The GREENPEACE Report
For Solar Energy in Israel
Economic and Social Impacts
from
Large Scale Utilization of Solar Energy
in Israel
Authors:
Dr. Amit Mor
Shimon Seroussi
Malcolm Ainspan
July 2005
The Report for Solar Energy in Israel
Table of Contents
Executive Summary ............................................................................................................. 4
1. Introduction ............................................................................................................ 11
2. Social/environmental and global costs ................................................................. 18
3. National benefits from local development and production of new technologies
..................................................................................................................... 20
3.1 Major assumptions for the analysis ....................................................................... 23
4. Advantages of solar electricity generation ........................................................... 27
4.1 Solar’s value as a “flexible real option” ................................................................. 27
4.2 Solar’s value for mitigating price and environmental/regulatory risks ............. 28
4.3 Avoided transmission and distribution (“T&D”) costs ........................................ 33
4.4 The geopolitical-strategic benefits of diversifying energy sources ...................... 35
5. The potential for regional development of solar energy projects ..................... 36
6. Major costs of solar technology ............................................................................ 38
6.1 Direct costs................................................................................................................ 38
6.2 Societal costs ............................................................................................................. 41
7. Direct cost-benefit of solar energy utilization ............................................................ 42
7. Comparison of NPV of new solar thermal, coal, and natural gas units........... 46
8. Lessons learned from international experience .................................................. 48
9. Importance of being a major contender in the “Solar Race” ............................ 51
10. Potential foreign investments in the local market in solar projects .................. 52
11. Recommendations for developing the solar sector in Israel .............................. 53
Appendix A: Assumptions underlying the benefit-cost analysis: .................................. 55
A-1 Avoided environmental costs ................................................................................. 55
A-2 Stable and known energy prices ............................................................................ 56
A-3 Avoided transmission & distribution (T&D) costs .............................................. 57
A-4 Avoided fuel costs ................................................................................................... 57
A-5 Real options value for T& D investments ............................................................. 58
A-6 Income multiplier and avoided unemployment compensation: Thermal ......... 58
A-7 Income multiplier and avoided unemployment compensation: PV ................... 59
A-8 Additional generation costs.................................................................................... 60
A-9 Environmental costs ............................................................................................... 60
A-10 Fuel switch to solar heating/cooling .................................................................... 60
Appendix B: European Union renewables policy implementation ............................... 61
Appendix C: Examples of successful solar deployment ................................................. 63
C-1 Germany .................................................................................................................. 63
C-2 Australia .................................................................................................................. 65
C-3 Japan ........................................................................................................................ 66
Cost - benefit analysis of solar energy in Israel 2
The Report for Solar Energy in Israel
Index of Tables and Figures
Table 1: Avoided environmental costs applied to 2003 Israel electric 20
Table 2: Survey of studies of economic benefits of solar energy 22
Table 3: Employment, personal income and gross domestic product benefits – solar thermal 25
Table 4: Avoided unemployment benefits - solar thermal 26
Table 5: Benefits of solar energy utilization 43
Table 6: Costs of solar energy utilization 43
Table 7: Net benefits of large-scale utilization of solar energy in Israel - 5% discount rate ($US Million)
44
Table 8: Net benefits of large-scale utilization of solar energy in Israel - 7% discount rate ($US Million)
45
Table 9: NPV of 500-MW coal, natural gas, and solar investment 47
Table 10: Net Present Value of 500-MW coal, natural gas, and solar generator - environmental costs
included: $10 CO2 47
Table 11: Net Present Value of 500-MW coal, natural gas, and solar generator - environmental costs
included: $20 CO2 48
Table 12: Photovoltaic market penetration in Germany 64
Table 13: Photovoltaic market penetration in Australia 66
Figure 1: Forecasted oil prices through 2025 31
Figure 2: Forecasted coal prices through 2025 31
Figure 3: Primary Energy Consumption in Israel during 2004 32
Figure 4: Primary Energy Consumption in Israel forecasted during 2025 32
Figure 5: Concentrating Solar Power (CSP) development through 2012 41
Cost - benefit analysis of solar energy in Israel 3
The Report for Solar Energy in Israel
Executive Summary
This report provides an initial evaluation of the economic impact of the rapid development
of solar energy sources in Israel. It concludes that the net benefit for the country from a
large-scale solar energy deployment is evaluated conservatively at $1.8 to $2.7 billion.
While Israel has been among the leaders in the research and development of solar
technologies that have been applied worldwide, it has not developed its domestic solar
energy sector with the notable exception of rooftop solar water heating. The report
identifies the costs and benefits associated with expanding solar energy utilization in Israel,
as well as the insights provided by other countries that are successfully integrating more
solar resources into their energy portfolios.
While not an exhaustive quantitative analysis of all benefits and costs, some of which are
extremely difficult to quantify, the report does develop quantitative analyses where
feasible, based on methodology accepted within the energy and environmental economics
literature. It is hoped that this report will serve as a guide to the decision makers in the
government and public sector to promote solar energy development in Israel and will
encourage the private sector to invest in and operate solar energy projects.
The results of this study demonstrate that solar technology can become a major
economic engine, producing high-quality employment, exportable technology in a
growing market, and a clean, stable energy source in a country that has relied heavily
on imported fuels whose market prices are becoming increasingly volatile, and whose
fossil-based reserves for meeting a growing peak demand are limited.
The benefits of developing Israel‟s solar sector range from energy security to
environmental improvement to increased economic opportunity. The additional direct
costs usually associated with solar energy are due largely to the failure of reflecting
environmental costs in the prices of electricity generation, steam, heat and air conditioning.
This in turn favoured the development of large fossil-fueled units at the expense of
developing an indigenous solar sector to a degree that would drive solar costs downward.
This study indicates that internalising environmental costs, under reasonable assumptions,
will make solar a much more attractive investment than coal, even without extensive
government incentives. To the extent that the Government of Israel creates such incentives,
Cost - benefit analysis of solar energy in Israel 4
The Report for Solar Energy in Israel
however, the cost of solar resources declines, creating a demand for solar that requires
mass production of components and drives costs down further. This “virtuous cycle” is
manifest in the current leaders in the “Solar Race”, such as Germany and Japan and it
should occur in Israel as well.
The report includes a summary of quantifiable costs and benefits associated with rapid
solar development in Israel. The economic benefits from solar, reflected in the income
multiplier and avoided unemployment compensation figures, comprise the largest share of
these benefits. Solar generation technology requires significantly more skilled labor per
KW than any other generation technology, and salaries in solar technology reflect this
higher skill requirement. Such employment opportunities, especially in the Negev region
of southern Israel where unemployment is rampant, can contribute significantly to the
belated development of this region, which the Government of Israel has declared a national
policy priority.
We note that these results reflect a rapid deployment of solar technology over the next 20
years, including the installation of some 2000 MW of central-station solar thermal
electricity generation, at least 500 MW of distributed photovoltaic and solar thermal
systems, and additional penetration of “passive solar” technology (e.g., solar water
heating). The timeline for deploying solar thermal and PV, which underlies the quantitative
analysis, is presented in Table A.
Table A: Deploying PV and solar thermal technologies 2005 – 2025
Year PV Solar thermal Total
2005 0 0 0
2010 125 500 625
2015 250 1,500 1,750
2020 375 2,000 2,375
2025 500 2,500 2,500
The exhibit in Table B below summarizes the net present value (NPV) of long-term
benefits and costs associated with solar deployment, assuming a discount rate of 7%, with
CO2 emissions prices of $10/ton and $20/ton. Under the assumptions detailed in Section 7
and Appendix A of this report, the total discounted benefits from solar are $1.7 billion. It
Cost - benefit analysis of solar energy in Israel 5
The Report for Solar Energy in Israel
should be indicated that a discount rate of 5% increases the net benefits (assuming $10/ton)
to some $2.6 billion.
Table B: Net benefits of large-scale utilization of solar energy in Israel
($US million)
Appendix NPV Annually
reference 7% Levelised
Benefits
Direct benefits
$10/ton CO2 A1 425.4 40.2
Avoided environmental costs $20/ton CO2 709.0 66.9
Stable and known energy prices A2 70.7 6.7
Avoided transmission & distribution (T&D) costs A3 116.1 11.0
Avoided fuel costs A4 171.5 16.2
Real options value for T&D investments A5 2.3 0.2
Total direct benefits $10/ton CO2 786.0 74.2
$20/ton CO2 1,071.8 101.2
Indirect benefits
Income multiplier: Thermal technologies A6 1,179.5 94.6
Income multiplier: PV technologies A7 551.0 44.2
Avoided unemployment compensation: Thermal technologies A6 234.2 18.8
Avoided unemployment compensation: PV technologies A7 134.5 10.8
Total indirect benefits 2,099.2 168.4
Total benefits $10/ton CO2 2,885.2 242.6
$20/ton CO2 3,171.0 269.6
Costs
Additional generation costs A8 962.1 77.2
Environmental costs A9 25.3 2.0
Fuel switch to solar heating/cooling A10 126.6 10.2
Total costs 1,114.0 89.4
Total net benefits – 7% discount rate $10/ton CO2 1,771.2 153.2
$20/ton CO2 2,057.0 180.2
Total net benefits – 5% discount rate $10/ton CO2 2,713.0 205.7
$20/ton CO2 3,184.3 243.5
Cost - benefit analysis of solar energy in Israel 6
The Report for Solar Energy in Israel
It is worth noting that these results reflect rather conservative estimates of the effects of
solar development on Israel‟s environment and economy. If, for example, solar resources
receive preferential status for electricity generation from Israel‟s regulators and generate
economic multiplier effects similar to those experienced in the US and Europe, the benefits
could be substantially more than those indicated in this report.
The graph below shows the annual benefits from 2005 through 2025 corresponding to the
above exhibit. Although the economic benefits of solar deployment are greatest during the
construction and installation stages, the ongoing economic and environmental benefits are
substantial as well, amounting to $125-$150 million per year.
Annual net solar benefits and installed solar:
$10/ton CO2
3,000 $300
2,500 $250
US millions
2,000 $200
$150
MW
1,500
$100
1,000 $50
500 $0
0 -$50
20 5
20 6
20 7
20 8
20 9
20 0
20 1
20 2
20 3
20 4
20 5
20 6
20 7
20 8
20 9
20 0
20 1
20 2
20 3
20 4
25
0
0
0
0
0
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
20
Year
MW (thermal and PV) Net benefits
Cost - benefit analysis of solar energy in Israel 7
The Report for Solar Energy in Israel
The table below summarizes the expected benefits, both environmental and
economic, during the ramp-up period assumed in Table B.
CO2 Annual
Total avoided employment
Year Installed MWh (thousands (construction,
MW at (thousands) of tons) installation,
year- during during ongoing) during
end year year year
2005 0 0 0 0
2010 625 1,314,836 983 3,565
2015 1,750 3,681,040 2,753 4,658
2020 2,375 4,996,378 3,745 5,450
2025 2,500 5,259,345 3,942 3,159
While including discussions of the countries that have developed significant solar sectors,
the report notes the strong tendency of these countries toward developing photovoltaic
systems. The Government of Israel has chosen to foster development of solar thermal
generation to a much greater extent for several reasons. These include southern Israel‟s
much higher level of consistent sunlight and the success of Israeli companies (Luz and later
on Solel) in developing solar thermal technologies, which demonstrated the long-term
commercial viability of solar thermal generation in California. Nevertheless, developing
solar thermal resources requires greater access to large amounts of capital than photovoltaic
(PV), and private investors will play a pivotal role in encouraging the solar deployment
necessary to achieve the benefits described in this report. These investors will demand a
level of regulatory and legal stability and a consistent government message with regard to
renewable investments, and will forego opportunities in countries lacking that commitment.
Cost - benefit analysis of solar energy in Israel 8
The Report for Solar Energy in Israel
The keys to ensuring the growth of Israeli solar technology include:
(a) Israel‟s creating and marketing its technological advantage within a short
timeframe – as little as 3 years according to industry experts – in order to ensure a
sustainable comparative advantage, and to do so without the substantial
government resources available to its German and Japanese counterparts;
(b) Reaching a production scale that substantially reduces input costs;
(c) The Government of Israel‟s providing incentives, at least for the next several years;
(d) Using the entitlements, as a Kyoto Protocol ratifier, to Kyoto Protocol provisions
such as the Clean Development Mechanism (CDM) to obtain necessary financing
from developed countries;
(e) Increasing acceptance of solar technologies within the investment community.
Israel may then be added to the shortlist of successful solar technology developers, to its
great economic and environmental advantage.
The report concludes with recommendations for rapidly developing Israel‟s solar sector.
Many of these recommendations emphasize the importance of the electricity regulator and
the Finance and Energy ministries in developing tariffs, regulation and competitive markets
that provide incentives for solar development. It is crucial that the government acts quickly
and “speaks with one voice” with regard to initiatives such as solar-appropriate renewables
premia1, tax incentives, R&D grants and loans, and net metering, in order to attract
potential investors interested in a long-term commitment to developing solar resources in
Israel.
Finally, it is strongly recommended to adopt the solar initiative recommended in the
Energy Master Plan for the State of Israel that was submitted to the Israeli
Government in August 2004. The Master Plan recommends adopting a major solar
initiative that includes the installation of some 2,000 – 2,500 MW solar thermal plants in
the Negev by 2025, starting in 2005. In addition, the plan recommends the promotion of
1
The current renewables premia in Israel reflect displacement of baseload coal generation, thereby
underestimating the potential value of renewable resources operating during the day.
Cost - benefit analysis of solar energy in Israel 9
The Report for Solar Energy in Israel
generating heat, air conditioning and electricity with distributed solar technologies in the
industrial, public, services and domestic sectors.
In order to achieve these goals the government must nominate a task force charged
with promoting a comprehensive and dynamic action plan with the cooperation of the
Israeli and international private sectors, including an attempt to create multilateral
regional cooperation.
