ECON 636 Harvard University Cost-Benefit Analysis Worksheet

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Problem Set
Consider a hypothetical residential household in Tokyo with an average electricity consumption
level. According to Enecho, the average electricity consumption in the Kanto area is 3,833kWh
per year. Suppose that the family in question has no solar PV at the moment. They face the
average electricity rate of 26.3 yen/kWh. Suppose the price level stays the same for the next 30
years. (This is a very strong assumption. There is large uncertainty about the price in the
future.)
Consider the family’s investment in installing a rooftop solar PV system. Here is the
specification.
System size: 5kW
Capacity factor: 13.7%
Duration: 30 years
The electricity output of the solar panel drops by 0.5% (that is, half of one percent) every year.
Based on the household electricity usage, 30% of the solar panel output is used by the
household; it sells the remaining 70% back to the electric utility. The household can sell the
electricity at 17 yen/kWh for the first 10 years; and at 9.5 yen/kWh for the rest of the following
20 years.
Suppose the initial cost of solar PV equipment and installation is 280,000 yen per kW (so the
5kW system costs 5 times 28 man yen). Every 4 years (that is, in year 4, year 8, year 12, …),
there will be maintenance costs equal to 29,000 yen every time. In year 20, the “power
conditioner,” a device that controls the management of the solar system, must be replaced at
the cost of 224,000 yen.
(1) Compute the net (private) present value of investment in solar PV for this average
household. Consider three scenarios with discount rates at 2%, 3%, and 5%. For this
cost-benefit analysis, the base (reference) case is the status quo with no solar PV; the
project to be evaluated is the investment in solar PV as described above.
(2) Is the (private) net benefit positive or negative? Explain.
(3) Compute the levelized cost of electricity of solar PV under the discount rates at 2%, 3%,
and 5%.
(4) The above computations address the private benefits and costs of solar PV installations.
What about the social benefits and costs? Explain how they affect the net present value
of solar PV investment and its levelized cost.
Apply a spreadsheet application (either MS Excel or Google Sheets) to answer the questions.
Submit your spreadsheet (either the file or the url of the Google Sheet). You can add your
answers to (2) and (4) on the same spreadsheet.
Note:
A. In class, we went over a spreadsheet exercise to evaluate similar projects.
B. You do not have to consider other subsidies for solar PV installations.
C. Many households invest in solar PV and home batteries at the same time. The above
exercise disregards the battery investment.
D. The numbers assumed for this problem are based on information available on the
following sites.
a. https://www.enecho.meti.go.jp/category/saving_and_new/saiene/kaitori/fit_kakak
u.html
b. https://www.meti.go.jp/shingikai/santeii/pdf/073_01_00.pdf
c. https://evdays.tepco.co.jp/entry/2022/02/01/kurashi5
d. https://www.tainavi.com/library/4387/
Renewable Energy: Wind
Nori Tarui
(with inputs from Seth Urbanski & Tialana Mallarme)
Introduction to Wind Power
?
?
?
One of the oldest forms of
renewable energy use.
Though designs of wind turbines
can vary, the general idea is the
same in each.
Wind turns the turbine blades which
are connected to a generator,
producing electricity in the process.
Types of Wind Turbine
?
?
?
?
Horizontal Axis Wind Turbines
(HAWTs):
Most commonly used for large-scale
electricity generation.
Tall tower allows for access to
stronger more consistent winds.
More expensive to install and
maintain.
Types of Wind Turbine
?
?
?
?
?
Vertical Axis Wind Turbines
(VAWTs)
More commonly used for small scale
electricity generation.
Cheaper to maintain and construct.
Less efficient due to drag on blades
as they spin back to the wind.
Rely on lower altitude winds which
can be more turbulent and less
consistent.
Global Availability of Wind Energy: On-shore
?
?
?
Relatively open and flat
regions with sustained high
winds are best for turbine
installations.
