Value of Solar Farm 20 Years After Construction

[Morgan]

I have been reading a bit lately about the prices of solar. Basically the price to build a solar farm with some battery backup has now fallen below the cost of building a new coal fired plant. Now the economics are in solar's favor, which is good, but it leads me to the question of how much will a solar farm built today, be worth in 20 years? 

 

Let’s say a $10m solar farm is built with a 20 year contract signed by the utility provider to buy electricity. At the end of the 20 year contract, some maintenance will have been done on the solar farm, and presumably it will have been a profitable investment. But I am concerned about the value of the asset for the years 20-40. 

 

Presumably solar and battery technology will improve dramatically over the next 20 years. The 20 year old solar farm will be using outdated technology, and will have a substantially lower ability to generate revenue compared to solar farms with the new technology, thus the value of the asset goes down correct? 

 

If we compare this to a newly constructed $10m apartment building, it will need maintenance (likely more than a solar farm), but it will almost certainly have increased in value over 20 years. 

 

Other than being a goody two shoes, why would someone invest in utility scale solar farms now? Please let me know where I have made a mistake! 

 

 

Some interesting info:

https://www.youtube.com/watch?v=Yl0VtxAbt40

https://www.nrel.gov/docs/fy21osti/77324.pdf

https://rameznaam.com/2020/05/14/solars-future-is-insanely-cheap-2020/

Edited September 5, 2021 by Morgan

[KJP]

This is another way of asking why anyone would invest in a mine, oil well, or other depleting asset.  The answer is that there is some price that the electricity/copper/oil can be sold (or other factors, such as tax benefits) such that cash flow generated by the depleting asset over its lifetime generates a sufficient rate of return on the initial capital invested despite full depletion of the initial capital investment.  Put another way, during its useful life, you would expect the cap rate of a depleting asset to be higher than the cap rate of a non-depleting asset because a portion of the return of the depleting asset represents a return of capital (depreciation) rather than a return on capital. 

[fareastwarriors]

What about the land? Some land can be used to build apartments if it's in a suburb or close to it, some can be used for agriculture, and some has no real use. A solar farm might generate return versus the alternative of 0. 

[Morgan]

15 minutes ago, fareastwarriors said:

What about the land? Some land can be used to build apartments if it's in a suburb or close to it, some can be used for agriculture, and some has no real use. A solar farm might generate return versus the alternative of 0. 

 

True. The value of the land on the solar farm would likely have gone up. The old mounts in the ground, wiring, etc will be reusable. Take the old panels off and install the new ones. Same with new batteries. 

 

Do you think land in good locations for connecting to the grid will become more rare? The cost of infrastructure to add more transmission lines is probably fairly expensive, so being well located will probably become more valuable over time. I'm not sure if here will be so much density for solar that it actually impacts the value in this way. What do you think? 

[Gregmal]

2 minutes ago, Morgan said:

Do you think land in good locations for connecting to the grid will become more rare?

I would pretty liberally say this is almost always true. In a growing and civilized society, the relevance ring as I call it is always expanding. I always point to the NYC suburb halo effect. Areas the were boondocks 2-3 decades ago are now multi million dollar mansion lined suburbs. Areas that were 20 minutes outside of those areas are now upper middle class enclaves. I dont see how this doesnt apply across the board, in the majority of RE based asset classes. Look at Orlando over time. Spare space in an OK or better location is basically just next generation's uncovered land play. 

[Morgan]

1 hour ago, Gregmal said:

I would pretty liberally say this is almost always true. In a growing and civilized society, the relevance ring as I call it is always expanding. I always point to the NYC suburb halo effect. Areas the were boondocks 2-3 decades ago are now multi million dollar mansion lined suburbs. Areas that were 20 minutes outside of those areas are now upper middle class enclaves. I dont see how this doesnt apply across the board, in the majority of RE based asset classes. Look at Orlando over time. Spare space in an OK or better location is basically just next generation's uncovered land play. 

Yes you’re correct, at least for dense areas. As the world becomes more urbanized (I think 2 billion more people are expected to move to cities by 2050), well located land for solar farms will become more scarce. 
 