Cost - benefit analysis of solar energy in Israel 10
The Report for Solar Energy in Israel
1. Introduction
This report provides an initial evaluation of the rapid development of solar energy sources
in Israel. While Israel has been among the leaders in the research and development of solar
technologies that have been applied worldwide, it has not fully developed its domestic solar
energy sector with the notable exception of rooftop solar water heating. The report will
identify the costs and benefits associated with expanding solar energy utilization in Israel,
as well as the insights provided by other countries that are successfully integrating more
solar resources into their energy portfolios. The development of solar resources worldwide
has mirrored the trend of renewable energy worldwide. The major difference in solar
technology, however, has been the large initial gap in production costs between solar and
other renewables and the dramatic decreases in solar production costs that have narrowed
that gap. Studies have shown that solar production costs have been declining by 20 percent
for each doubling of production, due mostly to technological advances.2 The average
annual growth rate worldwide, reflecting this increased cost competitiveness, is expected to
be 27% through 2009, rising to 34% between 2010 and 2020 as solar generation is more
widely adopted in developing countries. By 2020, 276 TWh of solar electricity is expected
worldwide, and solar resources are forecasted to meet some 10% of total demand in OECD
Europe, thereby providing electricity for over 1 billion people and 2 million jobs.3 In Israel,
a concerted effort to increase solar energy usage in the next decade could result in 1500
MW of electricity generation (onsite and central-station), and over 500 MW of
photovoltaics as solar energy replaces electricity for residential heating and various
manufacturing and institutional uses within the next 10-15 years. The increase in solar
usage for electricity generation from zero MW to 1500 MW alone could provide
approximately 1600 jobs4 in addition to ancillary employment growth to meet the demand
for supporting goods and services.
2
Stanford Business School Energy Conference Proceedings 2004 on
http://www.gsb.stanford.edu/news/headlines/2004_energyconf.shtml
3
EPIA/Greenpeace. Solar Generation: Solar Electricity for over 1 Billion People and 2 Million Jobs by
2020. Located at http://eu.greenpeace.org/downloads/energy/SGIIreport.pdf.
4
Discussions with Solel Solar Systems, February 9, 2005.
Cost - benefit analysis of solar energy in Israel 11
The Report for Solar Energy in Israel
The major benefits of solar power include5:
Reduction of greenhouse gas emissions, primarily CO2 and NOx, and prevention of
toxic gas emissions such as SO2 and particulates. (In Israel, it is estimated that 24
million tons of polluting gases could be avoided, amounting to $240 million at
current emissions prices.)
Reduction in import of fossil fuels, with their inherent risks of energy security and
price volatility.
Reclamation of degraded or underused land (in the Negev in southern Israel).
Reduction of required transmission lines of electricity grids.
Contribution to fuel diversity.
Inexhaustibility and „costlessness‟ of solar “fuel”.
Displacement of fossil-fueled units whose reliability is lower during periods of high
electricity demand, as well as serving as a reliable baseload unit (with steam
storage).
Rapid installation and customization of solar technology, with relatively little
maintenance.
Greater local economic development potential than that associated with any other
generating fuel. This economic development spurs opportunities to export skills
and technologies, especially for “first-mover” nations, thereby improving their
terms of trade.
The option to build solar systems in stages rather than as a large-scale generating
station allows for less dependence on raising debt financing abroad, thereby
reducing costs of currency risks.
Potential for regional cooperation between Israel and neighboring countries.
The primary drawbacks associated with increased solar power development are:
5
Tsoutos, T, Frantzeskaki, N. and Gekas, V. (2005). “Environmental impacts from the solar energy
technologies,” Energy Policy 33, pp. 289-296, and information from Solel Solar Systems Ltd.
Cost - benefit analysis of solar energy in Israel 12
The Report for Solar Energy in Israel
Capacity factors of central-station solar thermal generators are relatively low and
output may be less predictable than in fossil units, thereby complicating electricity
system dispatch procedures.
The per-MW installation costs are higher than those of “conventional” natural gas-
fired electricity generation. An important component of these costs is the large
amount of land per MW required for solar thermal generation relative to fossil-
fueled units.6 For PV systems, land requirements can be substantial as well;
constructing 500 MW of PV will require approximately 35 square kilometers of
land, or 1 out of every 600 square kilometers of Israel‟s land mass.7 Costs of
keeping additional generation capacity available to meet instantaneous demand
(regulation and reserves) if sun is unavailable. Recent studies have indicated that
these costs can become significant if the proportion of system demand met by solar
resources exceeds 10%.8
Most of the discussion in this report will focus on the following three types of solar
technology:
o Solar thermal electricity generation units
o Grid-connected photovoltaic systems
o Off-grid photovoltaic systems
(1) Solar thermal electricity generation units
The Israel Ministry of National Infrastructures has authorized the construction of a 100-
MW solar thermal unit scheduled to begin operating in 2007, with an option to increase
capacity to 500 MW upon successful performance of the first unit. The production
costs of this 100-MW unit are expected to be $0.09/kWh initially, decreasing to
$0.07/kWh9 due to expected scale economies and learning. Israel‟s leading producer of
6
However, as indicated later in the report, land costs are far less relevant for photovoltaic (PV) units which
can be located on rooftops of existing buildings or integrated within the buildings themselves (building
installed photovoltaic or “BIPV”). The relatively high materials costs for PV systems has become less of an
issue as well, as less expensive solar-grade silicon replaces higher-quality electronics-grade silicon.
7
Faiman, D., Raviv D., and Rosenstreich, R. (2005). A Top Down Approach for Bringing VLS-PV Plants to
the Middle East, draft discussion paper, Expert Meeting of the IEA Task 8 PV Specialist Group.
8
Milborrow, D. (2001). Penalties for Intermittent Sources of Energy: The Cabinet Office: London.
9
Greenpeace (2004), “Solar Thermal Power Plants”, working paper.
Cost - benefit analysis of solar energy in Israel 13
The Report for Solar Energy in Israel
solar thermal technology plans to build a 500-MW facility in southern Israel, and
expects to manufacture 200 MW per year, 100 MW of which would be for export. The
Ministry‟s decision to make solar thermal development a higher priority than other
solar technologies such as photovoltaic, while consistent with the recommendations of
the Ministry‟s Energy Master Plan, is unique; all other countries that have developed
significant solar markets have focused on photovoltaic development10. However,
southern Israel‟s high insolation rates, matched by only a few other countries, present
an opportunity for solar thermal to become commercially viable in Israel at a much
earlier stage. This in turn will facilitate the development and export of the technologies
necessary to make solar thermal viable elsewhere. Despite this opportunity, however,
there has been little progress toward implementing the Ministry‟s decision.
Solar thermal generation units focus sunlight onto a receiver that absorbs and converts
sunlight into heat, which the generator converts into electricity. Three primary
technologies are employed: parabolic trough systems, dish/engine systems, and power
towers. The primary technology developed in Israel is the parabolic trough, which uses
curved mirrors to focus sunlight on an absorber tube filled with oil or other fluid. The
hot oil boils water, which is used to produce steam, in turn generating electricity.11 This
generator is connected to a high-voltage transmission grid and is generally treated
similarly to wind and small hydroelectric generation facilities by an electric utility.
Currently, the per-MWh costs of solar generation are far higher than the per-MWh cost
of generation from fossil units, when environmental and other external costs are not
taken into account. Electricity generation from solar thermal power now costs between
$85 and $135 per MWh, which is 2-3 times the cost of electricity generated by coal and
natural gas units. However, technologies such as the parabolic trough (currently being
refined by Israeli manufacturers), the central receiver, and the parabolic dish should
produce higher conversion efficiencies and lower capital costs, possibly reducing
10
This does not imply that other countries have not developed solar thermal technologies, including the US,
Mexico, India, and Israel‟s neighboring countries in North Africa. See Greenpeace report Solar Thermal
Power 2020: Exploiting the Heat from the Sun to Combat Climate Change.
11
US Department of Energy description, located on
http://www.eere.energy.gov/RE/solar_concentrating.html. Accessed on May 11, 2005)
Cost - benefit analysis of solar energy in Israel 14
The Report for Solar Energy in Israel
generating costs to $62/MWh by 2020.12 Investment in solar thermal units grew over
50% in 2003 alone, becoming a $5 billion industry worldwide.13 Solar thermal capacity
worldwide is expected to reach 5,000 MW by 2015 and 9,500 MW by 2020.
(2) Photovoltaic (PV) systems
Photovoltaic systems generate electricity from sunlight by means of a semiconductor
material, primarily silicon, which can be adapted to release electrons, the basis of
electricity. When sunlight reaches the semiconductor, the electric field across the junction
between the positively charged and negatively charged layers of the semiconductor causes
electricity to flow, generating DC power. Photovoltaic systems do not require bright
sunlight to operate, and can produce electricity even on cloudy days, since their energy
production simply varies with sunlight intensity.
PV systems are comprised of the following elements:
o Cells
o Modules that combine a large number of cells into a unit.
o Inverters that convert electricity from direct current (DC) power to alternating
current (AC) compatible with the local distribution network.
(a) Grid-connected photovoltaic (PV) systems
Grid-connected PV systems currently comprise nearly 80% of the PV systems currently
installed worldwide.14 These systems can be installed on rooftops or integrated into the
roofs and facades of residential and commercial buildings. Grid-connected PV systems
are most economically viable when net metering tariffs permit electricity customers to
sell excess electricity generated by a PV facility to the electric utility.
12
Sargent & Lundy (2003). “Executive Summary: Assessment of Parabolic Trough and Power Tower Solar
Technology Cost and Performance Forecasts,” NREL Working Paper NREL/SR-550-35060
13
Earthscan website (www. Earthscan.co.uk), January 9, 2004 article.
14
Canadian Solar Industry Association (2005), Valuing Grid-Connected Solar Electricity: Priming the
Market in Ontario, May 25, 2005 version 2.3.
http://www.cansia.ca/downloads/CanSIA%20Position%20Paper%20-%20Feed%20in%20Tariffs%20-
%20V2.3.pdf (Accessed June 1, 2005).
Cost - benefit analysis of solar energy in Israel 15
The Report for Solar Energy in Israel
The average costs of generation for grid-connected PV technology range from $200 to
$400 per MWh, depending upon the scale and location of the unit. PV technology is
likely to become less expensive over time, primarily because of mass production of
components and greater access to cheaper investment capital. The average per-MWh
cost of a PV system in the most favorable locations worldwide is expected to decline
from $260 in 2005 to $190 by 2010 and $130 by 202015, based on conservative
estimates of scale economies and technological improvements. In Israel‟s case, if the
expected retail electricity price trends contained in the Government‟s Energy Master
Plan materialise, then PV power will be competitive with typical electricity prices paid
by residential and small commercial electricity customers during the next 10 years.16
However, such a relatively long timeframe, especially for residential customers, has not
hindered the development of solar PV systems in European countries with similar
electricity prices. In fact, one out of every five homes to be constructed in Europe by
2010 is expected to have a solar PV system.17 Achieving this level of market
penetration for grid-connected PV will likely require consistent government support for
programs such as Germany‟s 100,000 Roofs initiative and the Million Solar Roofs
program in the US.18
(b) Off-grid PV systems
Completely off-grid PV systems are less common, and are connected to a battery via a
charge controller which stores the electricity generated and acts as the main power
supply. These systems have long been cost-competitive for remote sites where line
extensions are costly or grid power is unreliable. However, these systems are being
increasingly considered as a replacement for or supplement to utility power in areas
15
Using average of Hong Kong, Bombay and Los Angeles as proxy. See Greenpeace/EPIA Report “Solar
Generation”
16
Ibid. Also see Israel Energy Master Plan (www.mni.gov.il) and Israel Public Utilities Authority tariffs
(www.pua.gov.il) in Hebrew. The rate inflation trajectory through 2010 is a weighted average of projected
fuel cost increases (70% coal; 30% natural gas).
17
Renewable Energy World, January 2004
http://www.earthscan.co.uk/news/article/mps/UAN/238/v/3/sp/624332670524272196606
18
EPIA/Greenpeace (2004). Solar Generation: Solar Electricity for over 1 Billion People and 2 Million Jobs
by 2020, October 2004, 15.
Cost - benefit analysis of solar energy in Israel 16
The Report for Solar Energy in Israel
facing electricity capacity shortages,19 as well as industrial applications such as repeater
stations for mobile phones.20
Although the PV technologies, both grid-connected and off-grid, will likely remain more
expensive for electricity generation for the next several years (though this gap is projected
to narrow substantially over this period),21 their clear advantage appears during super-peak
summer periods, when energy prices can be several times the price prevailing during
periods of lower electricity demand. In Israel, however, this advantage is somewhat muted,
due to the lack of peak-period pricing options for retail electricity consumers who are at
most affected only by the time-differentiated prices in the standard time-of-day rates.
Source: US Department of Energy
This report will identify and quantify, where feasible, the benefits and costs associated with
the development of solar resources in Israel.
19
Marnay, C. Richey, R., Mahler, S., Bretz, S. and Markel, R. (1997) Estimating the Environmental and
Economic Effects of Widespread Residential PV Adoption Using GIS and NEMS, LBNL Working Paper
LBNL-41030 UC-1321.
20
EPIA/Greenpeace (2004). Solar Generation: Solar Electricity for over 1 Billion People and 2 Million Jobs
by 2020, 12.
21
International Energy Agency (2004).World Energy Outlook In our report, however, PV costs decline from
$260/MWh in 2005 to $117/MWh by 2025, only $12/MWh above the projected generation costs for natural-
gas units without accounting for externalities.
Cost - benefit analysis of solar energy in Israel 17
The Report for Solar Energy in Israel
2. Social/environmental and global costs
A significant barrier to the development of renewable energy has been the omission of the
costs associated with environmental externalities in determining the optimal fuel mix for
generating electricity. In economic terms, environmental externalities are defined as
benefits or costs generated as an unintended by-product of an economic activity, occurring
whenever the private consumption or production decisions made by one economic agent
affect the welfare of another agent and there is no method for the producer of the
externality to compensate the affected party.22 In the context of electricity markets, most
electricity systems minimize the (private) costs of dispatching generators, without
reflecting the costs that electricity generation imposes on the environment. By not doing so,
this “least-cost dispatch” thus reduces society‟s welfare below its optimal level.
