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How to share the Solar Energy to Electricity in Relation to Inflation ScienceSkip

Solar energy systems are expensive. The fuel — sunlight — is free, but the up-front investment is significant. In some places solar energy is already at grid parity — an overall cost similar, or even better than, conventional alternatives. But in many places, solar still costs more than traditional electrical power sources. Even with a relatively high cost, solar maintains one big advantage: you know exactly what it’s going to cost 10, 20 or even 30 years down the road. Certainty is generally a nice thing when it comes to costs. It means no surprises — you won’t get bitten by inflation — either directly, as an energy producer, or indirectly, as a utility customer.

Different Cost Models

Utilities pay for solar energy in a different way than they pay for conventional energy sources. A large solar farm and a coal-burning power plant both require significant up-front investment. The solar farm is more expensive to install, but it has very low operation and maintenance costs and zero cost for fuel. The coal plant has a lower installation cost, but fuel costs something. And it also requires people to unload and process the fuel. Then add in the fact that coal plants are full of moving parts that require regular maintenance and you’ve got to hire more people — skilled people — and you need all of the overhead functions that go along with having a large staff and regular monthly expenditures.

Levelized Cost of Energy

Because solar and conventional power plants have such different cost structures, it’s not easy to directly compare their costs. To make that comparison easier, people within the industry have developed a calculation called the levelized cost of energy, or LCoE. The LCoE includes such variables as the total capital expenditure, the operations and maintenance cost, the tax rate, the cost of borrowing money and other economic and technical variables. You can get a general idea of how LCoE calculations are done by using the Levelized Cost of Energy Calculator developed by the National Renewable Energy Laboratory.

Inflation

When you look at the variables that go into LCoE calculations, you’ll find that the differences between the functions of conventional and solar facilities lead to one big difference between their LCoE calculations. Nearly all of the solar costs are known ahead of time. There are some maintenance costs — such as that of replacing the inverters that convert the DC solar output to AC — that could potentially change, and there are some potentially variable financial costs — such as the tax rate and the cost of loans. But those are much smaller than the variable costs of fuel, maintenance and staffing for conventional power plants — all of which will change with inflation. Because the costs for solar are nearly all up-front, they are almost completely immune to the effects of inflation.

Regulatory Hedge

In addition to immunity to financial inflation, solar energy production facilities are also a hedge against future regulatory changes. There is a growing realization that fossil fuel combustion produces substances that lead to “long lasting changes in our climate that can have a range of negative effects on human health and the environment”, according to the Environmental Protection Agency. It’s difficult to imagine a weakening of regulations on the production of greenhouse gases — including carbon dioxide. Solar energy facilities produce no greenhouse gases and will not be subject to regulations of that sort.

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