A new academic study published last week suggests that solar energy has already reached grid parity in some areas in North America and is therefore poised to move into the mainstream.
The study, 'A Review of Solar Photovoltaic Levelized Cost of Electricity,' was co-authored by Joshua Pearce of Michigan Technological University and Kadra Branker and Michael Pathak of Queen´s University in Kingston, Ontario. It was published in Renewable and Sustainable Energy Reviews. You can read an abstract of the study here.
The study focuses on the assumptions behind many of the past studies of the levelized cost of energy (LCOE) facing the solar industry and argues that falling costs combined with more accurate assumptions behind the LCOE calculations can provide numbers that are in line with what consumers in many areas pay for electricity - which is one definition of Grid Parity.
According to a report in R&D magazine, Mr Pearce made the following statement:
Many analysts project a higher cost for solar photovoltaic energy because they don't consider recent technological advancements and price reductions.... Older models for determining solar photovoltaic energy costs are too conservative.
The question of LCOEs and Grid Parity is surrounded by many fairly intensely debated questions. However, there can be little doubt that the LCOE for solar has been falling. The costs that go into calculating the LCOE include:
- The cost of solar photovoltaic panels themselves
- Balance of System costs
- Installation and maintenance costs
- Finance costs
- The system´s life expectancy and efficiency over its lifetime
- Solarization and the amount of electricity produced
The study raises issues with the assumptions of previous studies in most of these areas. However, Pearce particularly points to two important factors, which have ensured that the LCOE metrics for solar systems have been improving. Firstly, he argues that previous studies don’t consider "the 70% reduction in the cost of solar panels since 2009." Moreover, R&D magazine reports Pearce as suggesting that "research now shows the productivity of top-of-the-line solar panels only drops between 0.1 and 0.2% annually, which is much less than the one per cent used in many cost analyses."
Pearce´s results are likely to be hotly debated. However, he has correctly emphasized the direction in which solar is rapidly moving. In conclusion, he states that he "believes solar photovoltaic systems are near the 'tipping point' where they can produce energy for about the same price as other traditional sources of energy."
Finally, from our perspective, all of this is certainly encouraging given that we are once again bullish on the solar sector. We would simply repeat our conclusions from last week following the purchase of the Topaz Solar Farm by Warren Buffett:
"...this latest bullish news follows a series of bullish factors that have led us to recommend long solar positions again after having been flat for many months:
- The latest data points to blistering demand in the US - more detail here
- Likewise, China and Asia are showing extremely strong demand growth - see our previous article on this here
- The major Chinese players have drawn a halt to their excessively aggressive capacity expansion plans - more detail here.
Taken together, these factors should allow the supply-demand imbalance currently facing the industry to be eroded as 2012 progresses."
Since late November we have been recommending specifically being long a basket of Suntech Power (NYSE:STP), Yingli Green Energy (NYSE:YGE) and Trina Solar (NYSE:TSL). Last week, we also recommended adding First Solar (NASDAQ:FSLR) to that basket. We continue to recommend remaining long all four stocks for what should be a solid rally into 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.