While emissions markets have developed rapidly during the past decade to “internalize”
environmental externalities, they still persist to some extent. Extensive economic analysis
has been developed to quantify environmental externalities, in part due to government
policies requiring generating resources to be evaluated based on their societal costs and
benefits. When evaluated on this basis, solar resources become more economically viable.
That is, while the difference in the marginal private costs of solar-generated and fossil fuel-
generated electricity is currently large, this difference is much smaller when solar and
fossil-fuel generation are evaluated in terms of their marginal social costs which include the
marginal costs of environmental damage.
The calculations of the avoided environmental externality costs focus on the 4 major
pollutants that constitute the bulk of environmental externalities associated with electricity
generation: nitrogen oxides (NOx), sulfur dioxide (SO2), carbon dioxide/greenhouse gases
(CO2), and particulates. The annual avoided costs of these pollutants due to increased solar
thermal generation are calculated by determining the tonnage of each pollutant avoided for
each unit of fossil generator output displaced by solar, and multiplying that amount by the
cost of that pollutant.
22
Sundqvist, T. (2000). Electricity Externality Studies: Do the Results Make Sense?, Masters Thesis, Lulea
Institute of Technology (Sweden).
Cost - benefit analysis of solar energy in Israel 18
The Report for Solar Energy in Israel
The most reliable source for determining these avoided costs is the ExternE study for the
European Commission. This study uses a “bottom-up” approach, calculating the total
marginal external environmental cost associated with a MW of electricity generated by a
particular fuel. Moreover, the ExternE approach is unique in that it calculates the
environmental costs incurred over the fuel‟s “life cycle”, rather than the costs incurred
exclusively in electricity generation. The study recognizes that environmental costs can be
extremely site-dependent due to local climatic and other conditions, so that the costs for
various electricity-generating fuels reflect both local and Europe-wide effects.
The table below summarises the total annual avoided environmental costs using average
values for Europe, assuming CO2 emissions prices of $10/ton.23 The calculations
supporting these results are based on scenarios for which solar generation in Israel ranges
from 500 MW to 2500 MW. The avoided external costs reflect the displacement of coal
and natural gas MWh in typical hours during the peak, shoulder, and off-peak seasons
multiplied by the per-MWh emissions derived from ExternE data. All figures reflect the
hypothetical solar displacement of coal-fired and gas-fired units. To the extent that PV,
rather than solar thermal generators, would displace some amount of coal and/or natural
gas, the results could be higher or lower than those appearing in this table.24
23
Extern E values actually vary widely from $4.30/tons CO 2 to $160/tons CO2. Recent Greenpeace reports
suggest that a conservative value would be in the range of $10 – 20/ton CO2, which is in the range of the
current trading price for CO2 emissions of $8 (February 1, 2005).
24
According to CleanEdge, each MW of PV electricity displaces up to 16,000 kg of NO x, 9,000 kg of SO2,
600 kg of other particulates, and more than 2.4 million kg of CO 2 each year.
Cost - benefit analysis of solar energy in Israel 19
The Report for Solar Energy in Israel
Table 1: Avoided environmental costs applied to 2003 Israel electric
system25 based on average external values for Europe
Calculation of annual external costs avoided: $10/ton CO2 ($US millions)
Summer Winter Shoulder Total
500 MW 5.7 2.0 5.0 12.7
1000 MW 11.4 4.1 10.0 25.5
1500 MW 17.3 6.1 15.2 38.6
2000 MW 23.9 8.2 22.7 54.8
2500 MW 30.7 10.2 31.3 72.1
These results reflect solar thermal technology with neither heat storage capacity nor fossil-
fuel backup, and assume hourly levels of solar output typical for a unit in the Negev
desert.26 The avoided externalities will be quite overstated if there is substantial cloud
cover and the generating unit uses fossil-fuel backup, as has been demonstrated in Europe
and Australia. However, for Israel, whose current dominant solar thermal technology does
not use fossil backup due to Israel‟s higher expected insolation levels,27 these higher levels
of avoided environmental costs are reasonable. Moreover, these external costs may
actually be understated, to the extent that these ExternE values, which are annualized, may
not reflect the environmental conditions on peak summer days, when ozone levels are high
and solar electricity generation is most available.
3. National benefits from local development and
production of new technologies
The purpose of this section is to estimate the economic impact, in terms of employment,
personal income, gross domestic product, and avoided income support expenditures of
developing Israel‟s solar energy generation resources. This impact includes the “direct”
growth in the solar sector itself, as well as the “indirect” growth in other sectors of the
economy due to the “multiplier effect” of ancillary economic activity supporting the solar
25
The results using the results for Greece, for which the external costs are generally lower, are the following
(for CO2 emissions prices of $10/ton). These annual values are $6.7 million for 500 MW, $13.5 million for
1000 MW, $20.2 million for 1500 MW, $26.9 million for 2000 MW and $33.7 million for 2500 MW.
26
The assumptions are consistent with those modeled in a recent presentation, “Solar Power Stations in the
Negev” at the Association of Electrical and Electronic Engineers conference held in August 2004 in Eilat,
Israel
27
Dey, C. and Lenzen, M. (1999). Greenhouse Gas Analysis of Electricity Generation Systems, University of
Sydney (Australia) working paper.
Cost - benefit analysis of solar energy in Israel 20
The Report for Solar Energy in Israel
sector. Examples of such indirect growth include growth of firms supplying labor and/or
materials to these generating facilities, and the retail, services and other sectors supporting
the increased consumption activities due to solar growth. The renewables sector overall,
and the solar sector in particular, creates more jobs per MW than the petroleum-based
energy sector, especially in the professional, technical and managerial occupations.28
Table 2 provides a survey of US and European studies estimating the economic
development benefits of solar energy:
28
Daniel M. Kammen, Kamal Kapadia and Matthias Fripp (2004). “Putting Renewables to Work: How Many
Jobs Can the Clean Energy Industry Generate?” RAEL Report, University of California Berkeley.
Cost - benefit analysis of solar energy in Israel 21
The Report for Solar Energy in Israel
Table 2: Survey of studies of economic benefits of solar energy
Study Type of solar Findings
technology
Fred Morse - University of Solar thermal Building 5 100-MW concentrated solar power (CSP) facilities over
New Mexico Bureau of 10 years will create 11,696 jobs during construction and 397 annual
Business and Economic operations jobs; a total of $2.2 billion during construction and $46.1
Research million annually for operations.
National Renewable Energy Solar thermal For each 100 MW trough facility, 817 jobs are directly tied to
Laboratory (2004)29 (Schwer construction and installation, with another 1,570 jobs during the
and Riddel) construction phase. During the post-construction O&M phase,
employment impact averages 140 jobs annually.
Rocky Mountain Institute30 Solar thermal Solar thermal plants create 2.5 times as many skilled high-paying
jobs as conventional fossil-fueled plants.
Renewable Energy Policy Photovoltaic 35 person-years required for each MW of PV installed. Over a 10-
Project year period, PV creates 40% more jobs than coal. Adding 2,000 MW
of PV in the mid-Atlantic states would create 5,700 yearlong jobs in
installation, operation and maintenance and 8,100 yearlong
manufacturing jobs.31
Department of Energy Million Photovoltaic Forecast of 70,000 high-tech jobs created from 2004-2010 generated,
Solar Roofs Initiative32 or about 15 jobs/MW.
EPIA/Greenpeace Photovoltaic 20 jobs created/MW during manufacture and 30 jobs/MW total
(installation, retailing and ancillary services) through 2010; declining
to 10 and 26 jobs, respectively between 2010 and 2020.
Greenpeace report for the Photovoltaic PV 500,000 rooftops by 2010 leading to $10 billion market and
European Commission33 creating 100,000 new jobs.
VOTESOLAR (California)34 Photovoltaic 20 manufacturing and 13 installation and maintenance job-years will
be created per MW of installed PV. This will result in about 19,000
annual jobs created of 2700 MW of PV installed. Employment
multipliers of 3.86 for PV and for solar thermal.
David Berry Economic Photovoltaic Construction of solar energy projects resulted in $9.4 million of
Impacts of the Environmental Arizona earnings and 299 jobs (direct and indirect).
Portfolio Standard on Arizona
Solel Solar Systems (Israel) Solar thermal For 100 MW plant, 700 jobs for construction, installation and
operation during construction period and 1600 positions overall
(assuming another 100 MW manufactured for export). For 500 MW,
1,000 jobs during construction and 120 permanent jobs in operation
and maintenance post-construction. Permanent positions also
created for engineering and project management services “exported”
to other countries. Several thousand additional positions to provide
materials, transportation and supporting services.
29
Schwer, R.K. and Riddel, M. (2004). “The Potential Economic Impact of Constructing and Operating Solar
Power Generation Facilities in Nevada,” NREL Working Paper NREL/SR-550-35037.
30
Rocky Mountain Institute (http://finder.rmi.org/renewable/solar/benefits.asp)
31
Interstate Renewable Energy Council (2004). “Labor Forecasts and Job Trends for the Solar and
Renewable Energy Industries,” Working Memo, July 1, 2004.
32
Department of Energy Million Solar Roofs Initiative www.millionsolarroofs.com/about_initiative/
33
www.greenpeace.org/uk/gp_wind_solar/solar_power.cfm
34
http://ist-socrates.berkeley.edu/~kammen/C226/Berkeley-C226-VoteSolarJobs-Pres.pdf
Cost - benefit analysis of solar energy in Israel 22
The Report for Solar Energy in Israel
As mentioned above, one reason for the especially high jobs per MW figures for solar
(especially PV technologies) is that solar installation and maintenance requires more highly
skilled workers per MW than conventional fossil-based technology. In addition, relative to
conventional generation technologies, a greater percentage of solar employment (e.g.,
installers and service engineers) is at the installation site, thereby boosting local economic
opportunity. In addition, PV units can be easily installed in remote and rural areas
suffering from chronically high unemployment and which may not be targeted for grid
connection for many years.
Although most of Israel is a promising area for solar energy expansion, the poorer,
sparsely populated areas of the Negev in southern Israel show the greatest potential. These
areas suffer from chronically high unemployment (usually 2-2.5% above the national
average) and an inability to retain a highly skilled workforce. By developing these
technologies, the region will be able to retain highly trained graduates of the area‟s flagship
institution of higher education, Ben-Gurion University, and create ancillary technical and
support job opportunities previously unavailable to the region‟s residents. The export
potential for Israel-developed solar technologies has already received wide exposure over
the years, as Israel has exported much of its solar technology to California and Western
Europe, assisting the latter to progress toward the European Union goal of 22% renewable
electricity by 2010.
3.1 Major assumptions for the analysis
An assessment of the national benefits associated with rapid solar development requires
judgment on the expected growth trajectory of solar generation investment, which depends
on a variety of factors such as government energy policy, technological developments, and
energy prices. The general methodology of estimating national benefits for Israel through
2025 is described below. An additional analysis estimating these national benefits in the
context of an overall benefit-cost analysis appears in Section 7 and Appendix A of this
report.
Cost - benefit analysis of solar energy in Israel 23
The Report for Solar Energy in Israel
For illustrative purposes, we assume the following development schedule:
(1) Photovoltaic: 25 MW/year from 2006 through 2025, for a total of 500 MW.
(2) Central station: 500 MW by 2010; 1000 MW by 2013; 1500 MW by 2015 and 2000
MW by 2020. Each 500 MW increment is assumed to have a 3-year construction
period; for example, the first 500 MW increment begins construction in 2008 and is
completed in 2010.
The following employment and income assumptions are used in this analysis:
(1) The average annual Israeli salary for all jobs including the “multiplier effects” is
$28,400, and is increased by 2% annually. This assumes the same composition of jobs
in the Beer Sheva/Negev region as in the western US, but accounts for the salary
differentials between the two regions, using data from the Israel Central Bureau of
Statistics and the National Insurance Institute.
(2) The per-employee unemployment insurance costs avoided due to this increased
employment are 40% of the average salary for the Beer Sheva/Negev region, increased
by 2% annually.
Tables 3 and 4 show the employment benefits (including job multiplier effects) and the
reduced public expenditure for unemployment compensation derived from increased use of
central-station and photovoltaic solar technology. These exhibits reflect the multiplier
assumptions of the NREL/Schwer & Riddel study mentioned in the above survey. To
calculate the net present value (NPV) of these benefits, we assume a 5% discount rate; we
assume a 7% discount rate as well, later in this report.
Cost - benefit analysis of solar energy in Israel 24
The Report for Solar Energy in Israel
Table 3: Employment, personal income and gross domestic product
benefits – solar thermal
MW
Gross National manufactured
Product (Million and/or
Year Employment Nominal $US) Comments installed
2005 -7 0 0 No activity
2008 1,932 55 CON1 500
2009 3,497 108 CON1 500
2010 3,078 97 CON1 500
2011 2,234 72 CON2+SS1 1,000
2012 3,800 124 CON2+SS1 1,000
2013 5,312 185 CON2+SS1+CON3 1,500
2014 4,102 154 CON3+SS1+SS2 1,500
2015 3,682 143 CON3+SS1+SS2 1,500
2016 907 36 SS1+SS2+SS3 1,500
2017 1,512 60 SS1+SS2+SS3 1,500
2018 2,839 114 CON4+SS1+SS2+SS3 2,000
2019 4,405 178 CON4+SS1+SS2+SS3 2,000
2020 3,985 164 CON4+SS1+SS2+SS3 2,000
2021 1,210 51 SS1+SS2+SS3+SS4 2,000
2022 1,210 52 SS1+SS2+SS3+SS4 2,000
2023 1,210 53 SS1+SS2+SS3+SS4 2,000
2024 1.210 53 SS1+SS2+SS3+SS4 2,000
2025 1.210 53 SS1+SS2+SS3+SS4 2,000
Total 47,335
NPV@5%: 2005- 1,008
2025
Levelised per year 81
The notation in the comments is as follows:
CON1 – CON4: the construction of four 500-MW solar thermal units according to the
construction schedule described above.
