For part 1 of this series - is it possible to compare technologies on a truly like-for-like basis. And if so, what do we need to bear in mind?
For part 2 of this series - Renewable energy cost examples, LCOE and the importance of taking risk into account.
For part 3 of this series - Wind power.
For part 4 of this series - Renewable energy case studies.
Today, Solar Photovoltaics (PV) is rubbing shoulders with wind power as the renewable energy technology of choice for many, despite its higher cost in many scenarios.
While generous subsidies have played a major role in helping to drive demand and push costs down, the technology is starting to stand on its own feet, achieving grid parity with conventional generation in some select locations. Within the next decade that could be the norm, according to recent findings, as Gail Rajgor reports.
The solar PV market has boomed in recent years. Globally the market (including modules, system components, and installation) increased from a value of US$71.2 billion in 2010 to a record US$91.6bn in 2011. “We project the market to continue to expand to US$130.5bn by 2021,” says Clean Edge in its report Clean Energy Trends 2012, published in March.
While impressive, these numbers do not fully capture the extent of actual industry expansion, it adds. “While total market revenues were up 29%, installations climbed more than 69% from 15.6 GW in 2010 to more than 26 GW worldwide last year.” This, it says, reflects a decline in crystalline module prices of more than 40% between 2010 and 2011. “Between now and 2021 we project that installed costs for PV will continue to decline, falling to nearly one-third of their current levels.”
Major technology advancements continue to come at a rapid pace, often extending system life-spans, boosting cell efficiency, increasing kWh generation potentials, or driving down manufacturing or maintenance costs. Many of these advancements have helped lower the installed cost of solar PV and/or its long term cost-competitiveness in overall generation terms. However, reality is some PV technology is being sold at unsustainably low prices, according to some industry commentators, including Paula Mints, Principal Consultant of Navigant’s PV Service Market Research Programme.
Indeed the market is flooded with system suppliers and fierce competition across the sector has led to an overcapacity of supply, with system prices falling dramatically as a result. This has been driven by the availability of generous subsidies, most notably feed-in tariffs (FiTs). “Since the feed-in tariff (FiT) incentive pushed the PV industry to gigawatt levels of demand, the primary attribute used to describe and sell PV industry is grid parity,” she notes: “In other words, it is cheap.”
While the full industry impact of this FiT-frenzy inspired cost-cutting is beyond the remit of this series (Mints discusses this in detail in her article), the fact is the current low cost of PV systems across the globe has put the technology within tantalizing reach of grid parity in many regions. Of course, the possibility of prices correcting themselves upward is something future PV buyers need to consider. But even in the face of declining subsidies, this is unlikely to occur for some time (simply due to the sheer number of suppliers in the market), most pundits concede.
Location, location, location
While the technology selected plays its role, how cost effective or cost competitive a PV installation is in the long term still largely depends on where in the world a system is installed, as the first article in this series made clear (see link above). Local climatic and environmental conditions will play an obvious role for a technology dependent on solar resource.
Similarly private financing terms are largely shaped in light of local public policy support conditions, while the costs of financing are now increasing generally. The technology is still deemed unproven by most financiers and thus subject to tougher lending terms than conventional sources. This is even more so in light of the overall tighter credit conditions now prevalent across the globe.
The key factor for now in determining the potential returns and thus cost-competitiveness of solar PV from an investor's view is the level and life-span of public subsidy available to it in any give location. Availability of subsidy or another strong public support mechanism such as tax credits helps boost lender confidence when it comes to project’s/borrower’s ability to repay debt (some financing is project specific).
Indeed, as Mints notes, all but 1% of PV demand globally is incentive-driven. Securing private financing with good terms is often then dependent on public incentives and other market policy conditions.
Assessments pertaining to grid parity or levellised cost of energy (LCOE) – seen commonly as the most conclusive way to compare costs between generation technologies – exclude such subsidies for renewables in calculations. This is even though traditional electricity sources such as gas continue to be heavily subsidised too. As this series has highlighted already, the subsidising of fossil fuels seems commonly ignored or forgotten about.
Even with that in mind, solar PV still ranks relatively well in many regions (although not all – see part 4, above link). This is due to its low system and installation costs along with longer shelf lives and output efficiencies. “Given the state of the art in the technology and favourable financing terms, it is clear PV has already obtained grid parity in specific locations and as installed costs continue to decline, grid electricity prices continue to escalate, and industry experience increases, PV will become an increasingly economically advantageous source of electricity over expanding geographical regions,” says Branker, Pathak, and Pearce’s review of Solar Photovoltaic Levelised Cost of Electricity, Renewable & Sustainable Energy Reviews 15. The authors are from Canada’s Queens University and the 2011 paper reviews the methodology of properly calculating the LCOE for solar PV.
The most important assumptions for LCOE calculations are system costs, financing, lifetime and loan term, but these must be accurate and on a project-by-project basis, it says. LCOE results published for solar PV dating back to 2004 have been mostly based on varying assumptions (often poor or inaccurate), the report suggests, with LCOE figures varying by more than a factor of four, ranging from a low of US$0.122/kWh to a high of just US$0.86/kWh.
The paper calls for clearer and more accurate assumptions, justifications and reporting of solar PV calculations. What is clear though is that in some locations, PV is already cheaper than conventional electricity generation, it says. These are still in the minority globally, but within the next decade, that is likely to change, a point made recently by Clean Edge. Its historical data and projections show that “solar PV is on a steep price decline that is bringing it into cost parity at the retail level (for residential, commercial, and industrial applications), and increasingly competitive at utility scale, far sooner than many had projected”.
Between 2007 and 2011, solar PV total system costs (including PV modules, balance of system components, and installation) dropped by more than half, with complete systems being installed globally in 2011 at an average US$3.47/Wp (down from US$7.20/Wp in 2007). Solar PV's LCOE (global average) ranged from US$0.14-0.23/kWh in 2011, down from US$0.28-0.47/kWh in 2007. By 2021, LCOE is set to fall to US$0.05-0.10/kWh, it suggests, which would put it at the current level of conventional electricity generation and wind in some markets.
“Contrary to Solyndra’s critics who say the industry isn’t ready for prime time, solar is, in fact, becoming increasingly cost-competitive, making it difficult for high-cost providers like Solyndra to survive,” the report says.
Clean Edge continues that at the retail level (the customer side of the electric meter), where solar is most competitive, the US shows “a dynamic and rapidly changing” landscape. It projects that, in less than a decade, solar PV will be cost-competitive at the residential level without any subsidy requirements in 13 states (Alaska, California, Connecticut, Delaware, Hawaii, Maine, Maryland, Massachusetts, New Hampshire, New Mexico, New York, Rhode Island, and Vermont).
It adds: “Solar will become increasingly attractive with a likely explosion in a new breed of power providers (such as solar installers/financiers SolarCity, SunEdison, and SunRun) providing residential, commercial, and industrial customers with a hedge against fluctuating retail electricity rates tied to volatile prices of fossil fuels.”
With upfront capital costs and financing costs forming the “major generation cost [element] for solar PV”, the Queens University study notes better financing terms on the basis of solar PV as a proven technology will further help boost the technology’s LCOE in future. “As a proven technology solar PV should be able to obtain similar financing methods as other energy technologies, although this is not necessarily the case [at present].” Discount rates (interest rates levied on upfront costs) should be low, it adds, while interest free financing could prove a better incentive for deployment than FiTS.
About the author: Gail Rajgor is Managing Editor of Renewable Energy Focus.