Arizona Solar Job Losses = Arizona Productivity Gains

2011 was a tough year for US and European solar panel manufactures. The following companies declared bankruptcy or closed their solar divisions; BP Solar, Evergreen Solar, Solar Millennium, Solon SE, Solyndra, SpectraWatt, and Stirling Energy Systems. Pressure from low cost Chinese panel makers has forced many long-time solar manufacturers to exit the field, and many employed in the field have lost their solar jobs as a result.

 

These job losses are no doubt causing hardship and we all hope they can quickly find new work in the free market. But there is a silver lining to the story. The positive side is that the new work they find can actually provide goods and services we need to make life better. Unfortunately what they had been doing had little economic value since the financial return of on-grid solar is only marginal. Overall, the cost of on-grid solar is still about 4-5 times too high to be viable as a free market energy alternative for on-grid applications. So this activity had an economic utility of about 20% of a real free market activity.

 

In the free market, labor, materials, land and capital are combined to create things worth more than the sum of the inputs. But with on-grid solar we invest $1 in inputs and produce a device worth only about 20-25 cents. In a way, you might say solar jobs are only 20% of a real job. This whole activity has been a drain on the economy and taxpayers. But once these people return to the real work force, making needed goods, we will all have more; real wages will increase and/or prices of the goods and services we want will decrease. It really is a win-win for us all. And the sooner this happens, the sooner the economy will be more productive.

 

I just hope the transition is short and without much anguish. The drama and pain is no fault of the workers, it is the fault of those in the solar industry that created this bubble via subsidies for this non-viable market segment called "On-grid solar." They have been and continue to plunder money from taxpayers and ratepayers to sustain this unsustainable industry.

• On-grid solar:
• does not reduce oil imports,
• does not create real jobs,
• destroys free market jobs,
• is not cost effective at reducing C02,
• will not significantly reduce the need to build new generation equipment, and
• stifles entrepreneurs from developing real energy solutions.

 

Solar should develop under free market forces and government should regulate pollution and tax externalities.

 

It might not be obvious why these solar jobs, which have low economic value, are not helpful to the economy. For many, a job is a job, so why does it make a difference what is actually accomplished. Sometimes the complex nature of the economy makes it difficult to clearly see the effects of policies, so consider this simplified analogy.

 

Imagine a small island of 100 inhabitants. Assume they were all productive in producing food, building homes, making clothing, etc. Now assume the island government takes 10 workers away from their usual jobs and makes them dig holes. The overall productive output of the island will drop. This means that there will be less goods and services available. There are still 100 inhabitants, but now only 90 are productively working. So everyone has less. Either prices increase or wages decrease, but the result is the same. Everyone can now afford less of what they could afford before the 10 workers were ‘misdirected.’

 

This is similar to what is happening with solar subsidies. As money is taxed away and spent on solar, free markets contract and the solar industry expands. The result is that workers are displaced from normal productive free market activities to marginally productive subsidized activities so overall useful output drops.

 

The economic loss of subsidies for solar jobs might be justified if solar actually viably contributed to reducing pollution or providing energy independence, but those arguments are flawed.

 

But the island example does not capture the full penalty of the situation. Compelling the economy to manufacture non-economic PV panels is not only a waste of labor, but a waste of other valuable raw materials such as copper, aluminum, steel, land, and even finite working capital.

 

So now reconsider the island situation, but instead of just digging holes (wasting labor) the misdirected laborers were building homes, which are then bull dozed down. So they are also consuming raw materials such as wood, concrete, copper, etc and then wasting them. Wasting these materials drives up their price in the balance of the island market place. Wood, concrete, copper, etc is now more expensive because this activity is wasting those materials in non-economic projects.

 

So not only does the island have less productive workers, but raw materials needed for other goods are now more scarce and expensive.

 

So when you hear that some solar company has closed its doors and 1000 employees have been laid-off, it is more accurate to view it as 1000 people which had been sidelined are now available again in the real economy to produce goods and services. Further, the raw materials and other valuable resources used (wasted) in making the solar panels for the on-grid market are now more available and less expensive.