SS1-SS4: the “steady-state” period following the 3-year construction period for
each of the four units.
Cost - benefit analysis of solar energy in Israel 25
The Report for Solar Energy in Israel
Table 4: Avoided unemployment benefits - solar thermal
Average annual Unemployment MW
income support benefits avoided manufactured
Year Employment benefit ($US) ($US million) and/or installed
2005 0 7,705 0 0
7,859 0
2006 0 0
2007 0 8,016 0 0
8,177 16
2008 1,932 500
2009 3,497 8,340 29 500
2010 3,078 8,507 26 500
2011 2,234 8,677 19 1,000
2012 3,800 8,850 34 1,000
2013 5,312 9,027 48 1,500
2014 4,102 9,208 38 1,500
2015 3,682 9,392 35 1,500
2016 907 9,580 9 1,500
2017 1,512 9,771 15 1,500
2018 2,839 9,967 28 2,000
2019 4,405 10,167 45 2,000
2020 3,985 10,370 41 2,000
2021 1,210 10,577 13 2,000
2022 1,210 10,789 13 2,000
2023 1,210 11,004 13 2,000
2024 1.210 11,225 14 2,000
2025 1.210 11,449 14 2,000
Total 47,335 449
NPV@5%: 2005-2025 260
Levelised per year 21
These exhibits indicate that the total (undiscounted) benefits from this illustrative ramp-up
schedule for solar thermal generation from 2005 through 2025 would amount to $1 billion
of increased GDP in net present value (including multiplier benefits), and $260 million of
avoided unemployment payments through 2025.
We should note that this analysis of the economic benefits of solar excludes the following:
A broader tax base to support municipal services, which generally exceed
the additional costs that the industry imposes on the municipalities.
Other economic impacts that have not been quantified in this report
including “quality-of-life” considerations, such as mitigating the growing
Cost - benefit analysis of solar energy in Israel 26
The Report for Solar Energy in Israel
socioeconomic problems associated with urban migration and
overcrowding. The Government of Israel‟s policy over the next 20 years is
to create economic opportunity outside Israel‟s urban areas, and the
development of solar technologies has the potential to do so.
Avoided commuting costs associated with the current need to commute
from southern Israel to Israel‟s center region for employment opportunities.
4. Advantages of solar electricity generation
This section will address the advantages offered by solar electricity generation in terms
of fuel price stability and reduced investment risk, and will facilitate an evaluation of
the risk mitigation potential of solar technologies.
4.1 Solar’s value as a “flexible real option”
A strong argument in favor of solar resources is the flexibility they provide in terms of their
modularity, their time horizon and their insurance value. These attributes have no value in
the classical discounted cash flow (“DCF”) model for valuing capital investments, which is
one reason that solar investments have required extensive subsidies in order to compete
with conventional, less flexible fossil-fueled technologies. However, the real options
method, by explicitly valuating the investment alternatives‟ modularity, flexibility and
insurance, makes solar resources much more attractive without costly subsidies. In fact,
applying the DCF model to investments in solar technologies, by ascribing no value to
these characteristics, sets a lower bound on the value of solar investment.35
The major uncertainties addressed in a real options valuation of solar resources with respect
to generation include:
a. The role of research and development in lowering solar costs over time (e.g., by
improving storage capability)
b. Fuel and emissions price volatility
35
An example of calculating the value of a solar investment using NPV without including its real option
value appears in the Appendix.
Cost - benefit analysis of solar energy in Israel 27
The Report for Solar Energy in Israel
c. Environmental and energy policy changes
d. Probability of energy disruptions
e. Load growth.
The decision whether to exercise the option and deploy the technology or to invest further
in R&D is part of solar‟s function as an “insurance premium”. There is a cost to further
investment in R&D that may ultimately “pay off” in terms of reduced solar cost.
Nevertheless, the value of deploying that option at the correct time – an option that is not
nearly as available to fossil-fueled technologies (due to risks associated with regulation,
construction lead-times, etc.) – can be significant. In fact, the option value for all
renewable technologies offering this deployment option is estimated worldwide at over $12
billion per year.36
4.2 Solar’s value for mitigating price and environmental/regulatory risks
Electricity has the unique characteristic of being effectively a non-storable commodity.
Nevertheless, most of its consumers have a costless “call option” to consume at any time.
Consequently, electricity generators must have their generating fuels readily available with
minimal financial exposure, and thus purchase hedges and storage rights to meet this
objective. To the extent that solar displaces other resources in electricity generation (for
Israel - coal and natural gas), the need for price hedging and storage declines. Moreover,
solar itself may act as a hedge against fuel price volatility, especially during peak hours.
Recent history in the US and Western European markets has demonstrated the increasing
volatility of oil and natural gas prices. As natural gas has become the fuel of choice for
new electricity generation due to its combination of low emissions and high efficiency, its
price volatility has in some cases grown beyond the ability of many generators – and other
gas customers – to manage. Nevertheless, some attempts have been made to quantify the
cost of volatility, both in terms of the level of increased value-at-risk (VAR) and the cost of
managing price volatility. For example, the Wuppertal Institute estimates that the VAR
associated with one barrel of crude oil could be as high as $15.50 in the short-term and
36
G. Davis and B. Owens (2003). “Optimizing the level of Renewable Electric R&D Expenditures Using
Real Options Analysis,” NREL Working Paper TP-620-31221.
Cost - benefit analysis of solar energy in Israel 28
The Report for Solar Energy in Israel
$17.20 in the long-term. For most VAR applications, this means that there is a 5%
probability that a company‟s losses from oil price spikes could exceed their equivalent of
$15.50 per barrel in the short-term37; this can be a substantial loss for an energy-intensive
industry with few alternatives to date. Solar resources have far lower VARs despite their
generally higher per-MW cost, thereby being an attractive alternative for some energy-
intensive industries.
In this context, it is useful to describe the risk management benefits from increased solar
usage in greater detail. These benefits may be categorized as follows38:
a. Fuel price risk. The risk that the prices of the fuel and the associated emissions
associated with electricity generation will exhibit great variability. To a much lesser
extent, there is also fuel supply risk; i.e., the risk that fuel will not be available at any price
in sufficient quantities to meet regulatory or contractual requirements for delivery of
electricity.
With regard to fuel price risk, the supply of coal, oil and natural gas can be interrupted due
to a variety of “normal” factors such as transportation constraints. These risks can be
mitigated by financial instruments such as firm fuel and transportation contracts and
storage, although solar deployment could assist in this area as well. Catastrophic risks due
to natural disasters or terrorism striking a fuel transportation facility, however, can only be
managed by using fuels such as renewables for which these risks are minimal. Thus, solar
resources will help to mitigate unsystematic catastrophic risks and to minimize the price
risk in the fuel portfolio. Although we do not try to determine the value of all risks
mitigated by solar deployment, they can be significant. In fact, storage costs alone can be
expected to increase the cost of electricity of a gas-fired combined-cycle plant by
$0.005/kWh.39, 40
37
Busch, T. and Raschky, P. (2004). Value at Risk of Carbon Constraints – an Input Oriented Approach of
Resource Scarcity, Wuppertal Papers, Wuppertal Institute Working Paper, No. 144.
38
Bachrach, D, Wiser, R, Bolinger, M. and Golove, W. (2003). Comparing the Risk Profiles of Renewable
and Natural Gas Electricity Contracts, LBNL Working Paper LBNL-50965.
39
Awerbuch, S. (2000). “Investing in photovoltaics: risk, accounting and the value of new technology,”
Energy Policy 28, pp. 1023-1035.
40
Leitner, A. and Owens, B. (2003). “Brighter than a Hundred Suns: Solar Power for the Southwest”, NREL
Working Paper NREL/SR-550-33233.
Cost - benefit analysis of solar energy in Israel 29
The Report for Solar Energy in Israel
Recent history indicates the extraordinarily high level of price volatility to which fossil
fuel-dependent countries such as Israel are exposed. For example, although long-term
price forecasts produced by the US Department of Energy reference cases in the figures
below indicate that (in constant 2003 dollars) oil prices will remain in the range of $25-$30
per barrel and coal prices will remain in the $20 per ton range through 202541, the
increasing demand for energy, especially by China and India, and sudden supply changes
due to geopolitical events, have recently caused oil prices to fluctuate from $15 to the range
of $40-$60, and coal prices to double very quickly (as they have recently, reaching the $60-
$80 range). These recent changes raised the overall costs of electricity generation by 18%
in 2004 and diverted nearly 0.5% of Israel's 2004 gross domestic product to pay for fuel
import price increases.42
41
US Department of Energy, Energy Information Administration (2005). Annual Energy Outlook with
Projections through 2025, http://www.eia.doe.gov/oiaf/aeo/index.html (Accessed June 7, 2005).
42
A. Mor. "Oil Price Increases and Their Implications for Israel's Economy", Israel Parliament Information
Sheet 242 on Economic Topics, October 2004 (Hebrew).
Cost - benefit analysis of solar energy in Israel 30
The Report for Solar Energy in Israel
Figure 1: Forecasted oil prices through 2025
Source: USA, Energy Information Administration
Figure 2: Forecasted coal prices through 2025
Source: USA, Energy Information Administration
The extent of Israel's exposure to fuel price volatility is evident in the chart below,
indicating Israel's nearly complete current dependence on fossil fuels for its energy needs.
Cost - benefit analysis of solar energy in Israel 31
The Report for Solar Energy in Israel
Figure 3: Primary Energy Consumption in Israel during 2004
Primary Energy Consumption in Israel
in 2004 ( Million TOE and percentages)
1.1, 5% 0, 0%
7 . 8 , 38 % Coal
Oil
Natural Gas
11 . 8 , 57 % Renewables
Source: Israel Central Bureau of Statistics
The chart below indicates the forecasted portfolio of energy sources in 2025, reflected in
the Government of Israel's Energy Master Plan. This significant reduction in Israel's
dependence on coal and oil and increased reliance on natural gas (partially from domestic
sources) and renewables is likely to reduce Israel's exposure to fuel price volatility.
Figure 4: Primary Energy Consumption in Israel forecasted during 2025
Primary Energy Consumption in Israel
in 2025 (Million TOE and percentages)
2.1, 5%
9.6, 23%
Coa l
14.8, 36% Oil
Na tura l Ga s
Re ne w a ble s
14.6, 36%
Source: Eco Energy, Ltd.
Cost - benefit analysis of solar energy in Israel 32
The Report for Solar Energy in Israel
Fuel supply risk may be reduced in the long term as well. This fact was demonstrated
clearly in California, where an installed dependable PV capacity of 5,000 MW would have
reduced the annual peak day‟s load in 2000 by 2,500 MW, thereby reducing by 50% the
number of equivalently sized gas peakers needed to ensure capacity reserve.43 To the extent
that solar output and loads are not perfectly correlated (e.g. brief cloud cover), this solar
supply risk can be mitigated locally and inexpensively on the customer‟s demand side by
solar load control – a much simpler response to gas price volatility than the complex
financial instruments developed to hedge fuel supply risks for large fossil-fueled
generators.44
b. Environmental and regulatory risk. This refers to the financial risk stemming from
existing environmental regulations and the uncertainty regarding the extent of additional
stringency of future environmental standards.
Solar resources by nature entail far less environmental risks than fossil fuels – and even
other renewables. Such risks include changes in environmental compliance standards
(renewable portfolio standard, stronger emissions regulation).
4.3 Avoided transmission and distribution (“T&D”) costs
The coincidence of loads with solar availability can be extremely valuable for electricity
utilities as well. Local-area transmission and distribution systems are generally designed to
meet the sum of individual non-coincident demands for the area served, which can exceed
the area‟s coincident demand by 20-30% or more. If non-coincident demands can be made
to coincide, e.g., by using PV-generated electricity to meet demand, the T&D system
requirements are lower. This lower requirement has several positive impacts on the electric
utility and its customers, such as (a) reducing its needs for external financing from foreign
markets for T&D expansions and maintenance, and (b) improving local system reliability.
The same principle holds for central-station solar thermal generation.
Among the T&D costs saved by the electric utility are:
43
Herig, C. (2001). Using Photovoltaics to Preserve California’s Electricity Capacity Reserves, working
paper.
44
Perez, R. Hoff, T. Herig, C. Shah, J. (2003). “Maximizing PV Peak Shaving with Solar Load Control:
validation of a web-based economic evaluation tool”, Solar Energy 74, pp. 409-415.
Cost - benefit analysis of solar energy in Israel 33
The Report for Solar Energy in Israel
Deferred or avoided T&D capacity upgrade costs
Fuel price and supply risk associated with grid support
Debt service during T&D construction
A survey of US utilities indicates that that the values of these avoided costs range from
$2200 - $4500 per kW of PV.45 Distributed generation overall is forecasted to save nearly
$130 billion in transmission investment worldwide through 2030 (about 8% of the world
total).46
It should be noted that these avoided costs do not reflect two other measures of cost savings
from distributed PV systems: (1) their inherent “real option” value and (2) their
coincidence factor with respect to system peaks.
The modularity of PV systems can offer significant additional advantages for the system in
terms of their “real option” value. T&D investments are inflexible – they are effectively
“irreversible” and have no option value - since it is very expensive to reconfigure most
systems if the forecasted demands subsequently change significantly in response to new
information. A PV system, like other distributed energy systems, can be easily customised
to meet area demand changes at lower cost. That is, while T&D investments may have
higher net present values per MW than PV systems based on an expected outcome, PV
systems provide a utility with an option to respond to changes quickly. That option may be
sufficiently valuable to forego some large T&D investments.47 Such real option analysis is
now part of electricity system planning throughout the US and parts of Europe, where it has
been instrumental in identifying opportunities for developing renewable distributed
generation.