In rural areas, I’m not sure if that’s true though. I wonder if there will be lots of smaller-ish scale solar farms dotted around everywhere for rural populations? 

 

Another aspect is the power loss from long distance power transmission. Another variable for analysis for site selection. I don’t know enough to make any determination about this, but I assume it’s something that needs to be considered. 

Edited September 5, 2021 by Morgan

[JRM]

Generally I think rooftop solar makes a lot more sense than solar farms.  There's a lot of underutilized rooftop space, and solar farms are a gigantic waste of space.

 

Distributed energy generation is the direction things are going.

 

The minerals required to make solar panels and batteries are finite in nature, and cost will only go up over time as mines become depleted.  Recycling will become necessary, but only at higher commodity prices.  Maybe commodity prices go up, and solar panels you purchased today go up in value (more than inflation?) and you're able to sell your panels to a recycler for a profit.  Or, maybe we figure out nuclear fusion and all of these renewables are rendered worthless.

[Morgan]

25 minutes ago, JRM said:

Generally I think rooftop solar makes a lot more sense than solar farms.  There's a lot of underutilized rooftop space, and solar farms are a gigantic waste of space.

 

Distributed energy generation is the direction things are going.

 

The minerals required to make solar panels and batteries are finite in nature, and cost will only go up over time as mines become depleted.  Recycling will become necessary, but only at higher commodity prices.  Maybe commodity prices go up, and solar panels you purchased today go up in value (more than inflation?) and you're able to sell your panels to a recycler for a profit.  Or, maybe we figure out nuclear fusion and all of these renewables are rendered worthless.

Based on what I’ve read, utility scale solar farms are about 65% cheaper to build per watt than residential systems. See photo below. 
 

Underutilized roof space is a good option, but I’m not sure if it’s worth it on purely a cost basis at this point. This doesn’t take having some back up power for your home into consideration. Some people are willing to pay for that. 
 

@JRM do you have any reports on the limited supply of minerals needed to make panels and batteries? I’ve read about recycling old batteries (presumably panels can be recycled too) and they can reuse 95% of the original battery I think. Obviously the supply chain to do this is still being developed, but even if all batteries are recycled, 5% of the new batteries will need newly mined material. Minerals for 5% of the global battery supply is a lot of minerals. Anyways, I agree there are obstacles, but there certainly can be solutions. Not to mention new battery chemistries, or different chemistries used in different scenarios. It won’t all be lithium-ion. 

[LC]

Interesting that fixed axis PV is still cheaper than one axis 

[JRM]

@Morgan For the minerals discussion, here's a thread I started a while back.  Not much engagement on it.  Must not have been  very popular topic:

 

 

Yes, building utility solar is usually cheaper.  However, the electricity generated from solar does not contribute to grid stability and is unreliable for base load generation.  The batteries required to make solar productive base load makes it much less economical.  The batteries still don't fix VAR support issues, and capacitor banks are likely required at more substations.  Are these costs included, too?

 

 

 

[Morgan]

22 minutes ago, LC said:

Interesting that fixed axis PV is still cheaper than one axis 

Think about all the motors needed to move tens of thousands of panels reliably everyday. Electric motors are fairly cheap, but they add up. 
 

That being said, I wouldn’t be surprised if in some locations the one axis tracking builds provide a better ROI despite the higher build cost. 

[Morgan]

17 minutes ago, JRM said:

@Morgan For the minerals discussion, here's a thread I started a while back.  Not much engagement on it.  Must not have been  very popular topic:

 

 

Yes, building utility solar is usually cheaper.  However, the electricity generated from solar does not contribute to grid stability and is unreliable for base load generation.  The batteries required to make solar productive base load makes it much less economical.  The batteries still don't fix VAR support issues, and capacitor banks are likely required at more substations.  Are these costs included, too?

 

 

 

Thank you for sharing your thread. I missed it earlier. 
 

I’m not sure if the VAR costs are included in the analysis I provided, but it is something I need to research further. 
 

I believe, but could be wrong, the cost of batteries are dropping significantly and is making utility scale energy storage economical, or close to it. 
 

