Here Comes the Sun – The Chart Paul Krugman Left Out

December 12th, 2011 by John Farrell

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance’s New Rules Project.

Nobel economist Paul Krugman made waves last month when his column “Here Comes the Sun” noted that the rapidly falling cost of solar electricity – “prices adjusted for inflation falling around 7 percent a year” – meant that “solar is now cost-effective.”

It’s close. But it depends on what’s meant by “cost-effective.”

The first step is translating solar prices into electricity prices. Installed costs for solar have dropped dramatically, from $8 to $10 per Watt just a few years ago to as low as $3.50 per Watt for utility-scale systems and just over $4 per Watt for residential systems. But electricity isn’t sold in Watts, but in kilowatt-hours (kWh). So, solar installed at $3.50 per Watt in Minneapolis, MN, will produce electricity for about 23 cents per kWh. In sunny Los Angeles, the same solar PV array would produce power at 19 cents per kWh, because the more abundant and direct sunshine would make 20% more solar electricity over the same time period.

In either place, such prices don’t compare favorably to average residential retail electricity prices of 8 and 12 cents, respectively. In fact, none of the top 40 metropolitan areas in the country have average prices for electricity as high as 19 cents.

But there are several caveats:

Grid electricity prices are not fixed, but changing. Over the past decade, electricity prices have risen, on average across the United States, 3 percent per year. The solar electricity price is locked in once the panels are operating.
Some utilities have time-of-use rates that charge more for electricity during peak times (hot, summer afternoons) that rise as high as 30 cents per kWh. Solar competes favorably against these rates.
There are federal, state and utility incentives for solar that reduce the cost. The 30% federal tax credit, for example, is in statute until the end of 2016.

How much do these issues matter?

Electricity Price Inflation Makes Solar Competitive Now

If electricity price inflation continues apace, by the time their solar PV systems are halfway to their expected life of 25 years, 45 million Americans (roughly 1 in 6) would have cheaper electricity from solar if they installed right now at $3.50 per Watt. [Editor’s note: 25 years is a conservative, obsessively conservative lifetime estimate, and the cost of solar if you use a more legitimate lifespan is, of course, lower.]

Time-of-Use Pricing Makes Solar Competitive Now

Time-of-use pricing lets utilities charge different prices for electricity at different times of day, based on the actual cost of delivering power at those times. In many places, the higher prices coincide with hot, sunny summer afternoons and effectively increase the cost of electricity by 30% during the time a solar panel produces power. Already, 22 million Americans in Southern California can install solar at $3.50 per Watt and beat time-of-use pricing for grid electricity.

Incentives for Solar Accelerate Cost-Effectiveness

Solar power is crossing a cost-effectiveness threshold against grid prices that are rising and reflect the true cost of electricity. But incentives that capture the environmental and economic benefits of solar help finance projects outside of the sunny Southwest.

While only 3 million Americans can beat grid prices with $3.50 per Watt solar and no incentives, 41 million Americans can beat grid prices using the 30% federal tax credit. And the market expansion enabled by tax incentives is driving down the cost to install solar (labor and materials) as well as the cost of modules.

Time Makes Solar a Winner

As Krugman notes, the falling costs of solar make time its greatest ally. The following chart illustrates the number of Americans in the top 40 metropolitan areas for whom solar (at $3.50 per Watt in 2011) beats grid electricity prices (average residential retail rates) over the next 10 years. The base assumptions are that the price of solar declines by 7% per year and grid electricity prices rise by 3% per year. The chart examines solar with no incentives and with the 30% tax credit, and with and without utility time-of-use pricing (expected to boost the retail rate during solar-producing hours by 30%). The no-incentive and tax-credit lines merge after the 2016 expiration of the 30% tax credit.

Even without the federal tax incentives or favorable time-of-use pricing, nearly 50 million Americans can beat their utility’s electricity price with solar by 2016. With time-of-use prices, it’s over 90 million by 2016. And with the tax credit factored in, it’s nearly half the country. Of course, the chart will tend to underestimate over time, as the greatest population growth tends to be in the largest metropolitan areas (with the highest electricity prices).

Here comes the sun, indeed!

Keep up to date with all the hottest cleantech news by subscribing to our (free) cleantech newsletter, or keep an eye on sector-specific news by getting our (also free) solar energy newsletter, electric vehicle newsletter, or wind energy newsletter.

Tags: cost, Electricity, Energy, Federal 30% tax credit, federal tax credit, Grid, grid parity, incentives, self-reliance, Solar PV, US, utility

About the Author

John Farrell directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development. Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (energyselfreliantstates.org), and articles are regularly syndicated on Grist and Renewable Energy World. John Farrell can also be found on Twitter @johnffarrell, or at jfarrell@ilsr.org.

http://muckrack.com/dotcommodity Susan Kraemer

Numbers quibble: 19 cents for solar in LA – with no incentives – but there is a 30% one – my solar was 12 cents a kwh – in 2010.

And you lowball utility prices – Californians who use a lot of electricity already pay much more than the 19 cents a kwh they could make solar for (if there was no 30% off, which there is) –

Californians can pay as much as 49 cents a kwh in PG&E territory if they use too much. People with pools can wind up with $500 – $900 a month utility bills! For them, it make NO SENSE to keep dishing that out, when they could go solar for so much less monthly.
Marcel

I see a lot of people in Holland now investing in pv-solar as we pay as much as 23 euro-cents per KWh. Another factor is that people are not sure where to invest any excess money which they earn (bear stock market, low interest on savings account). Installing a bunch of solar panels gives you a better and solid ROI.
- Anonymous
  
  Great point. I think that’s a key one that more people need to become aware of — it’s a safe, reliable investment option!
Leandra Cooper

While New York may not have the most solar insolation in the country, it does have electricity prices that exceed 19 cents/ kWh– a rate that gets people thinking about alternatives. When considering that the state imports a great deal of its fuel sources, suffers from brown-outs several times annually, and has a high demand for a stable electricity source, solar installations begin to look like an even brighter idea than may be originally anticipated.

If state or federal incentives were to further galvanize the solar market and recognize not only the potential of the rapidly growing solar industry for economic stimulation, but also the long-term benefits of domestic energy production for energy security purposes and pricing, then solar prices would be even more competitive and appealing to consumers of all levels. Not to mention, further development in the solar industry would create a job engine for well-paid, safe and clean jobs for citizens from a range of backgrounds. Thus, solar installations would be more accurately portrayed as investments with many (shorter-term and long-term) benefits, rather than expenses, such as those bluntly listed on a monthly bill.
- Anonymous
  
  New York has about 67% as much sun (annual average) as does the ‘sun belt’.
  In the sun belt a 500 kilowatt flat roof-mounted system, suitable for large buildings, produces electricity for just over $0.15/kWh. That suggests that large arrays in NY should produce roughly $0.20/kWh electricity. And produce most of it when it’s needed to deal with summer demand.
Jenscom

Thank you