CleanTechnica is the #1 cleantech-focused
website
 in the world.


Clean Power Cost-of-Residential-p.3-320x236

Published on July 9th, 2013 | by John Farrell

26

Solar Costs & Grid Prices On Collision Course

Share on Google+Share on RedditShare on StumbleUponTweet about this on TwitterShare on LinkedInShare on FacebookPin on PinterestDigg thisShare on TumblrBuffer this pageEmail this to someone

July 9th, 2013 by
 
With the cost of solar continuing to fall rapidly (50% in the past five years) and electricity prices rising steadily, if slowly, the approach of solar grid parity is near. The following chart illustrates the trajectory of solar cost and electricity price, hinting at the coming intersection.1 The chart compares the cost of a residential solar installation to the cost of electricity for a residential property. The numbers are national averages, and do not reflect the wide variation in the cost of electricity (from $0.067 per kWh in Seattle to over $0.170 per kWh in New York City, for example).

In particular, the two lines have been converging rapidly since 2007. The key moment for solar is the crossover, when electricity from solar – without subsidies – costs less than grid electricity. The following analysis identifies this moment of “solar grid parity” for the top 40 metropolitan areas in the United States (representing just over half of the national population). For the list of the metro areas, see the Appendix (although Hawaii is already at solar grid parity, we did not include the Honolulu metro area as it ranks #53 in population).

This is the second of five parts of our Rooftop Revolution report (from 2012) being published in serial.  Read part 1 here. Download the entire report and see ILSR’s other resources here.

In our analysis, we focus exclusively on residential solar grid parity, rather than commercial solar (and commercial electricity prices) or utility-scale solar with electricity sold on the wholesale market.

Solar Grid Parity Analysis

To determine the year of grid parity for major cities, we compare the cost of solar power installed on a residential property averaged over an expected project lifetime – the “levelized cost” – with the expected change in the average residential retail electricity rate.

The First Half of Grid Parity: The Cost of Solar

The levelized cost of solar is calculated with the following assumptions. First, we use an installed cost for residential solar power of $4.00 per Watt. This number may seem low, as the average cost of residential solar installations in mid-2011 was $6.40.2 But at the same time, residential solar installations completed under a group purchase have received significantly lower prices. In Los Angeles, for example, the Open Neighborhoods group purchase achieved an installed cost of $4.40 per Watt.3  Some solar industry experts and observers have suggested costs are even lower. Furthermore, installed costs for small-scale solar in Germany average $3.40 per Watt or less, suggesting that there are near-term opportunities for lower cost solar in the U.S.4 

The cost of capital for residential solar installations is calculated at 5% based on the historically low interest rates that persisted in 2011. We also assume that homeowners will finance 80% of the cost of the installation. To account for the changing value of money over time, we use a 5% discount rate (equal to the cost of capital) and a 3% inflation rate (the historical U.S. average) to account for the smaller cost of payments made on debt in later years.

The project life of solar was estimated at 25 years, based on the the longevity of early installations and the quality of current solar panels. Operations and maintenance costs were estimated to be 1% of the initial installed cost, a slightly higher assumption than that used in many other studies. The output of the solar array is based on the local solar insolation data from the National Renewable Energy Laboratory’s PVWatts calculator. Panel out-put was forecast to degrade by 0.5% per year.

Assumptions for Solar Grid Parity

Solar Power Cost Before and After Federal Incentives

We used the same installed cost for solar nation-wide, ignoring variations that currently exist in the solar market. We assume that as the national market for solar grows, regional variation in prices will become insignificant.

Based on these assumptions, the levelized cost of solar today – without any incentives – varies from around $0.19 per kilowatt-hour (kWh) in Los Angeles to $0.29 per kWh in Seattle. For more discussion on the cost of solar, see the Appendix or for some context, see the Sensitivity Analysis.

Solar Incentives and the Cost of Solar

Currently, there are a variety of incentives that reduce the cost of solar electricity. At the federal level, a 30% investment tax credit and accelerated depreciation (worth an additional 20% discount) significantly reduce the levelized cost of solar. In many states and utility service areas, rebates and other incentives are added to the federal incentives.