The United States and China
are both currently leaders in
onshore wind generation,
though promising resources
exist in Russia.
https://globalwindatlas.info/
Global Availability of Wind Energy: Offshore
?
?
?
?
Offshore wind currently only provides
0.3% of global power, but there is
huge potential for expansion.
Potential to generate more than
420,000 TWh worldwide.
The EU, United States, Japan, and
India have the most high-quality
offshore wind resources readily
available.
Cf.

U.S. Availability of Wind Energy: On-shore
?
?
?
?
Significant wind resources available in Midwest and Texas.
Smaller pockets of viable onshore wind resources exist across
the U.S.
Onshore wind provides >10% of total electricity demand in 16
states, and over 30% in Iowa, Kansas, North Dakota, South
Dakota, and Oklahoma.
https://globalwindatlas.info/
U.S. Availability of Wind Energy: Off-shore
?
?
?
?
?
Currently, due to higher installation and operating costs of offshore wind,
generating capacity is limited.
However, US offshore wind has a technical resource potential of over 7,200
TWh per year.
This is nearly double the total energy use of the United States.
Due to distance from shore and the difficulty of constructing offshore wind
installations, not all of these resources may be economically viable.
Offshore wind remains a very promising renewable energy resource in the
U.S. as technology improves and installation costs fall.
Global Production of Wind Turbines
?
?
Vast majority of wind turbine
production is done by companies
based in China, Denmark,
Germany, Spain, and the United
States.
https://www.statista.com/statistics/
272813/market-share-of-the-leadi
ng-wind-turbine-manufacturers-wo
rldwide/
Global Generation of Wind Energy
Wind energy
generation by
country as a
percentage of
total energy
demand (2020).
From IEA 2020 Wind Outlook
Report.
Global Generation of Wind Energy
Cumulative
installed
capacity of wind
energy
worldwide by
country (2019).
From
https://www.statista.com/statistics/2
17522/cumulative-installed-capacity
-of-wind-power-worldwide/
Market Summary
?
?
?
?
Wind value in wholesale power markets depend on location of plants, output
by the hour, taking into account the real time electricity prices and capacity
markets
Levelized Price of Wind PPA( power purchasing agreement): below $50/MWh
(2020 CAISO); in 2009, it was at an all time high of $130/MWh
Levelized installed cost of wind projects: Land-based installations-$34/MWh.
Offshore- $77/MWh for fixed bottom substructures and $129/MWh for floating
substructures
Market value in 2021: $15/MWh(SPP) and $37/MWh(CAISO)
Offshore Wind Outlook
-Could supply more than the total supply electricity consumed today (involves only
tapping into sites close to shore)
-Global electricity demand currently is at 23, 000 TWh. Offshore wind turbines
could potentially meet this demand 11 times over in 2040.
-Set to increase by 15-fold worldwide and to become a $1 trillion business by
2040.
-Cost is declining and is predicted to decline further; financing costs account for
35%-50% of overall generation costs. (Well on its way to becoming competitive
with fossil fuels and solar PV)
-Can accelerate clean energy transitions, IF met with supportive policy framework.
Offshore wind in EU
Growth of the Offshore Wind Industry
Supply and Demand
Market Externalities
Potential:
?
?
Can help decarbonize electricity
supply in several key markets.
Without growing contribution of wind
energy, cumulative CO2 emissions
would be 5 Gigatonnes higher than
today.
Can replace other air pollutants from
other sources
NEGATIVE
?
?
?
Noise pollution
Intermittent energy source
Environmental threat to birds and bats
Potential Ways to Deal with Intermittency and Negative Externalities
–
Noise Pollution: Strategic placement of wind turbines in proximity to
residential areas.
Intermittent Energy Source
Birds:
References
?
?
?
?
?
?
