Solar energy Modularity

Fuel Costs

A frequently cited attribute of renewable is that they have no fuel costs. As a result, there is no uncertainty associated with future fuel prices. This research estimates the value of eliminating fuel price uncertainty by evaluating what it would have cost to enter into a long-term, fixed price fuel contract such as a natural gas contract.

This transaction has a direct cost and an indirect cost.

The direct cost is the present value cost of the fuel contract with the discount rate being the firm’s debt rate. The indirect cost is the cost associated with changes in the firm’s capital structure because such a contract is comparable to taking out a loan and has characteristics that are similar to debt financing.

Environmental costs

Renewable energy technologies tend to have minimal costs associated with environmental legislation. This results in a benefit of renewable relative to fossil-based plants. Environmental costs incurred by a fossil-based plant owner fall into two categories. First, there is the added cost of building the fossil-based plant to satisfy current environmental standards. Second, there are the potential costs that the fossil-based plant owner might incur in the future due to environmental standards that have not yet been established. While the added cost to satisfy current standards is typically included in the initial capital cost of the fossil-based plant, potential future costs are not.

This research suggests how to calculate these potential costs, and thus the relative benefit associated with renewable.

Modularity

In addition to having short lead-times, a number of renewable technologies provide plant owners with added value because they are modular and have location flexibility. The value of a short lead-time when combined with modularity and location flexibility can be high when the technologies are used to defer long lead-time GC system investments.

Availability

Modular plants are attractive from an availability perspective. First, modular plants can begin operation as each segment of the total plant is completed. Thus, modular plants produce revenue earlier than non-modular plants. Second, the availability of a modular plant is more certain than non-modular plants if equipment failures are independently distributed. This is because a failure in a modular plant only affects a portion of the plant while a failure in a non-modular plant affects the entire plant.

Initial Capital Costs

Modular plants are attractive from an initial capital cost perspective. First, fewer capital

resources are tied up for a shorter period of time in the plant as it is under construction. This reduces the possibility that the firm building the plant will get into financial difficulty and may result in a lower rate of return required by investors. Second, modular plants have off-ramps so that stopping a project is not a total loss.

Investment Reversibility

Investment reversibility is the degree to which a completed investment is reversible. A reversible plant will have a high salvage value should the plant owner need to remove the plant for some reason (e.g., if the plant’s value becomes low in the particular application). Modular plants are likely to be more reversible than non-modular plants because they can be moved to areas of higher value or used in other applications.

EXAMPLES

Examples are used to illustrate how to apply the methods listed above; the more detailed

examples are as follows.`+++++++++

Municipal Utility Invests in Wind

This example compares a municipal utility’s decision to invest in a wind plant versus a natural gas plant. The wind investment results in a reduction in fuel price uncertainty, a reduction in environmental cost uncertainty, and enables the utility to respond to demand uncertainty using the wind plant’s modularity and short lead-time. The example demonstrates that the inclusion of these attributes can make the wind plant an economically attractive investment.

Utility Extends Grid Using PV

This example describes a utility’s use of customer-owned PV to expand its grid to non-grid-connected areas when there is uncertainty about whether there will be sufficient demand to justify an expansion. The modularity of PV enables the utility to change a loss situation with an immediate grid extension to a profitable opportunity.

Utility Delays GC Expansion Using Distributed PV

This example illustrates how a utility can respond to demand uncertainty on the GC system level using distributed PV generation. It demonstrates how the PV can be combined with a system upgrade to be economically attractive even when PV costs alone are excessive.

Renewable Aggregator Invests in Wind

This example demonstrates how a renewable aggregator can use an investment in wind plants in combination with other generation to satisfy the terms of a power delivery contract. The aggregator can benefit from the project off-ramps associated with wind plants.

CONCLUSIONS AND FUTURE WORK

The general conclusion of this research is that renewable, particularly the modular technologies such as PV and wind, can provide decision-makers with physical risk-management investments.

The specific contributions of this research are that it:

Provides an overview of project evaluation methods as background information;
Describes how renewable can be used to manage known risks faced by various types of plant owners in the electric supply industry;

Develops methods to calculate the risk-mitigating value of the various attributes; and applies the methods using simple examples.

There are several aspects of future work that can be pursued. First is to apply the methods to actual case studies where decision-makers are contemplating an investment and a renewable technology may be a good alternative. Second is to further develop the methods presented in this report with an emphasis on more effectively incorporating risk attitude into the analysis.

Third is to develop software that enables a wider audience to use the methods developed in this research.