With incentives, commercial- and utility-scale solar is already competing with new fossil fuel power plants. California utilities have 4.5 gigawatts of signed contracts for solar below the cost of a new natural gas combined-cycle power plant (the “market price referant”).5 San Antonio’s public utility, CPS Energy, asked for bids for 50 MW of solar and was so pleased with the prices that they increased their order to 400 MW.6

Even residential solar can be competitive with grid prices, especially with the rising popularity of third-party ownership models. Solar leasing allows residential property owners to have solar installed with no or low upfront cost, and typically means they will see an immediate reduction in their electricity bill, even when factoring in the lease payments to the third party. The third party is able to capture the federal tax incentives (including depreciation, otherwise not available to residential users) and therefore can compete favorably with those making cash purchases of solar power for their homes.

The cost of these incentives is not insignificant. For example, the federal tax credit allows solar projects to get back 30% of the installed cost. Claimed by nearly all solar projects, in 2010 the tax credit amounted to nearly $1.6 billion (for 878 megawatts of solar at an average price of $6.20 per Watt).7 The following chart illustrates how the exponential growth of solar means an exponential growth in the cost of the tax credit, despite significant forecast price decreases. Values after 2011 are forecast, with a best fit line estimated for solar capacity additions, and a 7% annual decline assumed for the installed cost of solar.

Cost of Federal Solar Tax Credit

The cost of the tax credit will reach $22 billion a year by 2016 and the tax credit isn’t the only subsidy. The federal government estimates that accelerated depreciation for solar and geothermal projects costs about $300 million per year, forecast to rise to $7 billion by 2016.8 With solar capacity growing rapidly and costs coming down, the following analysis suggests that it may be time to re-evaluate incentives for solar power. For more on this issue, see Planning for Phasing Out Incentives.

To avoid complication in the analysis, all solar costs in this report (with the exception of the preceding section) reflect the unsubsidized cost of solar power.

The Second Half of Grid Parity: The Cost of Grid Electricity

Using the unsubsidized cost of solar reported earlier for each metropolitan area, we contrast it with each city’s average residential retail electricity price, as reported by the PVWatts calculator (and derived from the Energy Information Administration). Once again, there is wide variation. Prices varied from $0.067 per kWh in Seattle to $0.175 in New York City.

To determine when cities reach residential solar grid parity, we assumed that electricity prices would continue to rise at 2% per year (the historical average9) and that the cost of solar would decline at 7% per year (less than the 5-year average of 10%). Assumptions for a Grid Parity ForecastIt is possible that the cost of solar will plateau, or that electricity prices will rise much more slowly, and we have conducted a sensitivity analysis to examine some of those contingencies.

The following chart illustrates the number of Americans in the top 40 metropolitan areas who could go solar for less than the retail grid electricity price by year, from 2011 to 2027. San Diego is the first city at grid parity, in 2013. Seattle is the last, in 2027. Geographic regions are listed on the chart when cities in those regions reach grid parity. For a table showing the chart data through 2021, see the Appendix.

In the short-term, Southern California reaches grid parity with moderately high electricity prices and excellent sunshine, with New York coming soon after due to particularly high grid prices. By the end of the decade, 1 in 4 Americans in the largest metropolitan areas could go solar at better than grid prices.

1 in 4 Americans

Time-of-Use Pricing

Although the comparison above between solar and average retail electricity prices is accurate, it misses an important element of grid electricity pricing and the value of solar power. In some areas of the country, utilities have begun to offer “time-of-use” pricing that varies the rates for electricity during times of the day (and seasons) to reflect the higher costs for generating power during times when demand is particularly high.Average Solar Insolation by Season (LA) In general, these high demand (e.g. high cost) times are on hot, sunny afternoons when air conditioning loads are highest. Of course, these hot, sunny and high demand days (and high grid prices under time-of-use pricing) tend to coincide with high levels of potential solar power production. This means that solar can provide a lot more economic value to the utility by reducing demand and providing extra generation at a time when it’s most needed.