?
https://www.nrel.gov/docs/fy17osti/65323.pdf
https://www.iea.org/reports/offshore-wind-outlook-2019
https://www.iea.org/reports/wind-power
https://globalwindatlas.info/
https://www.statista.com/statistics/272813/market-share-of-the-leading-wind-t
urbine-manufacturers-worldwide/
https://iea-wind.org/wp-content/uploads/2021/12/IEA-WIND-AR2020.pdf
Renewable Energy: Solar
https://www.vox.com/energy-and-environment/2018/11/20/18104206/solar-pan
els-cost-cheap-mit-clean-energy-policy
(With inputs from Natalie Coffee, Chuong Mai, Hyun Kyung Kim, Ashley
Punderson, Ian Roos)
Background
Solar power: is the conversion of energy from sunlight into
electricity by
Directly using photovoltaics (PV)
Indirectly using concentrated solar power
or a combination.
Background
? Concentrated solar power systems use lenses or
mirror-sand solar tracking systems to focus a large area of
sunlight into a small beam.
? Photovoltaic cells convert light into an electric current
using the photovoltaic (PV)
Background
Brief History of Solar PV:
“PV gets its name from the process of converting light (photons) to
electricity (voltage), which is called the PV effect.” (NREL).
? 1839- Alexander Edmond Becquerel discovers the PV effect
? 1883- Charles Fritts develops first solar cell (photoelectric)
?
?
?
?
?
“We may see the photoelectric plate competing with (coal fired) fossil fuel plants”
1954- Bell Labs develops first PV cell (6% efficiency)
1956- First solar modules commercially available, but high
expense($300/1 Watt system)
2017- Global solar capacity and output reaches 398 GW and 460 TWh
respectively (2% Global Output)
Expected to approach capacity and output of 1200GW and 1800Twh
http://solarcellcentral.com/history_page.html
Background
How PV cells are produced:
?
Mine silica(SiO2) from quartz sand
?
Reduce into metallurgical-grade silicon (MG-Si) in
arc furnace (Energy Intensive)
?
Purified into solar-grade silicon
?
Ingots are cut into 156 × 156 mm2 size wafers
?
Cell is produced by etching to form texture and
screen printing to form electrodes.
?
Cells are connected into a string and then
encapsulated by two layers of glass and plastics
(ethylene-vinyl acetate) prior to installation into
the system.
https://www.eia.gov/energyexplained/index.php?page=solar_photovoltaics
How does solar energy work?
https://www.nrel.gov/research/re-photovoltaics.html
Types of panels
Three main types of solar panels: monocrystalline, polycrystalline, and thin-film.
?
Monocrystalline solar panels are the oldest and most developed technology. They are
usually made from about 40 pure silicon solar cells. They are square shaped with
corners removed, limiting any gaps that may form between the cells.
?
Polycrystalline solar panels are a newer development, but they are rising quickly
in popularity and efficiency. They are also made from silicon, but once the
crystals are cooled in their molds, the fragmented silicon is thinly sliced into
polycrystalline solar “wafers”. The wafers are then assembled together to form
panels. The shape of the cell is a square, so there are no gaps between the corners
of cells.
?
Thin-film solar panels are the newest development in the industry. They can be made
from a variety of materials, including cadmium telluride (CdTe), amorphous silicon
(a-Si), and copper indium gallium selenide (CIGS). These types of panels are
approximately 350 times thinner than polycrystalline panels, but their frames can
be sometimes by bulky, making their appearances comparable to that of a
monocrystalline or polycrystalline system.
https://www.8msolar.com/types-of-solar-panels
Types of panels

Large scale utility usage
?
In the U.S., there are more than 37,000 megawatts (MW)
of utility-scale solar projects currently operating.
?
Another 112,000 MWs is under development.
?
Utility-scale solar power can also be paired with
energy storage to manage evening energy surges and
provide backup power.
?
Out of all the utility-scale solar contracts signed
in 2018, only 11% were under a mandated renewable
portfolio standard. More than 80% of projects were
signed under voluntary procurement by a utility
corporations.
?
