In a December 22, 2014, press release, LG&E/KU announced that the Kentucky Public Service Commission (PSC) has approved a request by the utility company for the construction of what will be Kentucky’s largest solar panel facility. Buried in their announcement was the statement that “Kentucky is not blessed with an abundance of wind and solar energy.” This would seem at least superficially accurate — given that Kentucky only generates approximately 1 percent of its energy from renewable energy sources, primarily hydro-electric at the moment — although the elephant in the room is not only the comparative nature of the statement, but the $36 million price tag on the construction project. If solar energy is not a viable source of power in the state, why tax the ratepayers to invest in such a project?
The Current Infrastructure Arrangement
Coal has a long and storied history in Kentucky. First discovered in 1750, the first commercial coal production started in 1790, two years before Kentucky officially joined the United States. An abundant resource, coal has been the primary mainstay of our modern energy portfolio for more than 200 years, providing not only the fuel that we need to light and heat our homes, but the primary form of employment in 16 out of 100 of the poorest counties in the country, all located in Eastern Kentucky.
According to the U.S. Energy Information Administration, Kentucky was the third largest coal-producing state in 2012, and generated 93 percent of its energy from coal-fueled power plants.
Kendra Stump, Assistant Director for The Department for Energy Development and Independence Division of Renewable Energy explains: “Historically, yes, the convenience of coal played a role in our ability to deliver low-cost electricity. Transportation costs and proximity have played a significant role in determining the price of a resource and price determines how that resource is utilized.”
Still, Stump points to the 2014 Kentucky Coal Facts guide, which states “Kentucky imported coal from six different states during 2013, totaling 14.5 million tons or 37.5 percent of coal consumption. Of the five largest coal-producing states in 2013, coal mined in Eastern Kentucky was, on average, the most expensive coal delivered to electric utilities in the United States.”
Kentucky does have lower rates for electric use than the rest of the country. In Louisville, the basic charge for electricity is .08076, or approximately 8¢ per kilowatt-hour. To put that in perspective, according to the U.S. Energy Information Administration, the total average revenues per kilowatt-hour were 10.19¢ in January, .6 percent higher than last year.
The above cost represents only the direct cost to the consumer, which ignores monies spent on healthcare for coal workers or the environmental impact of coal as a primary fuel source. In an article titled “The Impact of Coal on the Kentucky State Budget,” the Mountain Association for Community Economic Development estimates from the 2006 State Fiscal Year that, “Coal is responsible for an estimated $528 million in state revenues and $643 million in state expenditures. The $643 million in estimated expenditures includes a $239 million to address the industry’s impacts on the coal haul road system as well as expenditures to regulate the environmental and health and safety impacts of coal, support coal worker training, conduct research and development for the coal industry, promote education about coal in the public schools and support the residents directly and indirectly employed by coal.”
Basically, Kentucky is doing more to clean up and promote the coal industry, than the coal industry is doing for the state.
Also, bear in mind that the above report indicates a higher expenditure than revenue. Translated plainly, coal has had a cumulatively negative economic net impact statewide, yet it perseveres as the primary fuel source in Kentucky.
There are a number of factors that allow this to continue that are couched in both cost and reliability of renewable energies, as well as socio-political issues about the environment and the economy. Coal production and revenue have fallen remarkably since their peak in the early ’90s, and that fall is forecasted to continue for the foreseeable future — meaning that the state can expect to face a further deficit in coal’s impact on the state’s economy.
The Viability of Solar Energy in Kentucky
The underlying argument against solar and other renewable energies is split between reliability and least-reasonable cost; both monitored by the KPSC. In this context, reliability means not only the amount of renewable resources available, but also the ability to store and distribute that energy per current technological standards. The concept of least-reasonable cost is a bit trickier, if not somewhat misleading. The PSC explains least-reasonable cost as “a long-standing principle, derived both from Kentucky statutes and legal parameters established by the courts, that utilities must select the least-cost reasonable option when making major capital investments including – but not limited to – electric generating facilities. In practice, that means examining a range of options and selecting a preferred option that will withstand both the (K)PSC’s scrutiny and that of the courts. Both cost and reasonability are considered.”