 

Stopping this non-productive activity is a win-win for everyone, except for the short term pain of those who must find new work and whose recently developed skills are not potentially useful in the real market.

 

A WORD TO OTHERS WHO WORK IN THIS ARTIFICIAL SOLAR JOB MARKET: You might keep an eye out for another opportunity. Hopefully the subsidies for this uneconomic activity will end soon and you can join the rest of us in the free market work force. We will all have more goods and services when you do. Please join us as soon as you can!

Just Deserts

Does anyone else find it hypocritical that the US solar industry is upset with China, because China might be averting market forces and selling solar products below cost?

Market forces that the US solar industry is happy to avert by using mandates and subsidies to stimulate sales of uneconomic products they just happen to manufacture?  They lobby congress to pass laws forcing the taxpayers to subsidize their products and thereby transfer wealth from the pockets of the citizens to the accounts of the solar corporations.  Now they are upset China is undercutting them in price?

I call that just deserts. After lobbying for a decade to plunder the public coffers they are now dropping like flies (bankruptcies) because China also sees the huge artificial market and wants to play.  So maybe they are 'cheating."  The taxpayers are now actually benefiting from lower cost, if not "below cost" on the solar panels they are being forced to purchase thanks to the lobbying efforts of the solar industry.

As a citizen, taxpayer, and ratepayer the only thing I have to say about the US Commerce Department trade case against China is "Thanks China!"

Solar Subsidies: Misdirecting Consumers and Industry

"Solar subsidies are a placebo which is giving the general public a sense of security about our energy future and is robbing the motivation of those entrepreneurs that could actually address our energy problems."

In a recent Economist on-line debate, the affirmative motion “This house believes that subsidizing renewable energy is a good way to wean the world off fossil fuels” was surprisingly defeated. In his closing remarks, the moderator softened his strident opposition to the negative case, even admitting that "subsidizing renewable energy, is wasteful and perhaps inadequate [to address climate-change concerns].”

Beyond the Climate Debate

The debate, indeed, reopened the question whether anthropogenic greenhouse-gas forcing was a serious planetary environmental concern. But such focus short-changed what I think is the more important question for The Economist.  Not only are the renewable-energy subsidies (such as for solar) wasteful and potentially insufficient, they are outright diabolical if indeed there is a looming environmental crisis.

I am not evaluating whether anthropogenic global warming is real and potentially cataclysmic; I’m arguing that if there is a valid concern about the enhanced greenhouse gas effect, not only will the subsidies not solve the problem, but may very well prevent or postpone a legitimate solutions.

Grid Solar: Radically Uneconomic, Intermittent

I've written before about why on-grid solar power is absurdly uneconomic and has almost no hope of becoming a viable alternative to current generation technology--or even competitive with other more viable renewable technologies. I’m asking the reader to accept this position for the sake of understanding the potential implication of my claim.

I think it is safe to say that public opinion towards solar is very positive, and there are many in the field claiming that on-grid solar is at or near grid parity.  But it only appears this way because of massive governmental subsidies/ratepayer surcharges for installing and using solar PV.  In reality, it is hopelessly inefficient from an economic sense to be a fix for our CO2 concerns.

The Real Problem of Subsidies

So here is the real problem with the subsidies. Subsidies make solar appear viable today, so where is the motivation for an entrepreneur to risk money, or even focus on developing real energy alternatives when solar is “almost” there? How can an inventor justify striving with the effort it takes to really develop something great when he is competing against a straw man technology which can provide power at almost the same cost of traditional power sources today? But of course it really doesn’t.

The answer is he can’t justify the effort, so the next great thing is not developing, at least not with the sense of urgency it should be. Why enter a contest when you are competing against someone with an unfair advantage? You may be the faster swimmer, but your competitor is using flippers.

Solar subsidies are a placebo which is giving the general public a sense of security about our energy future and is robbing the motivation of those entrepreneurs that could actually address our energy problems. Subsidies are much worse that just wasteful, they’re diabolical. They lull us into thinking we have almost solved the problem and they hinder us from seeking the real solutions.