What distinguishes utility-scale solar from distributed
generation is both project size and the fact that the
electricity is sold to wholesale utility buyers, not
end-use consumers.
https://www.seia.org/us-solar-market-insight
https://www.seia.org/initiatives/utility-scale-solar-power
https://www.smart-energy.com/renewable-energy/large-scale-solar-installations-hit-new-record-in-2019/
Large scale utility usage costs
?
Utility-scale solar plants provide the benefit of fixed-priced electricity
during peak demand periods when electricity from fossil fuels is the most
expensive.
?
Many utility-scale solar designs also include energy storage capacity that
provides power when the sun is not shining, increasing grid reliability.
?
Utility customers have repeatedly endorsed investments in utility-scale solar
plants.
?
In 1978, Congress passed the Public Utility Regulatory Policies Act (PURPA) to
encourage fuel diversity via alternative energy sources and to introduce
competition into the electric sector.
?
Solar prices have fallen over the last decade, as PURPA becomes a more and more
attractive option for solar developers. This Act continues to be a significant
driver of utility-scale solar installations moving forward.
https://www.seia.org/us-solar-market-insight
https://www.seia.org/initiatives/utility-scale-solar-power
Home and private sector usage
?
Solar power is more affordable, accessible, and prevalent
in the United States than ever before.
?
Since 2008, U.S. installations have grown 35-fold to an
estimated 62.5 gigawatts (GW) today, which is enough
capacity to power the equivalent of 12 million average
American homes.
?
Since the beginning of 2014, the average cost of solar
photovoltaic (PV) panels has dropped nearly 50%.
?
However, one major set back is the non-hardware related
costs of installing a system, such as permitting, financing,
and customer acquisition. One average, these costs
constitute up to 74% of the whole system.
?
With that being said, technological advances and
innovative solutions are still needed to increase
efficiency, drive down costs, and enable utilities to rely on
solar for baseload power.
https://www.energy.gov/eere/solarpoweringamerica/solar-energy-united-states
https://www.greenmountainenergy.com/2019/02/do-solar-panels-increase-home-value/
(2022)
CSP vs PV
CSP – 1.7 GW
PV – 35.4 GW
CSP
– Mainly used in
utility projects
– Needs to be near a
water source
– Less manoeuvrable
– High Scale
Types of Solar Panels / PV Panels
280 – 400W
-0.3%
-0.5%
-0.2%
-0.2%
-0.2%
(“Comprehensive Guide to Solar Panel Types – Aurora Solar”, 2022)
(Marsh, 2022)
250-400W
100-400W
Cost
(“Comprehensive Guide to Solar Panel Types – Aurora Solar”, 2022)
(“Solar PV Panels Market Size & Share Report, 2020-2027”, 2022)
Sector / Growth
Grid
Major CSP
Ivanpah (392)
Solana (280)
Major PV
Solar Star
(592)
Topaz (580)
(“Utility-scale solar has grown rapidly over the past ?ve years”, 2022)
International Renewables Breakdown
International: PV
Panda Green Energy Group
Datong, China 2017
International: CSP
Gemasolar Power Plant
Fuentes de Andalucía, Seville
First CSP plant to provide
24hr power for 36 days
Background
Installed Capacity Globally:
https://www.iea.org/topics/renewables/solar/
Production
Top 10 PV Manufacturers:
LONGi Solar
Tongwei Solar
JA Solar
Aiko Solar
Trina Solar
JinkoSolar
Canadian Solar
Zhongli Solar
Suntech
First Solar
Distribution of PV
module production,
2020
U.S.
U.S.
Initiatives to Promote Solar
Net metering
? Credits for electricity
added to the grid
? Some utility companies
view it as lost revenue
Feed-In Tariffs
? 15-20 yr contracts
? Used when production is
not economically
feasible
Environmental Considerations
Cradle-to-Grave environmental
analysis
? Materials are energy
intensive to make
? Produce equivalent energy in
1-4 years
Long-term effects on habitats
Cooling generators
Beams of concentrated sunlight
from solar power towers can
kill birds and insects
Tax incentives and subsidies
Hawaii:
?