Storage is necessary to transition to solar and wind, and that is being solved. My understanding is as renewables with storage are implemented, carbon based energies will be turned off balancing the load on the grid. 

Edited September 5, 2021 by Morgan

[JRM]

For a stable power grid you need power available (supply when it is demanded), frequency support, and VAR support (both real and reactive components of the power demand).  Traditional electrical generators are able to make fine tune adjustments as conditions on the grid change (load follow).  As these generators (coal plants) are taken off the grid, something needs to help support the grid.  

 

Technology improvements are definitely hard to account for.

[boilermaker75]

3 hours ago, Morgan said:

 

Another aspect is the power loss from long distance power transmission. Another variable for analysis for site selection. I don’t know enough to make any determination about this, but I assume it’s something that needs to be considered. 

 

That is not an issue. With power switching transistors you can covert to high-voltage DC for transmission, which can be transported across a continent, and then power switching transistors to convert to low voltage AC for use. In China they use such a system to transport power from Xiluodu hydroelectric facility to Zhejiang province 1,680 km away.

[JRM]

There is less power loss with DC transmission vs AC, but larger conductors are required (more expensive).  Also, power is lost anytime you step up, step down, invert, or rectify the electricity (copper losses\efficiency losses).  That is one advantage of rooftop solar.  

Edited September 5, 2021 by JRM

[fareastwarriors]

I think we are still very innings of battery tech. With all this money and attention on the issue, innovation will come through to drive down cost and increase capacity. It will be a bumpy road ahead but we will see substantial improvements. 

[Cigarbutt]

2 hours ago, boilermaker75 said:

 

That is not an issue. With power switching transistors you can covert to high-voltage DC for transmission, which can be transported across a continent, and then power switching transistors to convert to low voltage AC for use. In China they use such a system to transport power from Xiluodu hydroelectric facility to Zhejiang province 1,680 km away.

 

2 hours ago, JRM said:

There is less power loss with DC transmission vs AC, but larger conductors are required (more expensive).  Also, power is lost anytime you step up, step down, invert, or rectify the electricity (copper losses\efficiency losses).  That is one advantage of rooftop solar.  

i'm not sure the following is relevant or necessary but some of the developments for long-distance electricity transmission came from my back yard a long time ago. The 735kW lines are now standard but this wasn't always so obvious, like in the 1950s when the 'norm' was slowly being defined. In my area of North America, energy from hydraulic power is huge and the challenge was to 'transport' the energy over very long distances (from reservoirs to Montreal = about 1300km (700 miles)). 

CR52 complete versn-hi res.pdf (ieee.org)

 

Yes energy loss (heat and sound) along the way (and energy transition (transition not like the renewable kind but more along the lines that JRM describes) is an issue but it is not a major issue.

For those with an unusual interest:

Extra-High-Voltage Transmission | 735 kV | Hydro-Québec (hydroquebec.com)

For some technical aspects:

Lost In Transmission: How Much Electricity Disappears Between A Power Plant And Your Plug? | Inside Energy

-----

Who knows about batteries but there is further room to grow along long-distance electricity transmission. In my province, across-borders accords are slowly progressing (slightly easier in New England than in Ontario (CDN neighbor) for various reasons). The company needs an army of negotiators to navigate the different groups involved, including not-in-my-backyard constituents.

Berkshire Energy has invested, and will continue to invest, in long-distance transmission infrastructure. For BHE, the idea is to maximize the potential of distributed energy and differential geographical production capabilities:

Energy Transmission : Berkshire Hathaway Energy (brkenergy.com)

-----

Not that it matters to most on this Board (and there are various reasons for the relative electricity 'cheapness' apart from long-distance transmission technology and hydraulic power capacity) but we are enjoying a relative competitive advantage on that front:

But relatively low energy dissipation over long distances does play a role, at least for now and possibly for the foreseeable future.

 

[IceCreamMan]

Question: What is the productive life of solar PV panels, and do they produce the same amount of electricity year-over-year?