The following two graphics illustrate how solar PV systems produce more electricity during the times of day and year when electricity demand is high. For example, a solar panel in Los Angeles will deliver a disproportionate 28% of its annual electricity during summer months (June through August) and also deliver 43% of its daily electricity output during peak pricing hours.

Percent of Daily Solar Electricity Output by Hour

Percent Daily Solar Electricity Output by hour

The overlap of solar panel output with high electricity prices means that in Los Angeles and other communities, the utility’s time-of-use pricing plan makes solar power pay back faster, because the customer is offsetting more expensive electricity than average with their solar array. And if set up properly, any net excess generation flowing back to the utility grid should be compensated at peak power prices.

The following chart illustrates the time-of-use pricing plan for the city of Los Angeles municipal utility that charges higher prices during certain day-time hours during the summer months of June, July and August.

Time-of-use Graph

The availability of time-of-use pricing means that comparing solar to the average grid electricity price underestimates its value to a residential customer. A solar panel will reduce a homeowner’s consumption from the grid during the most expensive time periods. Therefore, we ran the solar grid parity analysis a second time, increasing the retail electricity price by 30% (to reflect the time-of-use value of solar).10 In this scenario, solar grid parity advances by two to three years for most cities, as shown in the chart below.

Population at Grid Parity

Fifty percent more people achieve grid parity by 2021 – nearly half of all Americans – with a time-of-use pricing plan compared to data using average retail electricity prices. One could conclude that implementing time of use pricing should be a cornerstone for any policy advocates seeking to make solar competitive sooner. As distributed solar generation expands significantly, the financial advantage of peak pricing may fade, but in the near term it’s a pricing mechanism that can make solar more affordable.

Economic Grid Parity

Lifetime savings from Solar Power (Los AngelesMost people think of grid parity in simple terms: “is the cost of solar electricity lower than grid electricity right now?” But with electricity prices rising 2% per year over the last decade, installing solar immediately could save money in the long run even if the current cost of solar electricity is higher than grid prices. Thus, we modeled a third pricing scenario, called “economic grid parity,” and the concept can accelerate the year of grid parity. Economic grid parity happens because rising electricity prices make solar installed today increasingly worthwhile over time. The cost of solar electricity is fixed, based on the cost to install the array.

It will continue to provide electricity with no fuel cost and with minimal maintenance for 25 years or more. Grid prices typically increase, however, making the value of solar greater over time. The adjacent chart illustrates the concept for Los Angeles. Grid electricity is cheaper than rooftop solar for the next few years, but then the two flip. Over 25 years, the savings from solar grow significantly.

solar rooftop revolution

To calculate the year of economic grid parity for each city, we simply matched up the lifetime cost of solar (the levelized cost over 25 years) to the expected cost of grid power in the year it was installed. Each year, the grid price rises by an expected 2%, while the cost of solar stays the same. We use the net present value11  of the costs and savings to determine the economic grid parity year.

In general, using this method accelerates solar grid parity by an average of two years for most major metropolitan areas, as shown in the following chart. A detailed table is in the Appendix.

The choice of measuring stick matters a great deal for solar grid parity. With time-of-use prices implemented and a careful look at the lifetime value of solar power production, the next five years could bring one-third of the U.S. population to solar grid parity.

The Next Five YearsThe following map shows the metropolitan areas that could reach grid parity by 2016 with time-of-use pricing and using “economic grid parity,” representing a total population of 96 million.

With time-of-use prices implemented and a careful look at the lifetime value of solar power production, the next five years could bring one-third of the U.S. population to solar grid parity.

Large Cities at Grid Parity by 2016

Sensitivity Analysis

Although we’re confident in our various solar grid parity analysis assumptions, conditions may change in unexpected ways. This section examines the impact of variations in the assumptions used for the solar grid parity analysis, including the inflation in grid electricity prices, the cost of solar, a potential plateau in the cost of solar, and the initial installed cost of solar power.

