Solar Generation Costs on Track to Achieve Grid Parity 19 comments
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Introduction
There is a considerable amount of talk in investment and research communities these days about the cost of solar power generation. Even though the cost of solar power today from sources such as photovoltaic [PV] and solar thermal is more expensive than traditional forms of power generation utilizing resources such as coal and natural gas, many believe that in the long term solar power will achieve cost parity with traditional forms of grid power. For the reasons stated below, I believe that solar power generation is on track to achieve grid parity in the next few years without the consideration of any government subsidies.
Levelized Capital Costs
The concept of levelized costs is a very simple premise. Since solar photovoltaic and thermal generation does not involve the use of any fuel other than sunlight, the cost of generation consists mostly of capital costs with minor operational and maintenance cost (Wikipedia.org, 2008). The property, plant, and equipment (PP&E) can be amortized over time to yield a fixed cost of generation, assuming the transmissions and distribution costs are the same for all forms of electrical generation.
For example, the levelized cost of solar photovoltaic generation is estimated to be $0.25-$0.35 per kilowatt-hour (kwh) (Sunpower, 2008). The cost of solar thermal generation is estimated to be less than $0.18 per kwh (CNET / Kanellos, 2007) today with estimates for future production at $0.10 / kwh (Khosla Ventures / Ausra, 2008).
On the other hand, the costs of fossil-fuel based electric generation derived from a coal-fired power plant or a natural gas fired turbine are unlevelized because they are dependent upon fluctuating, and mostly increasing coal and natural gas commodity costs.
Inflationary Impact
As I previously mentioned, fossil-fuel based electric generation is dependent upon coal or natural gas for fuel input. These commodities must be purchased from the open market at spot or contract prices. Sometimes, a utility company may hedge their commodity contracts if they fear rising demand, prices or uncertainty in supply. However, due to the volatility and uncertainty of market conditions, hedged contracts can work either to the benefit or disbenefit of utility customers.
In the long term, it is usually the commodities' inflationary impact that determines what our utility rates are going to be. Having said that, one can note that over the past 10 years, fuel commodity prices as measured by the U.S. Bureau of Labor Statistics Producer Price Index (U.S.BLS, 2008) have increased over 12.5% per year [CAGR] for natural gas and over 5.6% per year [CAGR] for coal. The price inflation in coal and natural gas is illustrated in the 10-year charts below (both charts are courtesy of bls.gov).
It is time to hug your local utility manager! Or maybe, send the president of the company a note of appreciation for a job well done. Why am I suggesting this? In light of ~ 12% per year increase in natural gas costs and another ~ 6% per year increase in the costs of coal, residential, commercial, and industrial electric power rates across the country, as measured by the PPI (U.S.BLS, 2008), have on average only risen a little over 3% per year.
While the utility companies may have done a terrific job keeping our utility rates low, just how long they can sustain the inflationary pressure of higher fuel costs is anyone's guess. Some utility companies have already begun to buckle under the pressure of higher input (natural gas and coal) costs. For example, the Tennessee Valley Authority [TVA], a utility that serves 8.8 million customers in Tennessee, and parts of Alabama, Mississippi, Kentucky, Georgia, North Carolina, and Virginia recently announced the largest rate increase over 30 years of 20% (AP / Mansfield, 2008), citing rising natural gas and coal costs as the primary reason.
Have you checked your electric bill lately? Are you sensing a domino effect yet?
With escalating energy costs that we have witnessed in the past 3 years, utility consumers may not be so lucky in the future as we have been in the past, and must be prepared for more dramatic annual increases (upward of 5%) in our electric and gas rates in the years to come.
Solar Generation and Grid Parity
The levelized cost structure of solar photovoltaic and solar thermal generation over time amortizes the infrastructure costs akin to making equal monthly house payments. Investment in solar generation is a natural hedge against inflation, and can be a boon for nations such as India with spiraling rates of inflation.
As can be seen in the graph below, when compared to inflation in peak electrical rates utilizing natural gas fired peaker units (Khosla Ventures Presentation, 2008) or managed electrical power rates (SMUD, 2008) based on natural gas and other forms of generation, we can achieve grid parity with solar PV generation by the 2015-2018 timeframe, and with solar thermal generation by the 2011-2012 timeframe (these scenarios assume a 5% forward rate of inflation for electric power). In the graph, the intersections of the inclining curves with the declining curves represent the points of grid parity.
Other Cost Reduction Measures
In research laboratories across the world, there are measures underway from increasing the efficiency of solar cells to developing novel and cheaper thin films for PV applications. Companies such as Applied Materials (AMAT) are driving down installation and production costs with their new SunFab line of fabrication equipment (Applied Materials, 2008) capable of producing utility scale (5.7 square meter modules) solar panels that utilize the abundance of amorphous silicon.
