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Published on June 20th, 2012 | by Stanford University


Commercial Solar Now Cost-Competitive in US

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Editor’s note: the costs discussed below, of course, do not take into account the important health benefits and environmental benefits of using solar power instead of dirtier alternatives. Add those in, and we’ve got an even better solar cost situation. Of course, the Stanford researchers were looking at the price of going solar for utilities and businesses since that is the primary factor  they consider. However, for businesses, the CSR and publicity benefits of going solar are also important (even financially beneficial) and are not examined by the researchers.

A conversation with Stefan Reichelstein on the economics of solar power.

STANFORD GRADUATE SCHOOL OF BUSINESS — Nearly everyone thinks that generating electricity via solar power is good for the environment, but there’s much less agreement on whether it makes sense from an economic point of view. At what point will solar power be competitive with electricity generated by conventional, fossil-fuel plants, and how long will subsidies need to remain in place before the solar industry can stand on its own? Those are some of the questions addressed in “The Prospects for Cost-Competitive Solar PV Power,” a new working paper by Professor Stefan Reichelstein of the Stanford Graduate School of Business, and Michael Yorston, graduate student in the Department of Management Science and Engineering at Stanford. Their paper breaks new ground in studying the life-cycle cost of electricity generated by solar photovoltaic, paying particular attention to key factors such as location, public subsidies, and the long-term learning effects in manufacturing solar panels.

Here is an excerpt from our discussion with Professor Reichelstein:

Stanford GSB: Why did you decide to study the economics of solar photovoltaic power at this time?
Stefan Reichelstein: Renewable energy and solar in particular remain rather controversial in the public debate about energy policy. Passions have been running high. What motivated me is the bewildering range of statements you have out there regarding the cost effectiveness of electricity based on solar PV. Given the range of opinions, I wanted to do my own analysis. I’m looking at it from the point of view of a business economist who is interested in measuring the life-cycle cost of this abundant energy source.

Your main conclusions?
Solar PV is not yet competitive with fossil fuel, like natural gas, from the perspective of a utility that can either build a new natural gas power plant or invest in solar installations.

For a commercial power user, say a business with plenty of rooftop space, the cost of generating your own electricity is now on par with what the business would need to pay in retail electricity prices. In that sense, grid parity has been achieved for commercial-scale installations. However, I need to add immediately that this is subject to two important qualifiers. The facility has to be in a favorable location, such as the Southwestern United States, and secondly the business must be able to take advantage of the current federal tax subsidies.

Concerning the future, and this may sound like a pun, the future of solar PV looks rather bright. The industry has consistently been able to lower the cost of solar panels. If this trend can be maintained for the next 10 years, and if subsidies are continued for that period, there is a real prospect for solar to become cost competitive on its own (that is, without a subsidy), at least for commercial installations. Utility-scale installations will take longer to become competitive; possibly 15 years, though it obviously becomes murkier to make projections that far into the future.

What happens if subsidies disappear or are sharply reduced?
The current federal tax subsidies come out of the Economic Stabilization Act of 2008 and will be in place until 2016 unless Congress changes the rules. The solar panel manufacturing industry has been on a remarkably steady learning curve for several decades now, which has pushed down the systems price of solar panels at a dramatic rate. However, this learning curve seems very much dependent upon production volume. So, if the tax subsidies were to cease, new production volume would probably be lower, and the effect of that would be to slow down the rate of cost improvements.

If the current preferential tax treatment is kept in place for about the next 10 years, and the observed learning curve holds up, we are projecting that, at that point in time, solar-generated electricity would be competitive with that generated from fossil-fuel power plants.

Why will it take longer for utility-scale installations to stand on their own, than for commercial-scale installations?
You have different benchmarks. For commercial-scale – and also for residential — solar, the benchmark is the retail price of electricity, while for utility-scale projects it is the wholesale price. The difference between the two is the cost of transmission, distribution, and administration; that is, everything that gets you from generating the power to delivering it to your customers.

What assumptions are you making about the cost of generating electricity from fossil fuels?
We believe that natural gas, as opposed to coal, is the most important fossil fuel competitor to renewable energy. In our cost projections, we have assumed a modern combined-cycle gas power plant with the price of natural gas given by the historical average observed in the United States over the past 10 years.

Are you factoring in the price of oil?
No. Oil is not used widely to generate electricity. The price of oil would be relevant to our analysis only to the extent that you want to compare gasoline-powered cars against electric vehicles.

Isn’t it true that panel costs have dropped sharply because of excess capacity in the industry?
Yes, solar panel producers are waiting for demand to catch up with current industry capacity. Until that happens, the panel producers will continue to hurt in terms of profits. In the last year, panel price came down about 40%, a drop that can’t be attributed to the learning curve alone. Without the capacity glut caused by new entrants, but taking into account the historic learning curve, we would have predicted a drop in prices of about 20% in 2011. Without the excess capacity in the industry, our estimate of the current life-cycle cost of electricity generated by solar PV would have been about 15% higher than it was.