Nevertheless, even when T&D investments are more valuable than the real option
associated with distributed generation such as PV, solar thermal units still provide T&D
benefits, especially during peak hours. Although any new generating unit will require some
degree of T&D investment, the fact that the output of PV is coincident with peak demand
45
McCage, J. and Herig, C. (2003). The Value of Building Integrated Photovoltaics, working paper.
46
IEA (2003). World Energy Investment Outlook 2003.
47
See for example, Dixit, A. and Pindyck, R. (1994) Investment under Uncertainty, Princeton University
Press.
Cost - benefit analysis of solar energy in Israel 34
The Report for Solar Energy in Israel
reduces its T&D investment requirements per MW (e.g., wires, transformers) relative to
conventional fossil units with lower coincidence levels.
Although at this initial stage, this report does not attempt to quantify the T&D costs
avoided due to solar deployment, these costs should be assessed as part of Israel‟s ongoing
activities toward restructuring the electricity industry.
4.4 The geopolitical-strategic benefits of diversifying energy sources
For various well-known reasons, Israel‟s geopolitical situation requires management of the
risks associated with its energy supply. Although Israel has progressed recently toward
achieving greater energy security through recent natural gas discoveries off its shores, its
projected dependence on natural gas and coal as its (almost) exclusive generating fuels
could result in unprecedented price volatility. This fact has already been demonstrated in
the northeastern US and parts of Europe, where gas-driven spikes in wholesale electricity
prices have become frequent events. Despite this correlation, however, the challenges –
and costs - associated with managing the “spark spread” between electricity and gas prices
have increased. There is growing evidence that increases in renewables reduce both the
level and volatility of gas prices. Moreover, since there is no organised market for natural
gas in Israel and much of the gas to date is committed via take-or-pay contracts, price
spikes for any remaining uncommitted gas could occur. The losses due to these spikes
could be significant, if experience outside Israel is an indicator.
Although renewables in general could mitigate these losses, solar has the potential of doing
so most effectively, since its productivity is highest during system peak hours, when gas
prices are highest and most volatile. Recent US studies indicate that every 1% reduction in
natural gas demand leads to a long-term average reduction in wellhead gas prices of 0.8%
to 2%, with even larger short-term reductions. This 1% reduction translates into electricity
price reductions ranging from $5/MWh (for the 0.8% case, assuming renewables displace
20% of natural gas for electricity generation) to $45/MWh (for the 2% case, assuming
renewables displace 80% of natural gas for electricity generation).48 Put differently, each
48
Wiser, R., Bolinger, M. and St. Clair, Matt (2005). Easing the Natural Gas Crisis: Reducing Natural Gas
Prices through Increased Deployment of Renewable Energy and Energy Efficiency, LBNL Working Paper
LBNL-56756.
Cost - benefit analysis of solar energy in Israel 35
The Report for Solar Energy in Israel
MWh for which renewables displace natural gas could result in added consumer value
equivalent to $10-20/MWh of renewables. Although the magnitudes for Israel cannot be
forecast at this point, the moderating impact that renewables can have on price levels and
volatilities can be significant.
Although coal in Israel is not expected to display the volatility of natural gas prices, due
largely to the wide geographic variety of coal sources and the historically strong
negotiating power of IEC and the Israel National Coal Company, there is a strong
possibility that the coal price volatility that has plagued North America since 2004 will
reach Israel as well. Moreover, geopolitical factors affecting coal transportation and
storage risks, as well as regulatory policy changes affecting coal-exporting countries could
also create price volatility that solar deployment could mitigate.
5. The potential for regional development of solar
energy projects
The possibility of solar energy project development as a basis for fostering regional
economic cooperation cannot be underestimated. Egypt‟s Sinai Peninsula, Israel‟s Arava
and Negev regions, and the Jordanian deserts provide optimal locations for building and
developing solar facilities. The geographical proximity between these areas would allow
for developments such as:
Establishing large-scale commercial solar power plants.
Constructing solar towers with heliostat fields at facilities such as the Dead Sea
Works or the Jordanian Potash Works for steam production and other industrial
processes.
Establishing a regional research and training center for solar energy applications,
such as expanding the commercial viability of photovoltaic systems and improving
solar thermal energy storage, including chemical storage of solar thermal energy.49
49
Government of Israel (1994). “Development Options for Regional Cooperation”, submitted to The Middle
East and North Africa Economic Summit.
Cost - benefit analysis of solar energy in Israel 36
The Report for Solar Energy in Israel
Desalination of seawater in cogeneration, a “by-product” of solar generation, which
would expand the potential for cooperation and sustainable development in North
Africa and the Middle East.
Efficient exploitation of each country‟s comparative economic advantages in
engineering and manufacturing of high-quality solar facilities for export, especially
to the European and East Asian countries where solar demand growth is outpacing
supply (e.g., France, Spain, and China). This would improve the region‟s terms of
trade with Europe and Asia as they progress toward compliance with greenhouse
gas reduction requirements.
Mitigation of security threats stemming from nuclear power development and
conflicts over increasingly scarce oil and gas, with the latter two being used more
efficiently for non-energy purposes.50
More rapid deployment of new solar technology as the presence of multiple solar
facilities within a small geographical area creates “network externalities”.51
Need for learning to accelerate solar penetration. As other countries have amply
demonstrated, developing centers of solar technology R&D creates opportunities
for readily available information sharing. This “network externality” within a small
region often results in technology standards with which solar developers worldwide
must comply, thereby creating a sustainable competitive advantage for that region.52
The magnitude of these benefits from regional cooperation is directly related to the region‟s
ability to be an early contestant in the “Solar Race”. As discussed later in greater detail, the
“first-mover advantage” requires a degree of continued government assistance in order to
develop technology locally and export it beyond the immediate region. However, to the
extent that the region develops first-mover advantages in newer solar technologies (as
50
The TREC Development Group (2003). “Trans-Mediterranean Renewable Energy Cooperation “TREC”,
Working Paper.
51
Network externalities are the benefits (or losses) one receives from using a product because a number of
other people are using similar or compatible products (e.g., e-mail or fax standards). In our case, there are
network externalities created by a number of countries working with and improving upon a shared technology
standard that would not exist without that sharing. See O. Shy, “The Economics of Network Industries,
Cambridge University Press 2001.
52
Taillant, P. (2002). Competition, Lock-in and Development of Technological Variety in the Production of
Solar Electricity, 25th IAEE International Conference paper.
Cost - benefit analysis of solar energy in Israel 37
The Report for Solar Energy in Israel
Germany, Denmark, Australia and Japan have already done), the benefits to the region can
be substantial, ranging up to a long-term market share of nearly 50%53 for the markets that
the first mover develops. The combination of large tracts of inexpensive desert land in
Israel, Jordan and Egypt with the technology developed at the major universities – with
some government assistance – has the potential of making this region a leader in solar
applications for the long term.
6. Major costs of solar technology
This section will address the costs associated with increased use of solar technology. These
include both direct costs associated with solar generation and indirect costs that solar
generation imposes on society.
6.1 Direct costs
Direct costs are the costs of constructing, installing, operating and maintaining the
solar generation facility itself. Some of these costs are directly reflected in the
higher per-kWh cost of these resources ($0.085 - $0.135 for solar thermal; $0.15 -
$0.26 for PV without subsidies)54; these costs are due to the need for a skilled
workforce, expensive materials such as silicon wafers, land per kW (to a lesser
extent for PV as well), and requirements for customization (especially for PV).55,56
It should be noted, however, that these direct costs – especially for solar thermal
generation – are often overstated when expressed as levelised annual values, since
their asset life is often assumed to be identical to that of fossil units (25-30 years),
even though the expected life of solar units actually approaches 40 years.57
53
See for example, Australia Department of the Environment and Heritage, “Corporate Sustainability: An
Investor Perspective: The Mays Report. http://www.deh.gov.au/industry/finance/publications/mays-
report/energy-sector.html. This 50% figure is a common estimate used by strategic consultants for first
movers.
54
Clean Energy Trends 2004.
55
It should be noted, however, that the materials costs have been declining, due to technological
improvements (e.g., thinner silicon wafers) and the trend toward mass production of solar components. See
Alsema, E.A. and Nieuwlaar, E. (2000) “Energy viability of photovoltaic systems”, Energy Policy 28, pp.
999-1010.
56
Ibid.
57
Conversation with Solel Solar Systems Ltd., February 9, 2005.
Cost - benefit analysis of solar energy in Israel 38
The Report for Solar Energy in Israel
Other direct costs include the higher per-kWh cost of transmission, due to the
intermittency of solar generation. Many open access transmission tariffs are based
on the assumption that a transmission customer will reserve an amount of
transmission capacity for all hours, assuming that the customer will need that
capacity at any hour. However, for intermittent resources like solar, such tariffs are
effectively “take-or-pay” contracts that charge these resources for capacity
reservations when these resources cannot use them. Although these intermittent
resources could opt for less restrictive non-firm transmission, they often face a
“Catch-22”: they cannot obtain financing without firm transmission contracts, but
these contracts make renewables so expensive that the probability of these resources
actually running declines, thereby discouraging financing. Although some proposals
have been made to address this situation, such as allowing rate options based on a
combination of access charge and energy, they have not been implemented yet, to
the best of our knowledge.58
The cost of financial instruments available to hedge the weather-related availability
risk of solar generations is very high relative to hedges required for fossil unit
availability (mainly well-developed fuel price hedges).
Environmental costs associated with solar technology penetration, especially for
solar thermal generators. Such costs are associated with the materials processing
and component manufacturing stages and with the discharge of water used by
parabolic trough systems connected to a conventional steam plant to generate
electricity.59 PV systems in particular also create environmental costs, both at the
manufacturing stage, when at least 5% of semiconductor material is defective, and at
the disposal stage after the 25-30 years of the PV system‟s useful life.60
It should be noted, however, that comparisons of these direct costs to those of peaking
plants, rather than baseload or intermediate plants, indicate that solar resources are fairly
cost competitive. Under peak load conditions, gas-fired combustion turbines with heat
58
Stoft, S., Webber, C. and Wiser, R. (1997) Transmission Pricing and Renewables: Issues, Options, and
Recommendations, LBNL Working Paper LBNL-39845 UC-1321.
59
World Energy Council (2003). Renewables in Power Generation: Towards a Better Environment, working
paper.
60
Fthenakis, V. (2000). “End of life management and recycling of PV modules,” Energy Policy 28, pp. 1051-
1058.
Cost - benefit analysis of solar energy in Israel 39
The Report for Solar Energy in Israel
rates exceeding 13,000 BTU/kWh will be dispatched; the current costs of these units are
not significantly different from solar at their normal capacity factors of 5-10%.61
Moreover, unlike gas-fired fossil generation, the cost levels and volatilities of solar
generation are declining over time. In fact, in the cost-benefit analysis conducted below,
the average levelised cost per kWh of solar thermal generation may fall below $0.06 by
2012, if total installed capacity exceeds 1500 MW during that period, even with modest
increases in the scale of production and the rate of new technology deployment.62,63
Figure 5 indicates the projected decreases in concentrating solar power (“CSP”) solar
thermal stations:
61
CleanEdge, Bringing Solar to Scale.
62
Discussions with Solel Solar Systems Ltd. February 9, 2005, supported by NREL Working Paper
NREL/SR-550-35060 “Assessment of Parabolic Trough and Power Tower Solar Technology Cost and
Performance Forecasts”, prepared by Sargent & Lundy LLC Consulting Group, October 2003.
63
Greenpeace (2004). Solar Thermal Power 2020, p. 16.
Cost - benefit analysis of solar energy in Israel 40
The Report for Solar Energy in Israel
Figure 5: Concentrating Solar Power (CSP) development through 2012
CSP Development Scenario
{Cost reduction scenario based on 2002 Sargent & Lundy assessment}
0.18
1989 30MWSEGS
1989 30MW
[Courtesy of
0.16 Troughs
H Price, NREL]
Current Potential
0.14
2003 Technology, 50MWe S iz e
LCOE 2002$/kWh
Optimum Location
0.12
0.10
Factors Contributing to
0.08 Future Cost Potenti al Cost Reduction
2004-2012 - Sc ale-up 37%
- Volume Produc tion 27%
0.06
- R& D 42%
0.04
Power tower and dish-engine
0.02 systems project analagous trends
0.00
0 1000 2000 3000 4000 5000
Cumulative Installed Capacity (MWe)
Source: Solel Solar Systems Ltd. based on NREL/Sargent & Lundy report NREL/SR-550-
35060
6.2 Societal costs
Higher electricity costs in general due to the intermittency of solar generation
because of its dependence on weather conditions. Solar resources have a significant
amount of hourly, daily and seasonal variation that is difficult to predict precisely.
Therefore, solar resources are much more difficult to dispatch than fossil-fueled
technologies, and often require some level of fossil-fueled backup in order to meet
even the lower performance and deliverability criteria contained in their contracts.
Fiscal effects of offering tax deductions and exemptions to spur solar growth to
target levels.
Higher financing costs due to lender uncertainty stemming from the lack of
comparables against which to benchmark solar investments. This situation can be
remedied by creating alternative contract and insurance arrangements, and
Cost - benefit analysis of solar energy in Israel 41
The Report for Solar Energy in Israel
education ventures by the PV industry – all of which entail additional costs
themselves,64 and could raise financing costs for new fossil units as well.
The value of PV increases as a function of reduced net-metered retail tariff rates.
These shift a utility‟s remaining costs to ratepayers for whom PV is not viable -
often smaller ratepayers who cannot afford onsite generation.
7. Direct cost-benefit of solar energy utilization
This section provides a direct estimate of the costs and benefits of solar energy deployment
from 2005 through 2025, based on a set of quantifiable costs and benefits from solar
technology deployment over that period. While PV and passive solar penetration are
assumed to ramp up gradually through 2025, solar thermal generation is expected to grow
in large increments: 500 MW by 2010; 1000 MW by 2013, 1500 MW by 2015 and 2000
MW by 2020.65 Each cost and benefit item and its underlying data and assumptions are
discussed at greater length in the Appendix; Table 5 displays the Appendix reference for
each item.