An Analogy to Leprosy

“Necessity is the mother of invention,” and it’s fairly easy to see this is often the case. Need is a great motivator. We need to feel the pain of our situation to really challenge and change it.

Leprosy maims it’s victims by robbing them of their sense of pain. The leper can put his hand on a hot surface and not feel the heat. He can twist an angle and will keep walking.

In the same way, on-grid solar subsidies will allow a homeowner to continue using much more electricity than he can afford (or the planet can sustain) and he will not know it. If he felt the pain of the real cost, he would use less power. But he does not feel it, since subsidies hide the pain, like leprosy.

Summary:

Subsidies defeat market forces on both sides of the equation. They reduce potential supply by hindering entrepreneurs from developing new energy supplies and they increase demand by artificially keeping the price of energy down. There could hardly be a more cleverly disguised means of exasperating a potential climate issue.

If solar PV does not develop into a viable alternative, which I believe it won’t for many decades, not only have we wasted billions of dollars, but far worse, we defeated normal protective market forces which would have better prepared us for a potential necessary change in energy use. So in the near term, perhaps our bigger concern is anthropogenic energy policy.

Green Jobs

Some solar advocates talk about solar energy projects in terms of how many jobs are created. They say subsidies for solar create jobs.  But what is not visible to the untrained eye is that subsidies also destroy jobs, and in sum, they are a net loss for the economy.

Who do you think pays for these subsidies?  The answer is taxpayers and ratepayers pay for the subsidies given to the solar industry. 

So what happens to these tax and ratepayers as they are forced to pay more in taxes and electric bills?  Of course, they can now spend less in other segments of the economy.  There is no free lunch.  Their reduced spending will directly cause economic losses and job losses in the balance of the economy.

 

So on net, the solar subsidies just shift jobs from one activity to another.  But we are worse off.  The new solar jobs don’t have much economic value.  If they did the market would have already employed people to install solar electric systems.  But the jobs that were lost were more productive, since they were created by real demand.  So on net, we shifted people from more productive activities to less. This causes lower overall economic output and lower aggregate wages. 

Imagine a small island of 100 inhabitants.  Assume they were all productive in gathering food, providing water, building homes, etc.  Now assume the island government takes 10 workers out of the job force and makes them dig holes.  The overall output of the island will drop by 10%.  This means that there will be 10% less goods and services available.  There are still 100 inhabitants, but now only 90% the output.  So everyone has less.  Either prices increase or wages decrease, but the result is the same.  Everyone can now afford only 90% of what they could afford before the 10 workers were ‘redirected.’ 

This is very similar to what is happening with solar subsidies.  Workers are moved from productive activities to less productive activities so overall output drops. 

So the next time you hear someone say, this or that solar company employed 100 people, it is more accurate to see it as 100 productive workers are now unproductive and we will all have less goods and services to go around.

But it is easy to be fooled by the jobs myth.  When the solar jobs are created, the number of jobs are easy to see and report in a news article.  But when spending drops in the balance of the economy, the job losses are diffuse and difficult to count.  You will see shirts with solar company logos, but no one laid-off in the restaurant business will wear a shirt that says “I lost my job do to solar subsidies.”  But they did just the same.

The economic loss might be worth it if solar actually contributed to reducing CO2 or providing energy independence, but those arguments are just as flawed. 

SimPlanet

Imagine a computer game in which a planet is struggling to reduce CO2 levels and failure to do so will result in total annihilation of human life on said planet.  You are in charge of the planet's eco system and are given 1 billion tons of aluminum to use in a manner which reduces the most CO2.  The game is set-up such that if you use it well you will save the planet, but if you squander it, you will doom the inhabitants.

Where would you use it?  You are given lots of choices. You could use it as a substitute for steel in cars to reduce weight and increase gas mileage.  You could put it in electric transmission lines to reduce transmission losses.  You can also use it to make frames for mounting solar panels.  The game also allows use of 1 billion tons of copper, which could be put in electric motors and generators, reducing their internal electrical resistance and increasing the output of hydro, wind, or geothermal generators.   Likewise labor is available and can be used to install insulation; capital can be used to finance energy efficiency projects with multi-year paybacks.  In real life, all of these valuable resources can be and are used to save energy every day.