In large part, solar PV panels are semiconductors; does Moore’s Law apply to them as well?
Yes, in a sense. Moore’s Law speaks to the rate at which the number of transistors doubles on an integrated circuit. In the context of solar panels, it appears that whenever the total cumulative amount of panels produced doubles, the unit cost decreases by 20%.

What is driving the economics of solar power?
A mix of federal tax incentives has been especially helpful to commercial-scale installations, and even to home installations. We’ve also seen dramatic growth in recent years of utility-scale installations despite their current cost disadvantage relative to fossil fuel power plants. The reason appears to be the additional subsidy mechanisms at the state and local level. Here in California, Assembly Bill 32 (a 2006 law that set goals for reducing greenhouse gas emissions) and the state’s “renewable portfolio standard,” which requires that 33% of California‘s electricity come from renewable resources by 2020, seem to be driving demand. Other countries (such as Germany) have different subsidy mechanisms that yield similar effects.

– Bill Snyder

This post originally appeared on the Stanford Graduate School of Business website.

Image: solar panels on Walmart stores via Walmart Stores

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About the Author

-- Mark Golden works in communications for Stanford University, writing on the university's broad range of energy research. Coverage spans more than 200 faculty members, as well as dozens of independent labs and academic departments from fundamental sciences to law.

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  • Bob_Wallace

    Bill – how about talking with Mark Jacobson in your engineering department and see if he and his students could give us a piece on the amount of storage/natural gas generation we would need to make renewables 24/365?

    I’m thinking something along the lines of the simulations that Elaine Hart presented on this page… 

    Take the “worst” solar/wind periods and show what it would take to get through those infrequent stretches.

    It would be nice to have a well stated response to “The wind doesn’t always blow” criticisms. 

    What might be very useful is something like a ‘Sim City’ ap where one could adjust the cost of wind/solar/wind/NG/etc. and move amount sliders up and down in order to estimate the cost of resulting electricity.

    Then as we see the price of solar/wind/storage drop we could adjust more fossil fuel out of the system without hurting the price of power.

  • Stan Stein

    This guy, Stephan, has indicated, by his interview comments, that he knows nothing more than most of us in the renewable energy field, and in fact, in the case of some people, less. THAT is one of the main reasons there is no reason behind all this….the economics of renewable energy.
    When we (our company) sells a commercial system, it is at $3.15 per watt, or less. We specialize in small to medium commercial systems. At an after tax credit price of $2, and then utilizing the accelerated depreciation schedule that’s currently in place, a financially healthy corporation is paying about $1.25 per watt. With only maintainence costs to worry about, because there is no fuel costs, and no need to buy energy certificates, the cash flow of a commercial system certainly IS competitve…..especially since the maintainence and other operational costs are so much less… takes a lot of manpower to operate a fossile fuel plant, and the materials are large and expensive…..boilers, tanks, pumps, valves….all with short to medium life cycles. The everday costs of fuel is a major expense…….
    So, this mentality people like Stephan have…not to pick on him as a person……but only as a so called expert in economics, are more of a problem than anything else, especially…ESPECIALLY, when you consider that while solar prices will go down, fossile fuels will go up…….we need to think about the coming years…not this moment…..without plenty of renewable energy in place soon, the escalation of fossile fuel prices will accelerate at a higher rate, due to supply and demand…..not ONE mention of even THAT was in Stephan’s article…..he’s a professor…..of economics….I’m a science professor….I think my students received the more astute education.

    • Zachary Shahan

      Stan, I’m not seeing estimates anywhere near $1.25 per watt for an installed system. You’re saying you work with a company that is getting this? Seems like I would have seen mention of this somewhere if this were true. Right now, avg installed cost of solar in the US is $4.44/watt from the guys who I find to be most reliable. Of course, that’s avg, so some are installing lower, but I’m yet to hear of anyone getting so low as $1.25/watt.

      And clearly, if a company is, looks like it might want to go for an easy $7 million:

      • Bob_Wallace

        I think that’s an ‘after subsidy’ price.

        $3.25/watt – $2 subsidy.

        • Zachary Shahan

          aha, that would make more sense.

          and if it is $3.25, that’s not too bad, so maybe it really would be possible for this crew to chase that $7 million :D.

  • Akbweb2

    Economists need to extend and develop better models that incorporate all the externalities (environment and health), assumptions about free goods (crucial natural resources) and cradle-to-cradle to give us a much better understanding of what the true costs of solar PV, fossil fuels, or any good or service…

    • Zachary Shahan

      i know, and most of all, we need to internalize those externalities.

  • Andrew Gebert

    “The difference between the two is the cost of transmission, distribution, and administration; that is, everything that gets you from generating the power to delivering it to your customers.” 
    In other words, to the degree we move away from a centralized model of energy generation to a distributed one, solar is competitive. 

  • ToddF

    PV technology is still improving, and this will be just as important in driving down its costs. One can see just 1-3 years ahead and PV will be the uncontested winner in all sunny locations.

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