An LG&E/KU corporate communications representative clarifies the responsibility of the utility, explaining, “Kentucky does not have consistently adequate supplies of renewable energy sources to meet the long-term energy needs every hour, of every day in a least-cost manner. The Kentucky Public Service Commission mandates that we provide electricity to our customers at the least cost of production of it and for 100 years or so, coal-fired generation has been least cost to customers.”
An electrical engineer by training and chair of the Kentucky Solar Energy Society, Jack Barnett, has misgivings about the rhetoric used by LG&E/KU in describing the viability of solar energy in Kentucky. Barnett explains, “In National Renewable Energy Laboratory/Department of Energy studies it is true that Kentucky is ranked, in comparison to other states, as a poor wind resource state. But this is not true for solar. Sure, we are less than Hawaii, California and the Southwest. But we have more solar resources than Massachusetts, New York, New Jersey and other New England states where solar is highly popular and well supported by state policies. Kentucky also has about 60 percent more solar resource than Germany (about the same as Alaska), who is the world’s largest user of solar electricity and produced more than 6 percent of their total annual electricity from solar in 2014.”
Keith Sharp, a professor of mechanical engineering at the University of Louisville and member of the American Society of Mechanical Engineers, agrees, noting, “It is certainly true that solar energy is not available 24 hours per day. That is true everywhere on Earth, not just Kentucky. But this is like saying that gardens are not worth planting because they don’t produce vegetables in the winter. Every technology has limitations. LG&E/KU has accurately pointed out the limitations of solar, except that I don’t agree that the solar resource is inadequate.”
He continues, adding “Kentucky actually gets around 70 percent of the solar radiation of the best locations in the Southwest U.S. In fact, if half of Kentucky were covered with photovoltaic cells, we could meet the entire U.S. demand for energy. Solar is by far the greatest source of renewable energy in Kentucky and around the world.”
Stump has a contrasting, if cautiously optimistic, view. She believes, “Costs and reliability are hurdles for solar, but progress is being made. Reliability can include but is not limited to both the intermittency of a resource and the ability of a resource to be dispatched to meet demand, solar struggles on both of these fronts. The good news is that technologies such as smart inverters are allowing utilities to control the ramping up of solar facilities or distributed solar resources. But, regardless of how far we come with smart inverters, solar today cannot compete with traditional baseload generation until we have significant breakthroughs in energy storage devices. To be truly competitive, solar needs the ability to be dispatched and to provide electricity generation 24 hours a day and that hinges on energy storage.”
Sharp offers the counterpoint that, “A number of technologies have been demonstrated for storing solar energy, including elevated hydro, compressed air, batteries and thermo-chemical cycles, that have the potential to eliminate the need for fossil fuels altogether. Heat storage is especially effective for extending electric production beyond sundown for concentrating solar thermal electric plants.
“Storing solar energy as heat works well for producing electricity from solar thermal plants for several hours past sundown, but longer-term storage is needed for producing electricity from solar energy reliably 24 hours per day. Some options are pumping water to an elevated reservoir and then running the water through a water turbine when electricity is needed (elevated hydro), compressing air in tanks or caverns to run gas turbines, batteries and thermo-chemical cycles.”
Barnett agrees adding, “Solar electricity can be distributed just as easily as any other form of electricity. But, the great thing about distributed generation (e.g. solar panels on homes, businesses) is that there is actually much less losses in that distribution, since the generation is nearest to where it is consumed, unlike the centralized generation plants used by utilities (regardless of fuel type).”
Solar Logistics/Cost vs. Coal
The second component is what the PSC identifies as the “least-reasonable cost.” The stated mission of the PSC is “to foster the provision of safe and reliable service at a reasonable price to the customers of jurisdictional utilities while providing for the financial stability of those utilities by setting fair and just rates, and supporting their operational competence by overseeing regulated activities.” What that means is that the utility companies like LG&E and KU are regulated by the PSC to protect the public from unfair costs, while in turn being restricted on what they can do with their own revenue. Specifically, “least-reasonable cost” is the cheapest, but most efficient option available.
