This post is co-authored with Duncan Callaway.
Ahhhh Hawai’i, where the waves are big, the beaches are long, and the renewable energy ambitions are large:
As you may have heard, Hawaii has set a goal of 100% renewable energy penetration by 2045. This is pushing the Aloha state to the bleeding edge of renewable energy integration.
We were lucky enough to spend our spring break at a conference hosted by our colleagues at the University of Hawaii. Although the focus of the conference was on the integration of renewables into the grid, there was lots of talk about possible dis-integration.
Living off-grid might seem like a pretty out-there idea. It’s true that, in the past, “grid defection” has been limited to survivalists and bohemian-types who can get excited about living like this:
But with solar PV and storage costs falling relative to conventional grid-supply systems, the economics of grid defection are changing fast. And off-grid living is not what it used to be:
A Hawaii developer is planning a 410-home project that would become the first off-grid community of this magnitude.
If grid defection takes hold, this would take concerns about stranded assets and utility death spirals to a whole new level. Grid dis-integration is a development we should be paying attention to.
The economics of grid defection
Let’s start by distinguishing a grid defector – the subject of this blog- from a load defector (that’s you if you have PV panels on your roof).
“Grid defectors” are consumers who fully disconnect from the grid and supply their electricity needs with their own power generation. “Load defectors” remain grid-connected, but get some fraction of their electricity from a source other than their incumbent utility. Importantly, load-defecting solar PV customers continue to rely on grid services. They draw power when demand exceeds their solar supply, and inject surplus generation when there’s excess supply.
The economics of solar PV load defection already pencil out in many places (even the Kentucky Coal Museum!). For many consumers (the US passed the 1 million solar PV installation mark last year), net bill savings appear to exceed private investment costs. This is partly due to falling PV technology costs. But it’s also thanks to retail prices that can significantly exceed the variable costs of supplying electricity, net metering policies, and other subsidies. For example, the graph below shows how Hawaii’s residential prices per kilowatt hour (kWh) reflects not only the variable costs of generation (green line), but also a substantial amount of fixed cost recovery (black line). When a net metered solar customer generates her own power, she avoids paying the sizeable fixed cost component that was being collected through her volumetric payments for electricity.
Source: This graph shows the average residential electricity price in Oahu. The green line measures the generation component (fuel costs and costs of buying energy from independent power producers). The black line measures non-fuel and fixed costs.
The economics of grid defection are more complicated. If you want to unplug from the grid AND maintain the same level of reliability and power quality, you’ll need to make investments in a battery (or a backup generator) in addition to PV. In 2014, analysts at the Rocky Mountain Institute estimated that an off-grid PV-battery system would average about 80 cents/kWh in Hawaii. The graph above shows how 80 cents/kWh is still a long way from grid parity.
We’ve made some updated calculations with an eye towards rapidly declining solar PV and storage costs (with the help of Berkeley graduate student Jonathan Lee). The graphs below show just how fast PV and battery prices are falling.
Solar PV source: Tracking the Sun IX Battery source: https://www.bloomberg.com/news/articles/2017-01-30/tesla-s-battery-revolution-just-reached-critical-mass. While the battery figure shows costs for EV batteries, these cost reductions carry over. It’s been estimated that over 18 months in 2015 and 2016, grid-connected battery system costs fell 70 percent.
Without getting too far into the weeds, we use a moderately aggressive scenario for solar and storage costs ($0.40/W for solar panels, $100/kWh for batteries), plus a host of other assumptions for system installation costs. We estimate that a stand-alone system would cost about 30 cents per kWh (assuming less than an hour a year of supply shortage). This is within the range of residential electricity prices in recent years (see above graph)… and that’s before accounting for state and federal incentives.
That grid defection could actually be cost-effective may seem inconsistent with everything you thought you knew about economies of scale in electricity generation. It’s true that generation costs per kWh are lower when electricity is generated at utility-scale, versus on your rooftop. The catch is that, as solar PV and storage costs fall, the additional cost associated with generating and storing electricity on a smaller scale could be more than offset by the transmission/distribution/retail service costs you can eliminate with a decentralized system.
If PV and storage costs get low enough, it could become more efficient to start grid dis-integrating (versus making additional investments in grid infrastructure). This is a mind-bending concept for those of us accustomed to thinking that the grid simply can’t be beat.
Stranded assets of the future?
Preparing for grid dis-integration?
Renewable energy developments in Hawaii can read like postcards from the future. Hawaii has been on the forefront of the distributed solar revolution, with PV penetration exceeding 15 percent on some islands. The state was the first to shut down net metering in response to costly solar load defection. Today, Hawaii is anticipating the next challenge that is grid defection.
Economists prescriptions for dealing with inefficient load defection emphasize cost causation: set real-time per-kWh prices at true variable costs. But there’s a hitch. When rates are set to recover real-time marginal costs, revenues can fall far short of total system costs. These residual fixed/sunk costs have to be recovered somehow.
If there’s no risk of grid defection, there’s room to be sloppy about recovering these residual fixed costs with some kind of fixed charge. But in a place like Hawaii, sloppy fixed cost recovery could lead to inefficient grid dis-integration in the not-so-distant future. So what’s the right way to recover sunk investment costs? Lumping them into customers’ fixed cost charges would lead to early/inefficient grid defection. Lumping them into per kWh costs has led to inefficient load defection. Exit fees could offer a solution. The socialization of cost recovery via general tax revenues has also been suggested. The jury in Hawaii is still out.
Grid defection may seem like a long way off for the rest of us. But the regulatory paths chosen in Hawaii’s renewable energy laboratory can inform decisions that the rest of the country will ultimately be confronted with. We’ll be watching this Hawaiian grid dis-integration story closely. And hoping to visit those long beaches and big waves again sometime soon.