64
REPP (2003). Expanding Markets for Photovoltaics, working paper.
65
This development trajectory for solar thermal, photovoltaic, and passive solar technologies, although
derived from the Energy Master Plan and target values from Israeli solar developers, is intended for
illustrative purposes only.
Cost - benefit analysis of solar energy in Israel 42
The Report for Solar Energy in Israel
The subset of benefits and costs calculated includes the following:
Table 5: Benefits of solar energy utilization
Item Location in Appendix
Avoided environmental costs: Assume CO2 traded price of A1
$10/ton and $20/ton and ExternE emissions values for Europe
(CO2, NOX, SO2, and particulates).
Stable and known energy prices: Avoided hedging costs for A2
coal and natural gas to ensure available supply at stable prices
Avoided transmission & distribution costs: Avoided A3
transmission and distribution upgrades for off-grid PV
(excluding real options value)
Avoided fuel costs: Fuel costs avoided due to “passive” solar A4
heating and cooling
Real options value for T&D investments A5
Avoided unemployment compensation: Thermal and PV A6 and A7
technologies
Income multiplier: Thermal and PV technologies: Increased A6 and A7
gross regional product: solar thermal and PV
Table 6: Costs of solar energy utilization
Item Location in Appendix
Additional generation costs: Solar displacement of coal and/or A8
natural gas, whose costs are lower when excluding
environmental externalities.66
Environmental costs: Small additional environmental costs A9
associated with solar (e.g., PV panel disposal)67
Fuel switch to solar heating/cooling: Costs of “fuel switching” A10
to solar from other fuels for heating, cooling and other
manufacturing and institutional purposes.
The two tables below summarize the calculations of expected benefits and costs from solar
deployment in Israel, assuming discount rates of 5% and 7% for determining the net
present value of these benefits and costs.
66
The assumed marginal costs for coal and natural gas generation through 2025 are $30/MWh and $35/MWh,
respectively. Solar is assumed to decline from $100/MWh to $60/MWh during the 2005-2025 period,
reaching that $60 threshold when 1500 MW of solar thermal will be online (Year 2013). We also assume that
PV costs decline from $260/MWh in 2005 to $117/MWh in 2025. Solar thermal and PV will replace coal and
natural gas whenever solar is available, regardless of price.
67
Israel Ministry of the Environment presentation at the Israel Energy Master Plan conference, Herzliya
Pituach, February 24, 2005.
Cost - benefit analysis of solar energy in Israel 43
The Report for Solar Energy in Israel
Table 7: Net benefits of large-scale utilization of solar energy in Israel -
5% discount rate ($US Million)
Appendix NPV Annually
reference 7% Levelised
Benefits
Direct benefits
$10/ton CO2 A1 706.9 56.7
Avoided environmental costs $20/ton CO2 1,178.3 94.5
Stable and known energy prices A2 117.5 9.4
Avoided transmission & distribution (T&D) costs A3 195.3 3.7
Avoided fuel costs A4 274.0 22.0
Real options value for T&D investments A5 3.8 0.3
Total direct benefits $10/ton CO2 1,297.5 92.1
$20/ton CO2 1,768.9 130.0
Indirect benefits
Income multiplier: Thermal technologies A6 1,691.7 135.8
Income multiplier: PV technologies A7 941.9 75.6
Avoided unemployment compensation: Thermal technologies A6 345.9 27.8
Avoided unemployment compensation: PV technologies A7 230.0 18.4
Total indirect benefits 3,209.6 257.5
Total benefits $10/ton CO2 4,507.1 349.7
$20/ton CO2 4,978.5 387.5
Costs
Additional generation costs A8 1,542.2 123.7
Environmental costs A9 42.1 3.4
Fuel switch to solar heating/cooling A10 209.8 16.8
Total costs 1,794.1 144.0
Total net benefits – 5% discount rate $10/ton CO2 2,713.0 205.7
$20/ton CO2 3,184.3 243.5
Cost - benefit analysis of solar energy in Israel 44
The Report for Solar Energy in Israel
Table 8: Net benefits of large-scale utilization of solar energy in Israel -
7% discount rate ($US Million)
Appendix NPV Annually
reference 7% Levelised
Benefits
Direct benefits
$10/ton CO2 A1 425.4 40.2
Avoided environmental costs $20/ton CO2 709.0 66.9
Stable and known energy prices A2 70.7 6.7
Avoided transmission & distribution (T&D) costs A3 116.1 11.0
Avoided fuel costs A4 171.5 16.2
Real options value for T&D investments A5 2.3 0.2
Total direct benefits $10/ton CO2 786.0 74.2
$20/ton CO2 1,071.8 101.2
Indirect benefits
Income multiplier: Thermal technologies A6 1,179.5 94.6
Income multiplier: PV technologies A7 551.0 44.2
Avoided unemployment compensation: Thermal technologies A6 234.2 18.8
Avoided unemployment compensation: PV technologies A7 134.5 10.8
Total indirect benefits 2,099.2 168.4
Total benefits $10/ton CO2 2,885.2 242.6
$20/ton CO2 3,171.0 269.6
Costs
Additional generation costs A8 962.1 77.2
Environmental costs A9 25.3 2.0
Fuel switch to solar heating/cooling A10 126.6 10.2
Total costs 1,114.0 89.4
Total net benefits – 7% discount rate $10/ton CO2 1,771.2 153.2
$20/ton CO2 2,057.0 180.2
Therefore, the net present value of a concerted effort to deploy solar technology in Israel is
estimated to be approximately $2.7 billion and $1.8 billion, using discount rates of 5% and
Cost - benefit analysis of solar energy in Israel 45
The Report for Solar Energy in Israel
7%, respectively. The annual net benefits expressed as levelised net present values through
2025 are approximately $206 million and $153 million, using discount rates of 5% and 7%,
respectively.
7. Comparison of NPV of new solar thermal, coal, and
natural gas units
In this section, we compare the net present values of new 500-MW solar, coal, and natural
gas plants that may be considered in terms of project financing. The installed costs of these
units are $2,000/kW, $1,200/kW and $600/kW, respectively. We calculate projected cash
flows as the difference between the projected revenue and marginal cost per kWh
generated. For this analysis, we assume the marginal cost per kWh for coal and natural gas
to be $0.032/kWh and $0.035/kWh, respectively. We also assume each unit to have a 40-
year asset life, which is also the expected term for financing.
To arrive at the projected revenue, we use the production components of the IEC‟s time-of-
day rates (the “rechiv yitzur of the TAOZ”) and derive generation prices for coal and
natural gas by weighting the production component for each time-of-day period by the
number of hours that the unit operates within that time-of-day period. The difference
between this price (approximately $0.066/kWh for coal and $0.081/kWh for natural gas)
and the unit‟s marginal cost ($0.032/kWh for coal; $0.035/kWh for natural gas; and
$0.005/kWh for solar O&M) is multiplied by 500 MW * 1000 kW/MW * the number of
expected annual operating hours to arrive at the expected annual cash flows. These cash
flows are discounted at a weighted average cost of capital of 7% (60% equity @ 8.3 + 40%
debt @ 5%); this cost of capital is more typical of an infrastructure project financing than a
utility (e.g. IEC) financing. We then re-calculate the net present value using a discount rate
of 5%, which is more representative of a generator that is either utility-owned or whose
output is part of a purchased-power agreement.
For solar resources, we follow the same convention, except we add the renewables
premium for each time-of-day period to the production component of the time-of-day rate.
The difference between this price (approximately $0.1083/kWh) and the marginal cost of
$0.005/kWh is then multiplied by 500 MW * 1000 kW/MW* the number of expected
Cost - benefit analysis of solar energy in Israel 46
The Report for Solar Energy in Israel
annual operating hours to derive the expected annual cash flows. These cash flows are also
discounted at a weighted average cost of capital (WACC) of 7% (60% equity @ 8.3% +
40% debt @ 5%) and at a WACC of 5%. We also assume that the $2,000/kW investment
occurs in stages from 2005 – 2009, before the unit begins operating in 2010.
Taking the NPV while assuming infinite asset life, we obtain the following:
Table 9: NPV of 500-MW coal, natural gas, and solar investment
Discount rate of 5% Discount rate of 7%
( US$ million) ($US million)
Solar 780.0 241.6
Coal 2,386.6 1,308.6
Natural gas 2,594.1 1,539.6
These results suggest that the current renewables premium by itself does not provide the
cash flows necessary to make a solar thermal investment more attractive than coal or
natural gas. Although it is possible that there is a “green” market in Israel willing to pay
a higher premium for solar resources and that will enter into purchased-power supply
agreements with the solar developer (and possibly lower the capital costs as a result),
some additional incentives will be necessary to attract that investment, at least initially.
This analysis suffers from one glaring omission, however; it fails to consider the
environmental costs associated with each unit, except for the slight renewables premium
that solar resources receive. If we reflect the environmental externality costs in the
production costs for coal and natural gas, we obtain the following results, using the
average ExternE values for Europe and $10/ton CO2:68
Table 10: Net Present Value of 500-MW coal, natural gas, and solar
generator - environmental costs included: $10 CO2
Discount rate of 5% Discount rate of 7%
($US million) ($US million)
Solar 768.4 234.1
Coal (147.2) (292.7)
Natural gas 1,863.0 1,077.5
68
The effective environmental externality costs per MWh are $27.36 for coal, $11.03 for natural gas, and
$0.70 for solar, based on ExternE and the Israel Ministry of Environment data, assuming CO 2 prices of
$10/ton. Assuming CO2 prices of $20/ton, the corresponding externality costs per MWh for coal and natural
gas are $35.20 and $18.48, respectively.
Cost - benefit analysis of solar energy in Israel 47
The Report for Solar Energy in Israel
Table 11: Net Present Value of 500-MW coal, natural gas, and solar
generator - environmental costs included: $20 CO2
Discount rate of 5% Discount rate of 7%
($US million) ($US million)
Solar 768.4 234.1
Coal (873.1) (751.5)
Natural gas 1,368.7 765.1
In other words, if the environmental costs are added to the marginal fuel and O&M costs
associated with electricity generation, to create a “least-social-cost” electricity system
dispatch, then coal is clearly the least economically viable generation investment option.
8. Lessons learned from international experience
The experience gained from countries that have developed successful solar strategies
indicates the need for a sustained, intensive effort by the public and private sectors to
overcome the short-run market barriers to developing solar resources. Examples of the
initiatives taken by the European Union as well as individual countries that have
successfully developed their solar sectors appear in Appendices B and C. The following
conditions are common to these countries and are mandatory for Israel as well.
A. Government and industry commitment to overcome temporary risk aversion by private
finance while waiting for technology to develop further before investing. This has been
a lesson, not only in Europe but also in the US, where sustained government
commitment to renewables incentives has been the strongest predictor of success in
meeting renewables portfolio standards in general, and solar targets in particular.69
Such government commitment must reflect a “united front” across governmental
departments and ministries.
69
Herig, C., Gouchoe, S., Haynes, R., Perez, R. and Hoff, T. (2002).Customer-Sited Photovoltaics: State
Market Analysis, working paper.
Cost - benefit analysis of solar energy in Israel 48
The Report for Solar Energy in Israel
A variety of instruments is available to the government to foster growth in the solar
sector. Examples of such instruments are:
1. Favorable tax and depreciation treatment and low-interest loans.70
2. Grants and loans for research and development in the solar sector (in Israel,
examples would include funding from the Office of the Chief Scientist and from
the Investment Promotion Center of the Ministry of Industry, Trade and Labor).
3. Regulatory advocacy for consumer-driven demand for solar. In Israel, such
examples include the following:
(a) Approving an expanded net metering71 initiative to make solar generation
more economically attractive during peak periods by allowing end-use
customers to sell power to the transmission grid. Currently, the Israel Public
Utilities Authority is considering the implementation of net metering in the
context of fostering renewable distributed generation,72 in addition to its
current rate incentives for renewables in general.73
(b) Creating a market for solar through facilitating retail competition for
electricity. Retail competition will allow customers to express their
preference for electricity from renewable resources by purchasing their
electricity from suppliers of these resources. This market-based demand for
increased solar investment will accelerate the process of making solar
electricity more competitive with fossil-fueled generation. The Israel Public
Utilities Authority has begun the process of allowing consumers to contract
directly with non-utility suppliers, including solar thermal generators.
(c) Removing barriers to entry, such as discriminatory tariffs and central
dispatch procedures penalizing limited-energy generators.74 This is
70
Ibid.
71
Hoff, T. and Margolis, R. (2004) Are Photovoltaic Systems Worth More to Residential Consumers on Net
Metered Time-of-Use Rates? Working paper.
72
Israel Public Utilities Authority (2005). “Distributed Power Generation: Integration into Israel‟s Electricity
Grid”, policy paper.
73
Israel Public Utilities Authority – Electricity (2004). Decision of 13 July 2004 (Hebrew).
74
Stoft, S., Webber, C. and Wiser, R. (1997).Transmission Pricing and Renewables, LBNL Working Paper
LBNL-39845 UC1321Hoff, T. and Margolis, R. (2004) Are Photovoltaic Systems Worth More to Residential
Consumers on Net Metered Time-of-Use Rates? Working paper.
Cost - benefit analysis of solar energy in Israel 49
The Report for Solar Energy in Israel
especially true in developed countries such as Israel, where the vast majority
of solar deployment is likely to be grid-connected.
(d) Giving incentives for guaranteed purchase power agreements (“PPAs”)
between the electric utility and solar thermal generators in order to create an
initial market for solar generation75, and increasing the market by means of
marketing and education initiatives, generally funded through “public
benefits charges” on electricity distribution tariffs. Israel‟s electricity
regulator has developed PPA arrangements between the Israel Electric
Corporation (IEC) and renewable generators, requiring IEC to purchase
renewables output at a slight premium. These initiatives can precede full
retail competition.