Barnett admits, “Seeing the Brown PV system submitted by KU/LGE was something of a surprise: it was packaged with a Combined Cycle Natural Gas plant submission, which was then later removed from consideration during the PSC proceedings. Currently the utilities do not include externalized costs (those that don’t appear on their books) as a real cost of their choice for generation facilities (or any facilities). But yet all ratepayers, Kentuckians, plus those downstream/wind feel the loss in their wallets, as well as to their health when poor environmental choices are made by the Kentucky utilities. Not to mention the cost of carbon and other greenhouse gas emissions.”
He continued to say, “Least-reasonable cost has historically been used to say that the PSC will only approve a facility to be built in Kentucky if the choice of technology was the least cost. The word ‘reasonable’ is thrown in for statisticians. There could be some leeway to interpretation for how it can be used. Ten megawatts was approved because it had no effect on revenue requirements, so that rates wouldn’t change as a result of their approval.”
This responsibility of the utilities to provide power to their customers at lowest cost presents a double-edged sword; if any utility wanted to develop renewable energies, they can only do so with the explicit consent of the PSC, and then only as it has a minimal impact on ratepayers. The PSC explained, “It is a long-standing principle, derived both from Kentucky statutes and legal parameters established by the courts, that utilities must select the least-cost reasonable option when making major capital investments including – but not limited to – electric-generating facilities.
They added, “In practice, that means examining a range of options and selecting a preferred option that will withstand both the PSC’s scrutiny and that of the courts. Both cost and reasonability are considered. No. KRS 278.020 (1) clearly states that any construction requires PSC approval, except for “ordinary extensions of existing systems in the usual course of business.” The PSC has on occasion granted exceptions from that requirement for very small generation projects, such as generators that use waste methane gas from landfills, deeming them to be ordinary course of business. But the utility has to seek the waiver.”
Suppose LG&E/KU wanted to build several solar fields in Kentucky, they could only do so if and only if given approval, to protect the public from the cost of the initial investment, as well as the long-term levelized costs. The LG&E/KU representative explains, “Levelized costs take into account costs for fuel, capacity factor (how often it’s available), any necessary infrastructure investments, and the maintenance and other costs required to generate and deliver power to customers.”
Despite these constraints, the LG&E/KU representative notes that they have “continued to monitor the potential for installing solar generation and the costs our customers would pay for it. Solar and wind generation have grown in many parts of the U.S. not because they are cheaper than other sources of energy, but because of state mandates in the form of Renewable Portfolio Standards (RPS) that require a certain amount of wind and/or solar generation.
They add that “Currently, 29 states have an RPS and nine additional states have RPS goals. In fact, the RPS’s in other states, along with available federal tax credits and building the solar facility on our own property, helped make the Brown solar project a feasible, cost-effective option to enable us to gain more experience with building and operating solar generation. As noted in our filings with the PSC, we plan to sell Renewable Energy Credits from the Brown solar project to utilities in other states that must fulfill their RPS requirements.”
This complicates the question of a return on investment. According the EPA, an REC “represents the property rights to the environmental, social and other non-power qualities of renewable electricity generation. An REC, and its associated attributes and benefits, can be sold separately from the underlying physical electricity associated with renewable-based generation source.”
In other words, an REC is an environmental offset sold to places that lack in federally mandated renewable-resource minimums. A return on investment for the Brown Solar Field is not just costs relative to the initial construction and continued maintenance minus any profit made selling the energy generated, but also anything generated by the sell of the REC. These REC’s are subject to change in market price, like any common stock.
No matter how you look at it, the utility is making their money back even quicker than expected. So why aren’t there more renewable energies being explored in the state?