So to make the decision about where to use the resources in this game you will need to consider the relative potential of each resource to save CO2.   If you decide to use these resources in an application which has a relatively low return for reducing CO2 emissions, you will lose the game.  If you use 1 lb of aluminum to save 1 lb of CO2 when you could have saved 10, you wasted the resource.  And that resource is now not available for the wiser use.  This is the concept of the energy opportunity cost of non-energy inputs.  Aluminum is not energy, but could have been used to make or save energy (and therefore reduce CO2).

I can tell you with certainty, that if you use these resources to make on-grid PV systems, you’ll lose the game and doom the planet.  This is known because one can easily calculate the CO2 savings from PV and the number is $150/ton, ignoring any embedded CO2 in the productions and installation.  We also know that CO2 trades on the EU market for $20/ton, meaning that someone, somewhere in the EU can reduce CO2 for a cost of $20/ton.  So there are much better (less expensive) ways to reduce CO2 than installing solar panels on homes already connected to the grid.

PV is a very expensive way to address CO2 and might even have the effect of increasing CO2 when the energy opportunity cost of PV is considered.  Using resources for PV crowds out the use of those resources in better applications.  Using copper for PV will reduce the efficiency of electric motors.  This may seem strange or non-connected, but PV systems consume copper and this will drive up the price of copper and result in less copper being used in the next generation of electric generators.  The market is warning us not to install on-grid PV, but we are ignoring price signals.  Sometimes ignoring price signals is the correct action, but one must be very careful when charting a course which ignores prices.  Price signals are by far the best way to determine were resources are optimally used.  When price signals tell you that using aluminum in transmission lines is more valuable than using it in PV, then that is a reliable answer.  Today the market is screaming to stop using resources for on-grid PV, but we can’t hear the screams because solar subsidies have almost silenced the cries.  Installing on-Grid PV systems  is a terrible misuse of these resources and may cause us to lose the real game.

Robb'n the Hood

Our country has a progressive taxation system; the more you earn, the greater percent of your earnings are taxed. In fact, the top 1% of taxpayers pay about 40% of all taxes (http://ntu.org/tax-basics/who-pays-income-taxes.html). Whether or not this is fair I don't know, but certainly the wealthier should pay more than the poor. But this is not true with solar subsidies.

The utility rebates which pay for the on-grid solar PV systems you see on housetops around town are paid for by a fee on your electric bill. For most houses in Tucson this fee is a flat $4.50/month or $54/year. Every house pays it, rich or poor, the same amount. This is a regressive tax. The poor pay a higher percent of their income on this fee than the rich. This is unfair and unjust by almost any taxation philosophy.

And if that is not bad enough, it is also more likely that you will find an on-grid solar system on the house of a well-off Tucsonan than a poor one. The poor are disproportionately paying for these systems and the rich are benefiting. This is a clear case of the rich robbing the poor, but in a "legal" way.  If you think it should stop, then you need to contact the Arizona Corporation Commission. If we can stop the solar subsidies and the renewable energy mandate in Arizona, it would boost our economy, since every house would then have $54 more to spend each year and businesses would have lower cost since their solar fees (about $200/yr for the average small business) would end.  Solar could still count on the 30% federal subsidy and the $1,000 state subsidy, both of which are collected progressively.  Let the richer citizens pay for their own solar systems, don’t make the poor do it!

Arizona Corporation Commission emails:
newman-web@azcc.gov
burns-web@azcc.gov
pierce-web@azcc.gov
stump-web@azcc.gov
kennedy-web@azcc.gov

Levelized Cost of Energy

The US Energy Information Administration (EIA) recently published an excellent report on the projected cost of electricity generated by different technologies: coal, natural gas, nuclear, and various others, including renewables. Their Levelized Cost of Energy (LCOE) calculation combines upfront cost with recurring cost to estimate the average cost of power produced by these technologies. Here is the EIA cost data for coal, natural gas, and solar PV.