Electricity SensitivityThe default assumptions are:

  • Electricity inflation of 2% per year
  • Solar cost decrease of 7% per year
  • Solar cost decreases steadily through 2027
  • Initial solar cost of $4.00 per Watt

Electricity prices are relatively stable, so the small range tested in the sensitivity analysis also has a relatively small impact on the eventual coming of grid parity (see adjacent chart).

Since the role of solar costs plays a disproportionate role and is less predictable than electricity prices, our sensitivity analysis reveals how changes in the solar cost assumption could have a significant impact on the overall results.

Sensitivity Analysis for Solar Grid Parity at Average Grid Prices

Average Grid Prices

Solar Cost Sensitivity POP

A ±2 percentage point change in the annual cost trajectory of solar could change the number of Americans at grid parity by 30 million in either direction by 2026 (the chart doesn’t show the full impact because our universe is artificially constrained to the top 40 metro areas).

A plateauing of solar costs after 2020 could severely limit the expansion of grid parity thereafter, but interestingly a starting cost $1.00 per Watt higher is no worse (in the long run) than a 1 percentage point slower decrease in solar costs.

Some might argue that even the sensitivity analysis underestimates is too bullish on solar costs, but the world market suggests otherwise. At the end of 2011, while the average installed cost of U.S. solar lingered at $5.20 per Watt, Germans installed solar at an average cost of $2.80 per Watt.12  The enormous difference suggests plenty of room for downward cost movement.

References

  1. The electricity price was calculated using the Bureau of Labor Services electricity price index and data from the Energy Information Administration. The cost of solar is primarily from Lawrence Berkeley Laboratory’s Tracking the Sun series, with earlier data calculated based on the solar resource in St. Louis, MO.
  2. Wald, Matthew. Solar Installations Rise, but Manufacturing Declines. (New York Times Green blog, 9/20/11). Accessed 1/4/12 at http://tinyurl. com/3ugtvlp.
  3. http://openneighborhoods.net/gosolar
  4. Farrell, John. Really, Really Astonishingly Low Distributed Solar PV Prices from German Solar Policy. (Energy Self-Reliant States blog, 7/13/11). Accessed 1/4/12 at http://tinyurl.com/3lbsa85.
  5. Who says solar is too expensive? (Vote Solar blog, 9/15/11). Accessed 1/6/12 at http://tinyurl. com/7sbvcwv.
  6. San Antonio utility ‘floored’ by low prices, increases order to 400 MW of solar. (Vote Solar blog, 7/8/11). Accessed 1/6/12 at http://tinyurl. com/445j26b.
  7. Barbose, G., et al. Tracking the Sun IV: An Historical Summary of the Installed Cost of Photovoltaics in the United States from 1998 to 2010. (Lawrence Berkeley National Laboratory, September 2011). Accessed 12/16/11 at http://tinyurl.com/3kg3tum.
  8. http://tinyurl.com/87o6lca
  9. Electricity prices for the residential sector have increased by 2.4% per year from 1997-2010.
  10. The value of time-of-use pricing can vary widely based on the length of the peak pricing period, the length of the season for peak pricing, and the peak price relative to the off-peak price. For example, the time-of-use plan offered by the Los Angeles municipal utility would boost the value of electricity offset by solar by 5%, whereas the time-of-use plan offered by PG&E in San Francisco would add a premium of 200% or more.
  11. Net present value compares the “present value” of revenues and expenses over time, adjusting those figures for inflation and a discount rate. A discount rate is a method of accounting for the fact that people value a dollar given them today more than one given in a month.
  12. Lacey, Stephen. Germany Installed 3 GW of Solar PV in December — The U.S. Installed 1.7 GW in All of 2011. (ThinkProgress, 1/10/12). Accessed 2/21/12 at http://tinyurl.com/6tkll2p.

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.

Print Friendly

Share on Google+Share on RedditShare on StumbleUponTweet about this on TwitterShare on LinkedInShare on FacebookPin on PinterestDigg thisShare on TumblrBuffer this pageEmail this to someone

Tags: , , , , , , , , , ,


About the Author

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.