Sunpower Corporation (SPWR) CEO Thomas H. Werner expects to achieve a 50% reduction in the cost of solar power [PV] generation by 2012 using a combination of upstream measures (higher efficiency cells, lower cost silicon, thinner wafers, and increasing manufacturing scale) and downstream measures (improving efficiencies in the supply chain and business processes) (Sunpower, 2008). If these cost reduction measures are realized by 2012, we can further accelerate grid parity goals by 3-6 years.
Do keep in mind that since solar generation costs are levelized, the present value costs of solar generation keep declining even after grid parity is attained until the economic life of the PP&E is realized (20 years).
Concluding Remarks
Solar PV and thermal generation are not only on track to achieve grid parity in the near term, but have present value declining costs even after grid parity is attained. In addition, solar generation helps the nation achieve reductions in criteria pollutants and greenhouse gas emissions as well as enable local and state governments attain RPS (Seeking Alpha / Ahuja, 2008) goals.
President George W. Bush has called for the US to achieve grid parity by 2015 (Wikipedia.org, 2008). With solar generation, we are likely to achieve that goal in the years to come. Lastly, with consumer inflation spiraling out of control in many of the world’s economies, we can count on solar generation to keep utility rates low. That makes solar generation a win-win for all!
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This article has 19 comments:
Your supposed cartel is not going to be able drop coal costs unless supply and demand dictactes it. Coal and gas generated electricity costs are going to continue to rise because of scarcity, transportation costs, land costs, etc.
If alternatives energy costs come way down and their use goes way up, then obviously the demand (and cost) for coal and nat. gas go down. But this is a bullish scenerio for alt. energy not what you're suggesting.
How does solar compare? The levelized cost of coal energy ~0.07/kWh. Wind ranges from $0.07/kWh to $0.12/kWh depending on the wind resource.
Like you I believe that solar is the solution to a lot of our energy problems. But pulling random numbers and claiming that they will be competitive in a few years without government subsidies is not only naive but detrimental for the industry.
For solar to reach grid parity, its necessary to have commercial solar installations as they cause cost reductions through (1) economies of scale, (2) learning in production, installation and O&M. And this isn't even considering the problem of grid integration. Without government support, solar will never be able to do reach grid parity.
The factors you cite are correct, but the non-time-differentiate... average prices you cite demonstrate a significantly less sophisticated conceptual grasp of the energy market than the levelized cost of investment + O&M basis for solar comparison used in the article. Further, by arguing that solar will not get to grid parity without government support, you win an argument only against a point not made in the article - I hope you aren't signed up to take the GREs any time soon!
In fact, these same calculations are generally used within the investment and solar communities - the question is, what happens *after* grid [parity is achieved? Current utility rate design and public utility commission thinking is ill-equipped to handle or value sub-market customer sited generation.
On a different note, if I were signed up for any GREs, I might still be able to pass: "For the reasons stated below, I believe that solar power generation is on track to achieve grid parity in the next few years without the consideration of any government subsidies."
Waste heat recovery via solid state direct conversion to electricity will cut the use of coal and NG by 70%. No other changes required. So the demand for those energy sources is going south, period; by 70%.
That makes the 30% remaining for replacement with solar and wind (and geo and hydro and nuc) a breeze!
No more drill, drill, drill, and dig, dig, dig (not to mention extract, process, transport, remediate, etc.).
One thing to add. Solar will reach grid parity at much different times for different places. Southern California will reach it much sooner than most other places. Electricity is high there compared to the rest of the country, the sunlight profile is much brighter there, and its 15 million residences is a large market which will help price reductions through economies of scale.
For solar concentrating technology (and even solar PV farms), the Mojave desert has one of the best solar profiles in the world because it is a high desert (over 2000 feet in elevation). It is also very close to those 15 million people. Money has already been approved for greatly improving the power transmission lines into the desert for both solar and wind power.
One more thing about California. It is very liberal when it comes to the environment. Coal fired power plants are looked down on. Alternate energy is loved.
So when it comes to watching the grid parity game, keep your eyes focused on southern California. It will be one of the first places in the world crossing the grid-parity finish line. When it crosses, and volume of solar installations there starts taking off, it will speed cost reductions and promote installations elsewhere. This is the "critical mass" effect that us investors in solar power are waiting for.
Also, you make the assumption that energy use in the US will be stagnant. It won't be. It is expected to grow by a staggering 50% by 2030. There will be plenty of room for all new energy technologies and for continued use of fossil fuel.