Continued Obstacles and the Future of Energy in Kentucky
As an advocate for solar in Kentucky, Barrett has faced the harsh political realities of our state legislature. He explains, “It’s not uncommon for me to walk into a legislator’s office and for them to say ‘I’m a friend of coal and I always will be.’” Those same legislators appoint commissioners to the PSC “to four-year staggered terms by the governor. They must be confirmed by the Senate.”
Those barriers are most apparent in the form of tax incentives, which LG&E/KU have utilized to help fund the construction of the Brown Solar Field. Barnett clarifies explaining, “Through 2016 there is a Federal Income Tax Credit of 30 percent available to all (businesses and individuals), which is KU/LGE’s reference. Also through December 2015, there is a $500 homeowner, and $1,000 for businesses, Kentucky state income tax credit available for installed renewable energy systems.”
He continues, though, noting of the brevity of this tax incentive, which is “the legislation passed by congress. At the end of 2016 it drops to 10 percent. Even worse is the Kentucky tax credit. It expires at the end of 2015. A bill introduced in this last session to extend it another seven years … that went nowhere. It received no further progress. Part of the problem is that this latest session was a short session, and related to the budget. It requires a supermajority to be pushed through. There is hope that in 2016 it can be reintroduced and pushed through.”
In addition to any political opposition is the assertion by the LG&E/KU representative that “It’s important to note that all capacity is not created equal in terms of availability and reliability. Coal and gas fired units are fully dispatchable at any time that customers need energy, while solar and wind are only available during sufficient sunlight and wind conditions, respectively.”
While the daily availability of solar or wind may be limited, the actual resource is not, meaning that the “levelized” cost here is minimized on a long enough timeline. The underlying issue would seem to be the initial cost, while the long-term costs are ultimately rendered nil due to resource availability, the progression of solar and other renewable energy technology and environmental offsets in the form of REC’s. Likewise, “levelized” cost fails to account for any concern outside of the immediate logistics of the operation of a utility including the cost of healthcare for employees of the coal industry, the finiteness of fossil fuels (like coal) and the environmental impact, which is ultimately immeasurable.
Where once it was the convenience of coal as a nearby and plentiful resource, now it is a fuel used out of necessity to historical precedent. Perhaps the most convenient quality in the continued use of coal is the fact that the infrastructure pre-exists to do so, that changing over to something different would require a radical, statewide change. And that change is slowly coming, as utility companies across the Commonwealth are slowly incorporating natural gas powered plants into their system. In fact, federal environmental regulations have mandated that Kentucky shut down 23 coal-fired plants between now and 2020, indicating that the national discourse on climate change is progressively (widening to include the states) making its way into the stubborn ways of Appalachia.
There are practical long-term solutions though. Sharp believes, “Many renewable energy sources are fundamentally unreliable. For instance, solar is only available when the sun is out, and wind turbines only work when the wind is blowing. Others are more reliable (such as hydroelectric) or incorporate storage (such as biofuels), which can be used to smooth availability of green energy. The challenge for utilities is to be able to meet demands whenever they occur. Thus alternative sources must be available when an unreliable source is not. This could mean firing up a natural gas or biofuel plant on cloudy days to replace the output of a solar plant, for instance. Two plants are more expensive than one.”
Barnett agrees: “I don’t doubt that coal will always be part of our energy portfolio. I’m saying that it should be an all-of-the-above portfolio. We know that there are health effects from people living downstream and upwind, and those costs are not being accounted for in the books of the utilities. One of the things that we promote all over the place is that the cheapest electricity you can get is the negawatt: that which you don’t consume. Conservation is the best way to converse your bills. Buy more efficient appliances. Don’t let the computers and cable boxes and radios and all the electronics suck up the power even when they’re off. Getting more conscious can save a huge amount of money and protect the environment.”
Ultimately though, whatever we do, Stump warns, “Keep in mind that our utilities make decisions that last 30 to 60 years. We are making decisions today for the next 50 years in terms of energy production. The ratepayers bear the burden for paying for those investments that are on the ground now and will be installed. As of today, natural gas is the most price-competitive resource available and it isn’t a function of proximity.”