(e) Phasing out subsidies for fossil-fueled generation so that policy choices
among fuels can be made based on actual social cost.
(f) Guaranteeing grid access to solar generation despite its being an intermittent
resource that creates operational difficulties for transmission grid operators
and electricity system dispatchers.
B. Taking advantage of joint manufacturing and R&D opportunities to maximize
efficiencies generated through learning. In fact, cooperation in building a few thousand
MW of new solar capacity may be as effective as the equivalent amount of investment
in R&D.
C. Educating the investment community regarding the real options value of solar
technologies and foregoing artificial rules for payback periods for energy investments
(e.g. NPV >zero within 3 years). Countries that have done so have also been the
countries that have developed first-mover advantages in technology developments and
have established the strongest export markets.76
D. Establishing solar as a mainstream energy option within a country in order to accelerate
cost competitiveness. Even in Japan, which has been home to 4 of the top 10 PV
75
CleanEdge (2002). Bringing Solar to Scale: A proposal to Enhance California’s Energy, Environmental,
and Economic Security, working paper.
76
Jackson, T. and Oliver, M. (2000). “The viability of solar photovoltaics”, Energy Policy 28, pp. 983-988.
Cost - benefit analysis of solar energy in Israel 50
The Report for Solar Energy in Israel
manufacturers for several years, the increased acceptance of solar has lowered PV
costs, thereby increasing solar‟s competitiveness; this “virtuous cycle” has reduced the
installed cost of solar PV by nearly 15% per year for the past several years.77
9. Importance of being a major contender in the “Solar
Race”
As shown in successful solar developing countries such as Germany and Japan, consistent
support of solar generation from government and industry has created an industry that is
fostering energy independence and improved terms of trade. Japan in particular has focused
large financial resources in order to establish internationally competitive mass production.
By their initial commitments to learning and development of solar technologies, these two
countries have established a substantial “first-mover advantage” in proprietary technical
and managerial procedures and specific labor skills. Having gained that advantage, their
respective governments have been devoting resources to maintaining it. These countries‟
experiences are especially relevant to Israel, which also features a knowledge-based open
economy with limited domestic energy resources.78 Moreover, as indicated in the
Appendix, these countries have far less solar exposure than Israel (especially Germany,
which has approximately one-third of the solar intensity available in Israel), yet they have
used their intellectual and financial resources to achieve considerable success.
These countries‟ experiences have also demonstrated that the victors in the Solar Race have
a sustainable advantage in maintaining profitability levels. One reason that PV prices
remain high, despite the continuing decline in input costs, is the growing renewables-driven
demand for PV, while supply – and sustainable technical advantage – continues to be
dominated by a few firms in Germany and Japan.79 Nevertheless, the opportunity exists for
Israel to develop and sustain a profitable solar sector – if it brings its technology to market
before other emerging solar-developing countries such as China and India. Moreover,
because Japan‟s growth is due to extensive government subsidies that may not be
77
Source: Solar Century submission to the UK Energy White Paper (2003).
78
Carroll, Glenn R. and Teece, David J. (1999). Firms, Markets and Hierarchies: The Transaction Cost
Perspective, Oxford University Press.
79
CleanEdge 2002.
Cost - benefit analysis of solar energy in Israel 51
The Report for Solar Energy in Israel
sustainable, Israel could be competing on a more level competitive playing field in the near
future.80
10. Potential foreign investments in the local market in solar
projects
Obtaining the foreign private-sector investment necessary to develop the solar sector in
Israel requires clear, unflinching support for solar energy development by Israel‟s public
sector. This support creates the stable regulatory and legal environment that is critical for
investor interest in Israel‟s solar development.
Foreign interest in the Israeli solar market depends to a great extent on five factors:
1. The rate at which potential investors are willing to invest in early-stage firms
developing technologies, rather than companies with a history of positive cash flows.
Investors may be more willing to do so in the future, as renewable energy funds
become managed more frequently by people from venture capital backgrounds rather
than utilities. Moreover, the renewables funds in the US have increasingly been
collaborating with development banks abroad to increase solar investment in
developing countries (where Israeli PV technology companies have been successful).
2. The willingness of Israeli companies to collaborate with established foreign
companies for certain technologies while developing their own. An example of such
a partnership exists between Kyocera (Japan) and Solarpower (Israel).
3. The movement away from the current tendency of renewables investors in Japan,
Germany and the US to invest exclusively in technologies within their countries
(mainly for their tax-preferred status).
4. The extent to which foreign governments “crowd out” private investment in
renewables, while favoring domestic technologies.
5. The extent to which solar investment is considered on a par with other renewables
investments such as wind, with which renewables investors in the US are more
80
CleanEdge, 2002.
Cost - benefit analysis of solar energy in Israel 52
The Report for Solar Energy in Israel
familiar. (Wind constitutes nearly 40% of renewables investments in the US,
compared to 20% for solar).
Foreign investment in renewable energy development ventures worldwide has grown
significantly since 2000, reaching $22 billion by 2003, including over $4 billion in solar
PV alone.81 While some of this increased investment is a consequence of regulatory
mandates such as renewables portfolio standards, much of the recent growth reflects the
market-driven demand for renewable electricity supply from competitive electricity
suppliers in the US and Western Europe. Moreover, renewables financing has begun to
shift from the traditional financing sources such as investment banks and utilities to private
equity and venture-capital firms. In the US, renewables market facilitators such as the
Cleantech Venture Network direct venture forums and match technologies to investors
from early-stage development through preparations for public offerings. Some of these
funds have begun to focus exclusively on solar technologies, including Solar Development
Capital, a private fund-development bank partnership to foster solar development
particularly in developing countries.82
The increasing participation of venture capital and private equity firms in this market is an
especially promising development for solar technology in Israel, where venture capital and
private equity funds are the primary vehicles for financing new technologies.
11. Recommendations for developing the solar sector in
Israel
In order to accelerate the anemic pace at which the solar sector has been developing in
Israel, there must be greater emphasis on incentives to spur this sector. Our primary
recommendations are the following:
81
Source: Indicators of Investment and Capacity, on Earthscan website www.earthscan.co.uk
82
A recent example of the inroads made by private equity funds into solar thermal investments in the US
occurred in February 2005, when FPL Energy Group joined with the private equity fund Carlyle/Riverstone
Global Energy Power Fund to purchase five 30-MW units of the SEGS solar thermal generating assets in the
Mojave Desert, thereby becoming the largest generator of solar power in the US in addition to the largest
wind generator. This investment has particular implications for Israel‟s solar thermal sector, since the SEGS
units were developed by Solel‟s predecessor, Luz, and Solel continues to advance the technology of those
units.
Cost - benefit analysis of solar energy in Israel 53
The Report for Solar Energy in Israel
1. Israeli government investment in solar energy R&D, preferably funded by a non-
bypassable public benefits charge on all electricity sales. This investment would
include the accelerated development of commercial central-station solar thermal units
in the Negev.
2. Requiring the internalisation of environmental costs in developing national energy
policy, especially in determining priorities for electricity generation. Examples could
include carbon taxation and/or markets for emissions trading.
3. Tax incentives such as tax credits and accelerated depreciation to give solar
investments an opportunity to be competitive with fossil fuels. Tax incentives could
also be directed to banks that offer low-interest loans to finance investments,
especially grid-connected PV.
4. Favorable terms for land acquisition to create incubator areas for solar technology
knowledge transfer
5. Feed-in tariffs and/or renewables portfolio standards to provide the initial cash flow
stimulus necessary for solar investment.
6. Tariffs for net metering and transmission that do not discriminate against intermittent
resources such as solar-generated electricity.83
7. Greater public awareness of the benefits of solar development, in order to create
market-based demand for solar.
If these recommendations are adopted, then the combination of private sector and public-
sector development will add Israel to the short list of successful solar technology
developers, to Israel‟s great economic benefit.
83
In the US, the Federal Energy Regulatory Commission is addressing this issue with regard to wind, with the
intention of addressing other intermittent renewable generation as well. See http://www.ferc.gov/whats-
new/comm-meet/011905/E-1.pdf .
Cost - benefit analysis of solar energy in Israel 54
The Report for Solar Energy in Israel
Appendix A: Assumptions underlying the benefit-cost analysis:
In the sections below, we will describe the assumptions underlying each item of the
benefit-cost analysis in greater detail.
A-1 Avoided environmental costs
This set of spreadsheets calculates the effect of solar displacement of coal or natural gas in
the hourly IEC unit dispatch. Despite its simplicity, it can be adjusted fairly easily to
reflect more realistic, complex assumptions.
The intuition behind the model is that, during their operating hours, solar electricity will
always displace the electricity produced from the most expensive generators online. If
there are still solar megawatts remaining, they will then displace the second most expensive
MW, and so on.
In this model, the “status quo” system consists only of coal-fired and natural gas-fired
units. The two coal units, with 4,840 MW of capacity (IEC Statistical Report 2003) are
assumed to run at full capacity year-round. Any remaining capacity needed to meet hourly
loads is served by natural gas units. The hourly loads are derived from load curves
provided in the IEC 2003 Statistical Report. To extend these 2003 results to the 2005-2025
period, we use the forecasted load data and generation fuel mix from the Ministry of
National Infrastructure‟s Energy Master Plan (co-authored by Eco Energy and Hushva).
As an example, assume that the hourly load for a particular day at 10 am is 6000 MW. In
the status quo case, we assume that 4840 MW are served by coal and 1160 MW are served
by natural gas. If there is only 500 MW of solar available, however, then the solar will
displace 500 of the 1160 MW, leaving only 660 MW served by natural gas. Solar then
displaces the NOx, SO2 and particulates for natural gas. If there is 2500 MW of solar, then
solar will displace all 1160 MW of natural gas as well as 1340 MW of coal, as well as their
NOx, SO2, CO2 and particulates. The model does recognize that 500 MW of solar
generation will not be equally available during all hours; rather, it accounts for the variation
among hours and seasons using the profile produced by Israeli researchers presented at the
Association of Electrical and Electronic Engineers convention in November 2004 in Eilat,
Israel.
Cost - benefit analysis of solar energy in Israel 55
The Report for Solar Energy in Israel
An interesting result of this model is that solar replaces coal only during the shoulder
months with the most daylight hours. The explanation for this is that loads are still
relatively low during the shoulder months, and can be served most economically by the
baseload coal units in the status quo case. Solar would then only displace high-polluting
coal, rather than some combination of coal and low-polluting natural gas. This result would
change if the marginal costs of gas-fired electricity are lower than those for coal-fired, if
there is a regulatory mandate to limit coal-operating hours, and/or if non-IEC gas-fired
units receive “preferential treatment” in the electricity system dispatch.84
On this note, we emphasize that these calculations reflect the assumed current economic
dispatch procedure used by the Israel Electric Corporation. It is possible, however, that
solar resources would be assigned a “must-run” status when available, thereby displacing
coal even when it is less expensive. In this case, the avoided environmental costs would be
even higher, and the benefits provided in this report would be understated.
A-2 Stable and known energy prices
For these calculations, we assumed that solar displaces coal and natural gas as described in
A-1. We then use conservative estimates of the fixed-price premia over spot prices for coal
and natural gas to derive hedging costs85, and estimates of storage costs for coal and natural
gas to derive overall storage costs.
84
This is part of the statutes governing gas-fired IPPs and cogenerators in Israel. See Israel Ministry of
National Infrastructures (http://www.mni.gov.il/heb/units/electricity_takanot_meshek.shtml)
(Hebrew).
85
Estimates for hedging costs vary widely, from the $0.11-$0.21/MWh used in this report, to nearly
$0.70/MWh.
Cost - benefit analysis of solar energy in Israel 56
The Report for Solar Energy in Israel
Our estimates, based on data from the Energy Information Administration (for storage
costs) and Dominion Energy (for hedging costs) are (in $/MWh):
Item $/MWh
Coal hedging $0.21
Natural gas hedging $0.11
Coal storage $1.75
Natural gas storage $1.81
A-3 Avoided transmission & distribution (T&D) costs
To calculate avoided transmission and distribution costs, we used the Israel Electric
Corporation‟s 2004 quarterly reports, which classify financial statement information as
generation, transmission, or distribution. For the 9 months ending 30 September 2004, 6%
of total revenues were classified as transmission and 21% as distribution. These
percentages were multiplied by the overall retail price per kWh, divided by an exchange
rate of NIS 4.5:$1 US and multiplied by 1000 to derive the overall $ revenue per MWh.
These $/MWh for transmission and distribution were multiplied by the total solar
photovoltaic MWh (equal to the total MW * 2,150 hours) to derive the total avoided
transmission and distribution costs. We then divided this total by 2 for conservatism. We
note our implicit assumption that solar photovoltaics will meet growth in electricity
demand rather than simply displace fossil resources to meet current demand. Therefore,
the avoided T&D costs include the costs of upgrading the T&D system, in addition to the
variable O&M costs associated with the current system.
A-4 Avoided fuel costs
The avoided fuel costs were calculated as follows:
(a) Avoided coal: Using the forecasted demands and coal-fired capacity from the
Ministry of National Infrastructures‟ Master Energy Plan, we calculated the
forecasted coal-fired MWh for each year through 2025 (see Appendix A-1) and
multiplied that by assumed coal prices of $45/ton delivered to IEC to derive the total
forecasted coal expenditure for each year. We then used the estimates of coal-fired
Cost - benefit analysis of solar energy in Israel 57
The Report for Solar Energy in Israel
MWh displaced by solar for each year (Appendix A-1) and multiplied that percentage
by the total forecasted coal expenditure displaced by solar.
(b) Avoided cogeneration: Using the total self-generation MWh provided by the Central
Bureau of Statistics, we multiplied this amount by 7% (i.e., the percentage of coal and
natural gas MWh displaced by 1500 MW of solar for IEC). We then assumed a price
of NIS 150 for fuel oil displaced by solar and used an exchange rate of NIS 4.5:$1US
to derive the annual dollar value of fuel oil displaced.
