Facts about solar energy – Solar Cost vs. Utility Cost

Fueled by supportive Federal policies and multiple incentives and rebate from local and state authorities, solar industry has witnessed unprecedented boom in the past few years and their numbers only seems to soar up by each passing day. There is another major factor that is playing critical role in fueling up the solar market (besides the fact that it generates green and clean energy) and that is the cost factor. According to the recent report published by Deutsche Bank (October, 2014), solar electricity is going to be cheaper than average electricity bill by 2016, provided U.S. maintains its 30 percent tax credit on system cost, which is set to expire the same year. Rooftop solar installation is slowly becoming a common landmark throughout the country, so much so that it is becoming a major concern and existential threat for utility companies.  Here are some facts about solar energy.

Savings-Over-Time-Solar-Utility

Utility death spiral is a term that is used to best describe the phenomenon where a customer chooses to install a solar panel and makes effort to adopt energy efficiency measures. This will lead to drop in the sale of units-of-energy. Utilities companies will increase the cost of units-of-energy to cover their fixed cost, grid maintenance and labor cost. Price hike will further push more customers to look for energy efficiency measures and alternative energy resource like solar panel installation leading to further drop of sale of units-of-energy. Industry experts claim Utility-death-spiral isn’t likely to happen for several years. As a matter of fact solar power accounts for less than 1 percent of electricity produced in U.S. Yet it is hard for anyone to not to notice the rapid growth of solar industry owing to all the federal incentives and support, large participation from customers and the declining cost of solar panels installations.

Solar power generation will increasingly dominate since it is a technology and not the fuel. Technologies over time improve in its efficiencies and their prices fall as time goes by. On the other hand Earth has got limited amount of fossil fuel that means with time it will only become scarce and its short-supply will only push its costs up. Michael Park, an analyst at Sanford Bernstein described very efficiently the staggering prices relationship between solar and the fossil fuel. He named (coined the term) the relationship ‘Terrordome’. The chart that he used to explain the relationship described the price of energy source since late 1940s. He made it very evident from his chart that very soon the cost of solar power will undercut even the cheapest fossil fuels (including poorer nations as well where billion dollar coal plants will not always stand practical). It is this reason scientific community has already started believing that solar will be the single largest source of electricity by the year 2050. However in the present scenario, given the small market share, solar power is unlikely to expand very quickly and so there won’t be any immediate impact on the price of other forms or sources of energy.

Source: EIA, CIA, World Bank, Bernstein analysis

The chart below shows the average cost of electricity for the year 2013 by consumer according to the US Energy Information Administration. For the year 2014, average residential cost is estimated to be 12.5 cents per kilo-watt hour. This translates to 3.3 percent up in the cost compared to the electricity cost in 2013. Commercial cost for electricity is expected to be at 10.7 cents and for industrial it will be around 7.1 cents. If we look at the historical figures, over the period of 10 years, electricity cost in U.S. has gone up by 3.2 percent.

US Electricity Prices – 2013
Residential 12.1¢/Kwh
Commercial 10.3¢/Kwh
Industrial 6.8¢/Kwh

However for solar electricity the things are completely other way round as far as prices are concerned according to the chart below. In last 35 years the prices of solar power has come down by a factor of 100. The resistance that we observe below for the period of 2005 to 2008 was majorly due to shortage of polysilicon around this time. However a sudden drop during 2009-2010 was primarily due to oversupply and too much capacity, causing the cost to almost collapse. By the year 2013, things are pretty back on track with average cost of solar power at $0.75. The follow-up cost after installation is minimal in case of solar power. The cost component that makes up the residential solar system includes the cost of system design, balance of system (BOS), labour and solar nodules.

Source: Bloomberg New Energy Finance

The last few years have witnessed dramatic reduction in cost for solar module prices, particularly during the period 2006 to 2012. Major portion of this reason was due to the fact that cost of polysilicon dropped tremendously. Polysilicon is one of the significant raw material in making solar panels and so it plays a significant role in over total cost of solar panels. Around the year 2007 there was a worldwide shortage of Polysilicon and this lead to the increase in the price of Polysilicon in the tune of about $400/kg. It was a time when Polysilicon suppliers made lot of money and it was also a time when manufacturers added up lot of Polysilicon capacity leading to oversupply by 2010. This resulted in price dropping to $25/kg.

PV systems can last for as long as 100 years with only small degradation of performance a year (about half a percent a year). So a PV system even after 50 years will be performing at 75% of its original performance. PV systems need very little maintenance once they are installed and so their lifetime cost is mostly just the initial price of the equipment and land. Once the initial cost of solar panel installation is paid off, the cost of running a PV system is almost zero, while the cost of fossil fuel will only go up by each passing day. In addition to this there are other costs as well that will add up to the fossil fuel like material cost, shipping cost, and many other costs in the form of tax.

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