  • Doug

    A revision to this analysis should include the impact of multiple rate tiers that hit many homeowners hard. Also, SCE is increasing rates at 5%/year, not 2%

  • mcutlerwelsh

    The prospect of pay parity being so close is very exciting. Good to have analysis like this.

  • JamesWimberley

    Great post. One of the charts is duplicated, replacing a missing one.

    • http://zacharyshahan.com/ Zachary Shahan

      Thanks. Unfort., was one of the hottest ones! It’s added now, but also attaching it here.

  • Adam Grant

    A 2% annual increase in fossil costs may be too conservative. The peak oil crowd make various good points about coming reductions in the supply of various fossil hydrocarbons, e.g. natural gas supply constricted in North America after 2017. Of course, the hardcore peak oil enthusiast then goes on to predict Malthusian doom for humanity, whereas it seems more likely that this will merely improve market conditions for a fast transition to renewables.

    • Doug

      Agree. Utilities in CA are increasing rates consistently at 5%/year.

  • Emmett

    Another way to look at this is ROI (Return on investment) Today, in Albuquerque, where residential rates are $0.12 KWH, and installed costs are dropping below $4 / watt, the ROI without any tax credits or utility rebates (on the 5 year old system currently on my house, if it were installed today and paid cash), would be just over 5%, TAX FREE. And gets better as electric rates increase. Compare that with other very low risk investments – CD’s, AAA bonds or T-bills, and it beats them all by a very wide margin.

    • http://zacharyshahan.com/ Zachary Shahan

      Wow, nice, thanks for those details! NM is certainly on of these initial breakthrough markets.

  • Robert Flanary

    I don’t know where you get your info that Seattle is the cheapest. I pay about 5 cents per kilowatt hour (including delivery charges) in the Chicago area using residential real time pricing. Rates for electricity are not going up. Wind is driving the prices down where I live. Demand will also continue to fall due to energy improvements of computers, refrigerators, water heaters, light bulbs and other technologies. I would consider residential solar only if I had extra money lying around. Otherwise it would make more sense for me to invest in larger commercial renewable energy projects. We really need to start approaching this from the standpoint of getting the most carbon out of the atmosphere for the least amount of dollars. Residential solar is not a good way to do that. Just remember: The grid is your friend if you want renewable energy.

    • Adam Grant

      By challenging the ability of generating companies to make a profit on fossil-derived electricity, rooftop solar will force the transition to utility-scale renewables.
      Over the next 10 to 20 years efficiency improvements may begin to be offset by increased power draw from home, kitchen and garden robotics.
      Power production close to use and neighbourhood-scale storage could also lead to a more robust grid.

    • Wayne Williamson

      just an fyi…Hawaii is around 40 cents a kilowatt…I pretty sure that’s why they are going all out for wind and solar….Florida is around 11 cents…but little to no incentive for solar or wind.

      • Wayne Williamson

        although I find it interesting that gasoline in Hawaii is only about 25 percent more expensive.

      • Doug

        Hawaii is an exciting place for solar!

    • Ken

      I would like to see more discussion of the distributed generation trade-offs of residential solar. Large central renewable farms need costly distribution lines & are less robust in the event of disasters. However, present grid-tied residential solar systems will shut down if the grid goes down. Next generation micro-inverters will be easier to configure for stand alone or local grid operation. This may give the edge to residential solar.

    • http://electrobatics.wordpress.com/ arne-nl

      Hi Robert, have you ever tasted the joys of running your own power plant? Just buy some PV! I guarantee you you’ll love it.

      For me, one of the irresistible advantages of residential PV (or actually any building mounted PV) is the fact that is reuses existing land, and doesn’t claim any new. Most large scale renewable energy projects (wind/solar/hydro/biomass) affect the landscape. In different ways, some more than others. Land is scarce on a planet with more than 7 billion souls.

      Another advantage, less appealing but nonetheless important, is that it generates the energy right there where it is consumed. Lack of transportation capacity and hassles with getting a new high voltage line approved and financed is too often holding back large scale renewable energy projects.