(c) Residential and commercial “passive solar”. Using estimates provided by Solel Solar
Systems, Ltd., we derived annual estimates of fuel saved and multiplied these annual
amounts by $400/ton, per information provided by Solel.
A-5 Real options value for T& D investments
Real options values were calculated as a conservative estimate of the avoided transmission
and distribution costs not reflected in a standard NPV calculation. For positive NPV,
previous real options valuations of distributed generation have indicated that the real option
adds approximately 30% to the investment‟s value. For this analysis, we assumed only a
4% addition, based on studies conducted for the California Independent System Operator
by London Economics. We applied this 4% addition only to the avoided T&D investment
piece of the T&D revenue requirement per MWh (see A-3), thereby excluding avoided
T&D losses that should be excluded from a real options investment calculation.
A-6 Income multiplier and avoided unemployment compensation: Thermal
These values rely heavily on a National Renewable Energy Laboratory study conducted for
Nevada using a REMI general equilibrium econometric model. The NREL analysis
assumes several phase-in schedules of 100 MW trough units; we based our modeling on a
schedule closest to that assumed for Israel (presented in the report itself). The model
reflects the adjustment for salary levels in southern Israel and additional efficiencies gained
by constructing 500 MW of solar generation in a given timeframe, rather than 100 MW
sequentially over a period of several years. Although the NREL model assumes
employment multipliers of 2.9 (i.e., 1.9 “spinoff” jobs for each job directly related to solar
generator construction and installation), we assume a very modest multiplier of 1.45, which
Cost - benefit analysis of solar energy in Israel 58
The Report for Solar Energy in Israel
is generally more applicable to pure R&D facilities. The avoided unemployment
compensation is assumed to be 40% of the average annual salary for the Beer Sheva region,
per the Central Bureau of Statistics.
It should be noted that our results are significantly more conservative than those of Israel‟s
largest central station manufacturers. Those results suggest that a 200-MW addition would
produce 1600 jobs and $146 million in GDP; our assumptions indicate that a 500-MW
addition would produce only 1900 jobs and $55 million in additional GDP.
A-7 Income multiplier and avoided unemployment compensation: PV
These calculations are based on estimates conducted by the California Energy Commission,
which are considered to be by far the most conservative estimates of income multipliers.
We assume that there will be 33 MW of new photovoltaic installations each year beginning
in 2006 to achieve 500 MW of PV by 2020. We interpolate the CEC values for different
levels of PV penetration to derive estimates for each year‟s income multiplier. The avoided
unemployment compensation is assumed to be 40% of annual salaries, per the Central
Bureau of Statistics.
This report estimates that the total number of jobs created from 500 MW of PV
development is slightly fewer than 2,000, including all spinoff jobs. This result is much
lower than the estimated 6,500 jobs excluding spinoff effects for 1,000 MW of very large
scale (“VLS”) PV indicated by other researchers86, and demonstrates the conservatism
inherent in this report.
86
Faiman, D., Raviv D., and Rosenstreich, R. (2005). A Top Down Approach for Bringing VLS-PV Plants to
the Middle East, draft discussion paper, Expert Meeting of the IEA Task 8 PV Specialist Group.
Cost - benefit analysis of solar energy in Israel 59
The Report for Solar Energy in Israel
A-8 Additional generation costs
To calculate the additional generation costs, we multiply the MWh displaced by solar
(Appendix A-1) for each year through 2025 by the differential between the production
components of the IEC‟s time-of-day rates (the “rechiv yitzur of the TAOZ”) for solar
(including the current renewables premium) and the production components for coal and
natural gas. We weight the production component for each time-of-day period by the
number of hours that each unit operates within that time-of-day period. The difference
between the solar price and prices for coal and natural gas is multiplied by the number of
solar MWh generated annually. We should note that the underlying assumption is that the
“rechiv yitzur” effectively sets the retail generation price through 2025 and that solar
generation reflects the relative risk of an IEC investment more closely than a project
finance. This is possible if the solar generator, as an independent power producer, has
purchased-power contracts for substantially all of its generation.
A-9 Environmental costs
We assumed environmental adders of $0.70 per MWh for all solar thermal and
photovoltaic generation, and multiplied this by the annual solar MWh.
A-10 Fuel switch to solar heating/cooling
We assume effective installed costs of $75/square foot ($807 per square meter) for all
installations, for a total expenditure per household of $1,800 and expenditure per
commercial establishment of $12,000. The ramp-up of fuel switching follows the trend in
A-4(c), with full ramp-up by 2010.
Cost - benefit analysis of solar energy in Israel 60
The Report for Solar Energy in Israel
Appendix B: European Union renewables policy implementation
The effort of the European Union to promote solar power as an alternative energy source
began in 1993 with its approval of the ALTENER (Alternate Energy) plan, which was
developed to promote renewable energy sources in Europe and to increase trade in
renewable products internationally. A subsidiary of the European Commission, AGORES,
set a goal of 2,000 MWp of PV to be installed in Europe and a total shipment of PV
installations of 630 MWp per year by 2010. The current plan, which is in effect through
2006, raises the target from 2,000 MWp to 3,000 MWp and 100 million square meters of
solar thermal by 2010.87
The targets set by the EU for individual countries have already been met by Greece and
Austria, and others are rapidly approaching those targets. The forecasted economic benefits
of compliance with the targets are significant: approximately 89,000 job-years would be
added with 3,000 MWp installed, or 29.7 job-years/MW.88 The growth of solar energy in
Europe has been highly dependent on public policy, however, and reaching these targets
will require a combination of subsidies and favorable financing to support the R&D
necessary for solar to become more cost-competitive.
Another factor determining the future growth of solar will be the liberalization of the
European electricity markets occurring roughly simultaneously with the targeted growth of
PV. There is some expectation that time-differentiated rates will become more common,
thereby allowing PV to compete more successfully with conventional peak power,
especially in Southern Europe. Moreover, there is increasing interest in setting up
international markets for green certificates that would reduce the effective price of
renewable resources including solar throughout Europe, much as feed-in tariffs have
reduced that price for solar resources in Germany and the Netherlands.89 The success of
87
Ban-Weiss, G., Larsen, D., Li, Sonny X., Wilusz, D. (2004). Job Creation Studies in California for
VOTESOLAR, University of California Berkeley working paper.
88
Arnulf Jager-Waldau, “PV Status Report 2003 – Research, Solar Cell Production and market
Implementation in Japan, USA and European Union: European Commission Directorate General, Joint
Research Centre (2003), quoted in Ban-Weiss, Larsen, Li and Wilusz, “Job Creation Studies in California for
VOTESOLAR”, working paper, University of California – Berkeley. In contrast with this study, our report‟s
results assume a total of 2,000 job-years to reach a total capacity of 500 MW of PV added, or only four job-
years/MW.
89
Menges, R. (2003). “Supporting renewable energy on liberalized markets: green electricity between
additionality and consumer sovereignty”, Energy Policy 31, pp. 583-596.
Cost - benefit analysis of solar energy in Israel 61
The Report for Solar Energy in Israel
international green certificates, however, will largely depend on the ability of the EU to
establish authoritative binding regulation common to all EU members90, including free
trade for certificate trading,91 and on the increased consumer demand for demonstrably
“green” suppliers.
Additional details regarding examples of successful deployment of renewable energy in
other countries appear in Appendix C below.
90
Solar Thermal Power 2020, Greenpeace working paper.
91
Midttun, A. and Koefoed, A.L. (2003) “Greening of electricity in Europe: challenges and
developments”.Energy Policy 31, pp. 677-687.
Cost - benefit analysis of solar energy in Israel 62
The Report for Solar Energy in Israel
Appendix C: Examples of successful solar deployment
There are several examples of countries that have made solar technology development a
focal point of their efforts to gain greater energy independence and achieve compliance
with environmental standards. Among the most prominent examples are Germany, Japan
and Australia. More detailed information about these countries‟ success in developing their
solar sectors follows.
C-1 Germany
Germany is currently the key player in the European PV market, due in large part to the
support provided by the Renewable Energy Law and the 100,000 Roofs Program. This
program, which lasted from 1999 through 2003, set a target of 100,000 grid-connected PV
systems totaling 300 MWp within 6 years, and included a variety of financing and subsidy
schemes, amounting to an effective 35% subsidy rate. Even with the termination of these
schemes in 2003, the German solar market grew by nearly 40% during the following year,
due mainly to the start of a new public awareness campaign, rising oil prices, and an
increase in other government incentives. Electricity output from PV generation is
forecasted to reach two terawatt-hours by 2010, equivalent to the output of a 300-MW
baseload fossil-fueled plant, and six TWh by 2020, thereby meeting over 3% of Germany‟s
electricity demand. In terms of overall economic impact, the German PV industry would
create 83,000 jobs in the retail chain, installation, maintenance and other services by 2025,
and an additional 50,000 jobs if all the modules were manufactured in Germany itself.
The primary catalyst behind Germany‟s PV penetration has been “feed-in tariffs” that have
provided the financial stability needed to attract further investment.92 These tariffs have
spurred the growth of solar technology centers that have created a Germany-specific
learning curve, resulting in rapid movement of the technology to market and a significant,
sustainable first-mover advantage. In the short run, Germany may need to maintain feed-in
tariffs near their current levels, in order to provide the capital cost coverage essential during
92
Feed-in tariffs are agreements that oblige grid companies to purchase renewable electricity from eligible
sources and to pay the producers an annually fixed feed-in tariff. The philosophy is that PV has “public good”
aspects since it is part of a public mandate for renewables quantities that markets would not produce. See
Sijm, J.P.M. (2002) The Performance of Feed-in Tariffs to Promote Renewable Electricity in European
Countries.
Cost - benefit analysis of solar energy in Israel 63
The Report for Solar Energy in Israel
a PV system‟s initial years.93 Nevertheless, it is possible that a declining feed-in tariff may
become less relevant if the current Germany-specific learning curve becomes self-
sustaining, as market growth (projected at 25%/year from 2004-2010) increases the supply
for PV systems. This in turn will accelerate the learning effects causing further reductions
in PV costs.94 It is estimated that these learning effects have themselves resulted in nearly
30,000 newly installed systems and 15,000 jobs in a PV industry generating annual
revenues of $1.5 billion.
Germany‟s success has spurred other European nations, primarily the Netherlands, the UK
and Spain, to pursue some combination of feed-in tariffs and a subsidy initiative for PV
rooftop installations. However, Germany remains ahead in the solar race and has the
domestic PV capability to maintain that leadership position for the near future.95
Table 12: Photovoltaic market penetration in Germany
Jobs in
CO2 retailing,
avoided installation
MWh (thousands and other
Year MW (thousands) of tons) services
2000 44 44 27 1,329
2005 149 531 319 4,595
2010 437 2,044 1,226 13,483
2015 1,088 5,949 3,569 33,551
2020 2,708 15,666 9,400 83,485
Source: Greenpeace
93
Stryi-Hipp, G. (2004)). Experience with the German Performance-Based Incentive Program, presentation
to Solarpower conference October 19, 2004.
94
Stryi-Hipp, G. (2004)
95
Cameron, M. and Teske, S. (2001) Solar Generation by 2020, EPIA/Greenpeace working paper
Cost - benefit analysis of solar energy in Israel 64
The Report for Solar Energy in Israel
C-2 Australia
Until relatively recently, Australia had the largest per-capita PV penetration in the world;
having lost this ranking to Germany; it is now accelerating its PV industry, with the
participation of major international players such as BP Solar and Pacific Solar.
Since 2003, the Australian government‟s PV Rebate Program has been responsible for the
vast majority of new installations. With the criteria for program eligibility being tightened,
however, the PV industry will need long-term targeted support based on a comprehensive
market development plan. A unique feature of Australia that will enable this is the
cooperation among the transmission and distribution companies, the Australian government
and regulators, and the Electricity Supply Association of Australia, in terms of creating
transparent rules and stability necessary for PV entry. If this cooperation continues, then
production capacity could reach 250 MW by 2010 and 2500 MW by 2020, or nearly 9% of
Australia‟s installed generating capacity.96
The current market is dominated by off-grid applications (80% of the total), although the
grid-connected sector has been boosted since the 2000 Summer Olympics in Sydney.
Government programs aimed at commercializing renewables technologies in general have
benefited PV.
The table below summarizes the rapid growth forecasted for PV in Australia through 2025:
The future growth of the solar sector in Australia will depend greatly on the international
players remaining in the market, and the continued cooperation among regulators, utilities,
and competitive market participants. Conversely, the relative weakness of the new
mandatory renewable energy targets may signal fewer opportunities for these international
players, thereby jeopardising Australia‟s status as a leading contender in the solar race.
96
Cameron, M. and Teske, S. (2001) Solar Generation By 2020, EPIA/Greenpeace working paper.
Cost - benefit analysis of solar energy in Israel 65
The Report for Solar Energy in Israel
Table 13: Photovoltaic market penetration in Australia
Jobs in
CO2 retailing,
avoided installation
MWh (thousands and other
Year MW (thousands) of tons) services
2000 4 5 3 117
2005 74 225 366 1,688
2010 263 1,724 853 8,114
2015 820 5,258 3,155 25,261
2020 2,554 17,201 10,321 78,645
Source: Greenpeace
C-3 Japan
Japan is a potential comparison market for Israel, in terms of the extent to which market
forces rather than policy have created rapid solar deployment primarily for export. In fact,
Japanese installations are expected to exceed the number of installations in all of Europe
through 2008,97 and Sharp and Kyocera alone produce about 40% of the total PV
worldwide.98 Japanese PV systems have grown exponentially since 1999, reaching 350
MWp in 2003. The primary reasons for the Japanese expansion include:
(1) Internationally competitive interest rates.
(2) Economies of scale due to pooling of equipment and materials purchases
among PV manufacturers.
(3) Consistency of research and development efforts with industry demands.
97
EPIA (2004). Towards an Effective European Industrial Policy for Photovoltaics, working paper.
98
CleanEdge (2002).
Cost - benefit analysis of solar energy in Israel 66