1. The Economics of Solar Energy in New Zealand Kenneth Gillingham 2007 Energy Postgraduate Conference Massey University, Palmerston North 17 July 2007

2. Kenneth Gillingham, 17 July 2007, p. 2 Outline Motivation Background Methodology Preliminary Results

3. Kenneth Gillingham, 17 July 2007, p. 3 Motivation The science of global climate change is becoming increasingly clear: global temperatures are rising, and we are becoming increasingly confident it is due to anthropogenic sources From the IPCC Fourth Assessment Report: “Most of the observed increase in global average temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations.” (where “very likely” means with greater than 90% likelihood)

4. Kenneth Gillingham, 17 July 2007, p. 4 Motivation The New Zealand government is very interested in reducing its greenhouse gas (GHG) emissions At the same time, electricity demand is increasing, and major hydro resources are mostly tapped out Solar, along with wind, is often described as of the more promising avenues to pursue to add generation capacity while reducing GHG emissions in the electricity sector

5. Kenneth Gillingham, 17 July 2007, p. 5 Background on Solar in New Zealand 2005 electricity generation only has a small fraction of renewables Solar photovoltaic (PV) is mostly used in remote sites off the grid  Nearly insignificant Solar domestic hot water (SHW) reduces electricity demand  About 1/3 of household electric use is for hot water heating  Provided 0.23 PJ in 2005  0.15% of electricity use (150 PJ total) Source: MED (2006)

6. Kenneth Gillingham, 17 July 2007, p. 6 Solar Technologies Solar PV panels  Convert sunlight directly into electricity  May act as distributed generation sending electricity back into the grid SHW systems  Use sunlight to heat water for domestic use  Typically provide 50-75% of hot water needs  Two types of systems: Flat panel Evacuated tube

7. Kenneth Gillingham, 17 July 2007, p. 7 SHW Market Penetration Currently there are ~35,000 systems installed Last year there were just under 3,500 new systems installed  Market growth rate of about 40% Source: Solar Industries Association (2007)

8. Kenneth Gillingham, 17 July 2007, p. 8 SHW Market Primary market for SHW is new homes  About 2/3 of the installations  Over 80% of these are in custom built homes  Relatively few volume-built homes include SHW, even though they make up half of the new homes built The rest of the installations are retrofit systems  1/3 of the systems  Often installed when an old hot water system fails  In many cases installed as DIY kits Source: EECA (2006)

9. Kenneth Gillingham, 17 July 2007, p. 9 Current Government Policy EECA has had increasing incentives for the past few years Current government initiatives:  Grant of $500 toward cost of system or interest on loan to pay for system Only for “qualified systems” – systems that cost less than a specified capital threshold (usually around $6,000) $15.5 million set aside over 3.5 years  SHW quality standards setting  Informational and training programs  SHW purchases for government buildings

10. Kenneth Gillingham, 17 July 2007, p. 10 Research Questions What is the current financial attractiveness of different solar energy technologies in New Zealand? What policy options would be both economically efficient and effective in promoting solar energy in New Zealand?  Includes current policy options, policy options being debated now, and other promising policy options

11. Kenneth Gillingham, 17 July 2007, p. 11 Goal of the Research: Develop a numerical model based on the most salient characteristics of New Zealand’s electricity system and climate in order to analyze different policy options to promote solar. Overview of Methodology

12. Kenneth Gillingham, 17 July 2007, p. 12 Methodology: Financial Attractiveness Research into the financial attractiveness of different solar technologies For solar PV, and different types of SHW:  Costs  Net Present Value  Payback Period This analysis led to the conclusion that further policy analysis should be first focused on SHW

13. Kenneth Gillingham, 17 July 2007, p. 13 Methodology: Model of Market Penetration Model of market penetration of solar based on common technology diffusion assumptions Model based on decreases in solar costs due to learning-by-doing in installation costs Assumed decreases in equipment costs This model will provide estimates of the number of installations by climate region as a function of the incentives