      But if you look at it as a purely economic proposition, you are right, but aren’t you making your life a bit dull? ;)

      Btw, I have done both. I operate my very own fusion energy harvesters AND have invested in offshore wind through meewind.nl.

  • Matt

    This is a great data; but of course their are other item that could shift the ground it is based on. Several items that could have a large impact on fossil fuel base electric cost. (1) US finally does a GHG tax (2) US wakes up to the risks of NG gas fracking (big jump in NG prices) or doesn’t wake up and exports it instead.
    On the Solar side, if US solves it Soft cost issues and we drop $1-$2/watt to be in line with UK/Germany/down under.

    I think “time of day” is needed and can’t move across the country fast enough. In the long run I’m sure it helps storage; but less clear on PV. When PV takes away the mid-day peak then that benefit will go away. Germany is already getting to where they have two smaller peaks; instead of one big peak middle of day.

  • UK Gary

    In the UK, 4kW domestic solar systems are advertised by a number of installers at an installed price of around $2.25 per watt inclusive of a 5% sales tax.

    How can the UK install solar arrays so much cheeper than the USA?

    Mostly it’s down to soft BOS costs.

    In the UK most solar arrays do not need planning permission, do not need grid connection permission, and provided they are installed by micro-generation certification scheme accredited installers do not need to be individually inspected (some random inspections are carried out).

    In the USA I would say that possibly around $1.75 on average is spent on the above permissions and inspections and their knock on costs such as delayed or cancelled orders. These potentially avoidable soft costs are of the same order of magnitude as the federal and other tax incentives available for solar installations .

    If you want to cut costs – get your legislators to learn from the UK and other European countries and simplify their administrative processes – that way, much of the country could be at residential grid parity almost overnight!

    • Ken

      I totally agree. Having installed a 5KW system recently @ $4/W before subsidies, I can attest that homeowner association rejections & re-configuring add significant cost. I also had structural inspectors, electrical inspectors & power company approvals. All this cost months of time, thus more cost.

    • http://zacharyshahan.com/ Zachary Shahan

      Definitely support you on this. And I know SEIA is focusing a lot of attention on this these days. One of the key problems is that these requirements vary from place to place… and getting an overarching national policy seems unlikely.

  • ToddFlach

    This story just gets better and better for PV….but you could add even more to the case. PV works best in hot, sunny climates when it is needed the most, namely, hot, sunny summer days during droughts. This is when thermal power plants are threatened by cutback due to lack of cooling water or too high discharge water temperatures (kills all the fish in the river or lake), just when the power is needed the most to run AC. Spot electricity prices “super spike” in such periods, at which time PV production is even more valuable.

    • Robert Flanary

      If people shifted their air conditioning use to night time, essentially pre-cooling to a very low temperature overnight, we would not have such a super spike and we could shut down about a third of the coal plants within a few years. The public needs to be educated about the concept of peak demand in the summer and how that determines the number of power plants that are on line. This also could help people understand that plug in electric cars do not mean more coal plants. We need to get rid of coal – were everyone educated about electricity and if everyone cooperated we could shut all coal plants within the decade.

      • Matt

        Yes, demand shifting could be a big player. But only once Time of day pricing happens. Since then it saves people money. Sorry but that is when people move, only a small percent will spend extra to be green. Big public space already do this because it saves them money. When Texas will give you electric free at night, then there is no reason not to install a super chiller, and then just run a fan during the day.

        • Doug

          I’m confused Matt. Why do you think people need to move to get TOU rates? It’s just a matter of the utilities installing the necessary smart meters, which is already happening by the million.

          • Matt

            Doug I edited my post to make it clear, I mean without TOU people will not move when they use power. Not that they should move where they live. You need smart meters and the utility to use TOU pricing. Which might be limited in some states by the state rules on the utility.

      • Doug

        Time of use should be mandatory for all electricity users. Our entire electric generation and distribution system is based on peak usage, which can be drastically reduced.

    • Ken

      Thermal plant heat loss (typically 2/3 of the heat generated) is one reason I can’t get excited about nuclear. It still dumps a lot of heat into the local environment (rivers, lakes, air).

Back to Top ↑