Answer: The productive life of solar panels and the electricity production from these panels over time depend on factors such as climate, module type, and racking system, among others. The reduction in solar panel output over time is called degradation. NREL research has shown that solar panels have a median degradation rate of about 0.5% per year but the rate could be higher in hotter climates and for rooftop systems.[1] A degradation rate of 0.5% implies that production from a solar panel will decrease at a rate of 0.5% per year. This means that in year 20, the module is producing approximately 90% of the electricity it produced in year 1.

 

Source: https://www.nrel.gov/state-local-tribal/blog/posts/stat-faqs-part2-lifetime-of-pv-panels.html

[boilermaker75]

17 hours ago, Cigarbutt said:

 

i'm not sure the following is relevant or necessary but some of the developments for long-distance electricity transmission came from my back yard a long time ago. The 735kW lines are now standard but this wasn't always so obvious, like in the 1950s when the 'norm' was slowly being defined. In my area of North America, energy from hydraulic power is huge and the challenge was to 'transport' the energy over very long distances (from reservoirs to Montreal = about 1300km (700 miles)). 

CR52 complete versn-hi res.pdf (ieee.org)

 

Yes energy loss (heat and sound) along the way (and energy transition (transition not like the renewable kind but more along the lines that JRM describes) is an issue but it is not a major issue.

For those with an unusual interest:

Extra-High-Voltage Transmission | 735 kV | Hydro-Québec (hydroquebec.com)

For some technical aspects:

Lost In Transmission: How Much Electricity Disappears Between A Power Plant And Your Plug? | Inside Energy

-----

Who knows about batteries but there is further room to grow along long-distance electricity transmission. In my province, across-borders accords are slowly progressing (slightly easier in New England than in Ontario (CDN neighbor) for various reasons). The company needs an army of negotiators to navigate the different groups involved, including not-in-my-backyard constituents.

Berkshire Energy has invested, and will continue to invest, in long-distance transmission infrastructure. For BHE, the idea is to maximize the potential of distributed energy and differential geographical production capabilities:

Energy Transmission : Berkshire Hathaway Energy (brkenergy.com)

-----

Not that it matters to most on this Board (and there are various reasons for the relative electricity 'cheapness' apart from long-distance transmission technology and hydraulic power capacity) but we are enjoying a relative competitive advantage on that front:

But relatively low energy dissipation over long distances does play a role, at least for now and possibly for the foreseeable future.

 

 

This article on DC power grids may be of interest,

 

https://spectrum.ieee.org/lets-build-a-global-power-grid

[Cigarbutt]

2 hours ago, boilermaker75 said:

 

This article on DC power grids may be of interest,

 

https://spectrum.ieee.org/lets-build-a-global-power-grid

Very interesting indeed.

Apologies to the poster who initiated this thread but this post expands on the potential value of long-distance transmission lines which, counter-intuitively on the surface, may be fully compatible with the long term value of solar farms and other sources of distributed energy on a more local level.

There has been progress on the DC front and more recent long-distance transmission lines seem to go this way. As an example, the more recent Canada-Massachusetts line that was approved (approved with the transmission through Maine after unusual resistance in New Hampshire) the New-England-Clean-Energy-Connect project, involving new high voltage (DC current) over about 150 miles.

i've come around this graph which shows the concept of "critical distance" which, as your article implies, has been coming down.

Interestingly, these projects need to coordinate various priorities and the "critical distance" could be replaced to "time it takes for the project to overcome or bypass various multi-jurisdiction political, regulatory or other social issues" versus the initial larger cash outlays that these gigantic projects require. I guess the BHE people estimate this cost when investing in those long-term projects and Mr. Buffett has described the assumption that people tend to be mostly reasonable although he did pull out of a major LNG project some time ago (multi-billion project) and events that unfolded after revealed that he had correctly assessed this cost (too high). i guess people (individually or in crowds) are not always reasonable.

But yeah, it's the AC vs DC dilemma again as a standard of transmission and it looks like DC will win this time. This reminds me that, during the most fun times and when stocks (individually or in groups) crater, i get excited and put Hell's Bells on when logging in the buy orders only to listen to Back in Black after. Just in case for clarity, both songs are form AC/DC. Who cares as long as it's powerful.

[boilermaker75]

I've was never an AC/DC fan, but I do like Back in Black!