14. Kenneth Gillingham, 17 July 2007, p. 14 Methodology: Cost-Benefit Analysis Framework of Welfare Analysis Benefits:  Consumer energy bill savings  Avoided carbon dioxide emissions  Benefits to the electricity grid (avoided costs) Costs:  Costs of the system to consumers  Cost of the incentives to government  Cost of lost ripple control capacity Optimization problem: maximize net benefits over size of the incentives

15. Kenneth Gillingham, 17 July 2007, p. 15 Methodology: Cost-Benefit Analysis Framework of Welfare Analysis Benefits:  Consumer energy bill savings  Avoided carbon dioxide emissions  Benefits to the electricity grid (avoided costs) Costs:  Costs of the system to consumers  Cost of the incentives to government  Cost of lost ripple control capacity Optimization problem: maximize net benefits over size of the incentives

16. Kenneth Gillingham, 17 July 2007, p. 16 Methodology: Benefits Consumer energy bill savings  Calculated per installation based on where in New Zealand the system was installed Avoided carbon dioxide emissions  Calculated based on the sources of the avoided marginal (i.e., highest cost) electricity Done by both time of day and month (i.e., season) Benefits to the electricity grid  Avoided need for new transmission and possibly generation capacity in the long run

17. Kenneth Gillingham, 17 July 2007, p. 17 Methodology: Cost-Benefit Analysis Framework of Welfare Analysis Benefits:  Consumer energy bill savings  Avoided carbon dioxide emissions  Benefits to the electricity grid (avoided costs) Costs:  Costs of the system to consumers  Cost of the incentives to government  Cost of lost ripple control capacity Optimization problem: maximize net benefits over size of the incentives

18. Kenneth Gillingham, 17 July 2007, p. 18 Methodology: Costs Cost of the system to consumers  Average system costs based on best estimates available Cost of incentives to the government Cost of lost “ripple control” capacity  Lines companies have the ability to shut off electric domestic hot water heaters (~75% of heaters) during peak times to shave the peak and keep system stability  This capacity is degrading anyway, but a switch to SHW may speed up the loss of ripple control

19. Kenneth Gillingham, 17 July 2007, p. 19 Data Sources Electricity price and quantity data – Electricity Commission (EC) Electricity generation capacity data – EC Retail pricing and lines charges data – EC, various sources Solar Insolation and Rainfall Data – National Institute for Water and Atmospheric Research (NIWA) Data on use and effectiveness of ripple control – Vector Energy Data on cost trends and sales of solar – EECA/Solar Industries Assoc. (SIA) Data on current and past solar incentives – EECA Data on building codes relevant to solar – SIA Technical details on solar hot water heaters – Sola60/Todd Energy, various sources

20. Kenneth Gillingham, 17 July 2007, p. 20 Preliminary Findings Solar hot water heaters are considerably more financially attractive than solar PV  Solar hot water (SHW) is already cost competitive with retail electricity tariffs throughout New Zealand  SHW usually costs between NZ$4,000 and NZ$7,000 and has a payback period of around five to six years, depending on the location  Solar PV will be a niche market for the foreseeable future due to a payback period of around seven to fifteen years Solar insolation appears to correspond relatively well with dry periods, but not as well time of day peaks The loss of ripple control appears to be inevitable, especially with new pricing regulations promulgated by the Electricity Commission, so increased SHW will not lead to the loss of a valuable load-control mechanism

21. Kenneth Gillingham, 17 July 2007, p. 21 Planned Next Steps Finish developing the modeling framework Finish performing all data analysis to correctly parameterize the model Run the model and analyze the results…

22. Kenneth Gillingham, 17 July 2007, p. 22 Thank you!

23. Kenneth Gillingham, 17 July 2007, p. 23

24. Kenneth Gillingham, 17 July 2007, p. 24

25. Kenneth Gillingham, 17 July 2007, p. 25 Policy Options Current policy:  The Energy Efficiency and Conservation Authority (EECA) has a finance assistance program in which EECA contributes $500 as a grant towards the cost of a SHW system Proposed policy options:  Direct subsidy for solar installations  Mandated solar hot water heaters on new homes  Uniform building codes for solar nationally  Guaranteed rates for electricity sent back into the grid (PV)  Policies to promote other types of load-management besides ripple control