?
?
Originally enacted in 1976, the Hawaii Energy Tax Credit
allows individuals to claim an income tax credit on as
much as 35% of the cost of equipment and installation of
a residential photovoltaic (PV) system.
The credit is capped at $5,000 per 5 kW system, but
multiple systems may be installed on one home.
Solar electricity is now economically-competitive with
conventional energy sources
Federal:
?
?
The federal solar tax credit, formally known as the
investment tax credit (ITC), is a credit equal to 26% of the
qualified costs of installing a photovoltaic (PV) solar
system for the current year..
The ITC was established as a part of the Energy Policy
Act of 2005 in effort to boost the U.S. renewable energy
market.
https://www.revolusun.com/tax-incentives
Adaptation trends
?
?
Currently, China, Japan, and the United
States lead the world in terms of total
installed solar capacity.
Many factors influence a PV potential,
including geographic area, sunlight
angle, day length, and surface
reflection.
?
Nevertheless, areas near the equator
have relatively higher PV potential
given the amount of sunlight they
receive throughout the year
?
In addition, factors such as the tilt of
panels, air quality, air temperature,
and weather impact the hourly, daily,
monthly, and yearly potential energy
production of solar PV systems.

Adaptation trends

Costs (historical and present)
?
SunShot Cost Targets
The Solar Energy Technologies Office (SETO) launched the SunShot Initiative in 2011 as a
national effort to drive down the cost of solar electricity and support solar adoption.
At the time, a dramatic acceleration of cost reduction was needed for solar to become
competitive with conventional sources of electricity generation.
SunShot was designed to address that need and it established aggressive cost targets for
the year 2020, the most prominent one of which was achieved three years ahead of
schedule.
?
?
?
?
SUNSHOT 2020 TARGETS
In 2011, the U.S. Department of Energy (DOE) set targets for solar energy to reach
market competitiveness with conventional electricity sources by 2020:
?
?
?
?
$0.10 per kilowatt hour for residential solar
$0.08 per kilowatt hour for commercial solar
$0.06 per kilowatt hour for utility-scale solar
Source : An office of U.S. Department of Energy – Office of Energy Efficiency & Renewable Energy
https://www.energy.gov/eere/solar/goals-solar-energy-technologies-office#LCOE
Costs (historical and present)
?
SUNSHOT 2030 TARGETS
Photovoltaics
?
?
The SunShot 2030 targets are:
? $0.05 per kilowatt hour
for residential PV
? $0.04 per kilowatt hour
for commercial PV
? $0.03 per kilowatt hour
for utility-scale PV
Source : An office of U.S. Department of Energy – Office of Energy Efficiency & Renewable Energy
https://www.energy.gov/eere/solar/goals-solar-energy-technologies-office#LCOE
Costs (historical and present)
SUNSHOT 2030 TARGETS
?
?
Concentrating Solar Power
? The Solar Energy Technologies
Office also set 2030 targets for
concentrating solar power (CSP) to
enable the technology to be
competitive with other dispatchable
power generators.
? The target for CSP peaker plants
is $0.10 per kilowatt-hour.
? The target for CSP baseload plant
is $0.05 per kilowatt-hour.
Source : An office of U.S. Department of Energy – Office of Energy Efficiency & Renewable Energy
https://www.energy.gov/eere/solar/goals-solar-energy-technologies-office#LCOE
Future usage projections
?
Solar photovoltaics (PV) is on track with the IEA’s Sustainable Development
Scenario (SDS)
?
?
?
Solar PV generation increased 22% (+131 TWh)
in 2019 and represented the second-largest
absolute generation growth of all renewable
technologies, slightly behind wind and ahead of
hydropower.
Despite decelerating growth due to recent policy
changes and uncertainties in China (the largest
PV market globally), 2019 was a year of record
global growth in PV capacity.
As competitiveness continues to improve, solar
PV is still on track to reach the levels envisioned
in the SDS, which will require average annual
growth of 15% between 2019 and 2030.
