller projects.
Then there is the PPA negotiation process. SCE developed the RSC (and the CPUC approved the related Renewable Auction Mechanism, aka RAM) as standardized contract with limited room for negotiating terms and conditions. Bidders are required to bid on price alone head-to-head against other potential projects for a contract. They are likely to offer their lowest and best price into the solicitation. Large RPS contracts, on the other hand, often require months of negotiation and in many cases go through upward pricing adjustments before they come to fruition. How much this adds to the final price is hard to say.
The conclusion drawn from these interesting submissions is that an increased reliance on distributed PV generation – whether on rooftops, vacant lots, or surplus agricultural land – may not prove to be more costly than the huge projects built in the middle of nowhere. Of course, the smaller projects do not require the massive transmission projects needed to export power from the middle of nowhere. That means less utility ratebase – often receiving incentive rates of return – available to benefit IOU shareholders, the very same IOUs that are negotiating PPAs with the massive projects. Interesting coincidence.