CLICK TO ENLARGE

At first glance, it looks like PV could be competitive with coal or natural gas plants if the PV cost were to drop below 10 cents/kWh. But there is an important difference between PV and the traditional technologies which makes this simple cost comparison invalid.

But first, take a look at the cost of electricity from a coal plant. The total cost is projected to be 9.5 cents/kWh per the EIA study. About 6.5 cents of this is capital cost[1] and about 2.5 cents is the cost of the coal. Looking at the natural gas plant, one can see the capital cost is about 2 cents, and the fuel cost is about 4.5 cents. Solar has no fuel cost element but significant capital investment.

But here is the rub. If you plan to power a city with PV, it is not sufficient to simply build a large PV array, because PV only produces power during the day. At night and during cloudy weather, a back-up power source is needed since there is no practical way to store the PV energy. So the city must also build a conventional coal or gas plant, which will sit idle on many sunny days. The real cost of the PV is not just its cost, but also the cost of the back-up plant. Coal and natural gas plants do not need back-up like PV does.

So what is the real value of PV? It is principally the fuel savings which occur when the traditional plant can reduce output during sunny days. Or stated another way, PV is worth avoided fuel cost. The main point is that PV is not competing against the LCOE of coal or natural gas plants; it is competing against the variable operating cost of these plants, which is 2-4.5 cents. Here in Tucson, we use coal and the fuel avoidance value is less than 3 cents. For PV to actually be cost effective today, it would need to have an LCOE of about 3 cents. Since it is currently about 21 cents, it has a long way to go before it makes sense for the citizens of this city, despite industry propaganda and political pandering.

But to further demonstrate how nonsensical this technology is, even if PV manufacturers drove the cost to $0/watt for PV panels, the cost of the aluminum mounting structure, copper wiring, labor, inverters, and maintenance result in a LCOE around 10 cents. So even with free PV panels, the total system is still 3 times too expensive to be viable. The economic case for grid-tied PV is indeed quite hopeless, and the sooner we stop the misguided subsidies the sooner we can focus on actually addressing our legitimate energy and environmental concerns.

Installing grid-tied PV is not just a waste of time and money, but a waste of copper, aluminum, labor, land, and capital. We are neither ahead nor green. This wasteful activity is unsustainable, mining the materials used in these unnecessary systems is damaging the environment, and the entire endeavor is a burden on the economy. There is hardly a clearer case of special interest run amok, besides perhaps ethanol subsidies.

PV is fantastic for people that live where there is no access to the electric grid, but it is wishful thinking to believe it can replace conventional generation methods or even be cost effective for on-grid application. Other renewables-- geothermal and biomass-- will likely become viable before PV because they do not require back-up power. But today, conservation is by far the best way to economically reduce pollution and CO2 emissions.

The economist Paul Krugman missed this concept and was forced to make a retraction.

Krugman: I’ve been getting some pushback from people I respect on today’s column, not so much for what I actually said as for what they fear readers may take away from it. So a bit of clarification.

Some of it involves questioning the cost data, but the main point, I think, is that even if solar power’s price per kwh matches coal-fired, it’s not going to take over the market right away, and maybe not ever. The sun doesn’t shine at night, and often doesn’t shine during the day. Intermittency is a big problem, and I probably should have made that clearer.

Ref: http://www.eia.gov/oiaf/aeo/electricity_generation.html

[1] EIA includes a 3 percentage point cost of capital increase for coal-fired plants without carbon capture and sequestration equipment to represent the difficulty in getting coal-fired plants permitted today. That 3 percentage point increase in the cost of capital for coal-fired plants makes the capital component larger than that of current coal-fired projects.

The Perplexing CO2 Problem

The US produces only 16% of the global CO2 emissions, so even if we aggressively restricted CO2, it would do very little to reduce global levels.

Ref: http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=90&pid=44&aid=8

Two good articles on this by Chip Knappenberger can be found here:

http://www.masterresource.org/2011/12/us-co2-cuts-math/

http://www.worldclimatereport.com/index.php/2011/04/14/biggest-drop-in-us-greenhouse-gas-emissions/