Source : Solar PV power generation in the Sustainable Development Scenario, 2000-2030
https://www.iea.org/fuels-and-technologies/solar
Future usage projections
?
Emphasising plant storage value will be key to attracting investment for
concentrating solar power (CSP)
?
?
?
CSP generation increased by an estimated
34% in 2019.
Although this growth is exceptionally high,
CSP is still not on track with the SDS, which
requires annual average growth of almost
24% through 2030.
Policy designs that emphasise the value of
CSP plant storage will be key to attract
additional investment.
Source : Concentrating solar power generation in the Sustainable Development Scenario, 2000-2030
https://www.iea.org/fuels-and-technologies/solar
http://www.eia.gov/energyexplained/
Primary energy consumption by source
and sector, Hawaii, 2011
Source: State of Hawaii Energy Data and Trends, Jan 2014, DBEDT
Electricity industry and regulation
• A large portion of energy produced is used for
electricity generation (about 40% in the US, 35%
in HI)
• Historically, the electricity industry is
characterized by “natural monopoly,” a form of
market failure
• We study:
– How does natural monopoly work?
– How is the nature of the electricity industry changing?
– Review of regulations—past and present
• VHV Ch 11, Ch 12
Natural Monopoly
(VHV Ch 11 in laulima)
• An industry is a natural monopoly if the
production of a good/service by a single
firm (as opposed to more firms) minimizes
cost
Why does a natural monopoly
emerge?
• (Recall) Economies of scale: situation in
which average cost (total cost per output)
declines as output increases
– Output can be doubled for less than a
doubling of cost
• Historically, it is observed at production,
transmission, and distribution of electricity
Economies of scale
in electricity supply
• Generation: small localized pockets of demand
and substantial line losses from long-distance
transmission à generation plants best located
near individual market centers
• Transmission: building single high-voltage
lines less costly than multiple low-voltage
lines
• Distribution: one local distribution grid
preferred to multiple lines from competing
generators
Why monopoly leads to
inefficiency (without regulation)
Example: P = 18-0.5*Q (or: Q = 36-2P)
Price Quantity Marginal cost Revenue(=P*Q) Cost (=MC*Q) Profit(=Rev-Cost)
18
0
10
0
0
0
16
4
10
64
40
24
14
8
10
112
80
32 r?
• From the firm’s point of view, the cost of
capital is cheaper than r, its true cost
• So the regulated firm uses too much capital
and too little labor
Gross profit, or revenue minus variable costs divided by capital input = rate of return
• Note, s>r (otherwise, no incentive to invest..)
• What does this mean? For each additional
capital input, the firm is allowed to earn a
profit (difference between the market cost of
capital, r, and the allowed rate of return, s)
that it otherwise would have to forgo
• So… effectively, the real cost of capital faced
by the firm is smaller than r …
This effect of RoR regulation on overuse of
capital is called “Averch-Johnson Effect”
Slope r/w
Slope (r-alpha)/w
Having studied Averch-Johnson
effect under RoR regulation…
• Empirical supports are mixed (though lot
of anecdotes about “goldplating” (i.e.
overinvestment / overcapitalization)
• Under public utilities commission (PUC)
regulation, electricity prices are fixed
between “rate cases”
Incentive regulation
• Alternatives to traditional RoR regulation
• How can the regulator improve efficiency
(by inducing (i) lower costs and (ii) firms to
have incentive for innovation/cost
reduction)?
• As of 2001, 28 electric utility companies in
16 states were under incentive regulation
• (Assignment: More updated figure?
Hawaii?)
Incentive regulation (1)
Earnings sharings
• Under RoR regulation, firm does not gain
from any of the cost savings
• Earnings sharings allow the firm to share
the gains from cost savingsà give the firm
incentives for cost savings
• Example (Pacific Bell in the 1990s)
– PB could keep all profits if its RoR
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Cost-Benefit

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