Will Solar Ever Reach “Grid Parity”?

AllianceBernstein L.P.

The coming of grid parity keeps receding into the distance like a desert mirage. Over the last six years, executives at solar energy firms and their consultants have projected repeatedly that solar energy will reach grid parity—become cost competitive with other power sources—in three to five years—only to push its expected time of arrival further into the future. My colleague Brett Winton explains why.

SunTech, a solar power manufacturer, projected that grid parity was three to five years away in November 2007, and five years away in February 2009, November 2010 and November 2011, as the display below shows.

The Coming for Grid Parity Keeps Receding into the DistanceIf I were a cynic, I would suspect that company executives were trying to encourage analysts to include a growth spurt in the more distant years of their earnings models. But even a massive growth spurt would not make the economics of solar work, in our analysis.

The US Department of Energy’s SunShot Initiative has been more circumspect in its forecasts. At the end of 2011, it said its “aspiration” was to reach grid parity by 2020. What I can say with confidence is that we are many years from grid parity today, despite decades of subsidies intended to help the industry build economies of scale.

To understand the concept of grid parity, imagine you’re an electric power company executive poised to invest in new generating capacity. You can invest in any technology you want, using any kind of fuel. All you care about is whether the net cash flow from selling the electricity would provide a reasonable return on invested capital. Your first order of business would be to see what price you’d have to charge for the electricity you produce to justify the investment.

Today, you’d need to charge $375 per megawatt hour to justify investment in new solar equipment—nearly four times the average US retail price of electricity. That’s why solar energy requires steep subsidies.

Other power-generating technologies require a much lower price of electricity to attract new investments—from $95 per megawatt hour for new-built nuclear power generators to $130 for new-built wind power generators. Investments in gas-powered and coal-powered generating plants require a price between these two, even if you factor in paying $50 per metric ton to offset the carbon emissions and gas prices more than double their current level.

And these calculations don’t include the cost of backup power or energy storage to supply power when the sun isn’t shining. A backup power system or battery would add roughly 25% to the electricity price required to justify new investment in solar power.

Finally, these calculations ignore the cost of the real estate upon which a solar panel sits, because most smaller scale installations are on a rooftop that would otherwise go unused. For utility-scale installations, however, ignoring real estate costs is not fair. The cost basis for what will be the largest utility-scale solar power installation in Japan more than doubles if you take into account the value of the real estate that the solar panels will occupy.

Defenders of solar power understand that it’s relatively expensive. They argue that investments and subsidies are needed to get the technology to a cost-competitive scale. They leave a key question unanswered, however: how much scale is required?

I’ll provide an answer in a future blog post.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Catherine Wood is Chief Investment Officer—Thematic Portfolios and Brett Winton is a Research Analyst, both at AllianceBernstein.

14 comments

  1. Wood conveniently excludes that fossil fuels receive subsidies early in the value chain, then compares their PPE capital investments, excludes their operational costs (fuel), and then compares wholesale LCOE.
    This is a myopic argument about solar”s value proposition. Which is no operating cost, consumer level subsidies, and current grid parity vs. retail electricity. Distributed solar is here now, and grew 170% in 2011. Naysay all you want but the PV industry provided jobs at 10X the rate of the US Economy in 2011 alone.

    • Brett Winton

      Subsidies for fossil fuels come to billions of dollars a year in the US because vast amounts of fuels are produced and used. But the subsidies have little impact on the competitive cost of fossil-fuel generated electric power.

      In the US, federal subsidies for oil, gas and coal electric power are $0.64 per megawatt hour, according to the US Department of Energy Institute for Energy Research. They are immaterial compared with the $100 per megawatt hour levelized cost of electricity from a new build facility—and within the error range of a grid parity analysis
      Our levelized cost analysis takes into account all operating costs, including fuel. If it didn’t, we would find the levelized cost of electricity from a gas turbine to be below $20. Natural gas may seem cheap these days, but it’s not that cheap.

      A solar power installation doesn’t really have zero operating costs. Though it’s not embedded in our analysis, a solar panel’s output will degrade by roughly 1% per year; a thin film installation will degrade twice as fast. This actually makes the economics of solar marginally than our analysis showed.

      All of that said, yes, direct consumer subsidies can work wonders—and create a lot of jobs. We don’t doubt that, given the state and federal dollars available today, solar power makes a lot of sense for some consumers. But whether that subsidy system itself makes sense (and whether solar will truly become cost-competitive without it) is another question that we’ll address is a future article.

    • Dear Catherine Wood. I would like to bring to your attention that SHEC Energy Corporation has developed a suite of technologies that will allow the production of 24/7 base-load solar power at grid parity this year.

  2. Julian Davies

    Benchmarking solar power against alternatives is valid only if the alternatives are available. Vast areas of Africa are off-grid and many urban areas suffer inadequate and erratic power supplies. In Zimbawe urban areas there has been a rapid and substantial growth in solar power installations without any government subsidy due to inadequate generation and delivery. For much of the world the benchmark cost should be the cost electricty from diesel generators. Whilst subsidies will be the engine of growth in first world economies very different dynamics prevail in Africa.

  3. Wood does make a good point about how forecasts can often be too optimistic. But on the other hand, she appears to be rather too pessimistic or just wants to “tell a good story”.

    Grid parity is a wide and moving target and as technology progressess will be first reached in areas where sun is abundant and electricity prices are high. And thus, grid parity has been already reached in Hawai.

    Recommend reading e.g. the article below, which gives a more comprehensive view of the situation.

    http://www.climatespectator.com.au/commentary/what-does-grid-parity-mean-solar-pv

  4. Ms. Wood,

    I think your $375/MWh cost for solar is a bit off. Perhaps you were looking at 2008 or 2009 data for solar costs.

    Just today, GCL and Foxconn announced they were installing 310MW of solar in China at a capital cost of $1.43/W. By my math, this works out to a levelized cost of electricity of $110/MWh over the 20 year life of the system. Take this out to 30 years and the cost drops to $70/MWh.

    These pricing levels are not inconsistent with installed prices in the southwest US or in Germany.

    I have a hard time accepting the rest of your arguement when your initial premise is so far off base.

    Perhaps you can share your assumptions on how you calculated that $375/MWh number?

  5. Nils Mellquist

    No doubt solar industry was over hyped in what has turned out to be profitless growth and a race to the bottom for many industry players as they exploited subsidy arbitrage. But grid parity, in and of itself, is a misnomer. (pls see pp. 23-34 of report below for LCOE discussion of generation technologieshttp://www.dbcca.com/dbcca/EN/_media/NaturalGasAndRenewables.pdf

    The biggest theme in energy these days is not solar but BTU arbitrage between gas and oil in North America that is likely to last longer than people expect with powerful investment implications.

  6. Grid parity is a nice short-hand cocktail chat concept suitable for politicians though it ignores the notion of a daily load curve and thus pricing varies dramatically based on generation dispatch orders, load, time of day, daily fuel costs etc. Your commentary seems a tad biased as it implies a clear willingness on the part of the renewables sector to gull on investors with a siren-song of “cheap renewables.” If memory serves, was it not the esteemed Edison Electric Institute that once comment that nuclear power would be “… too cheap to meter?”

    What you have failed to include in your discussion is the fact that natural gas prices – a key determinant of the market referent price used by various PUC”s – has declined by 50+% since the the peaks when proximity to grid parity seemed closer.

    Further, let”s not mince words too finely when addressing “subsidies” for fossil fuels or nuclear. If one includes all the various tax benefits accorded to the extractive industries or implicit insurance subsidies borne by the government (eg the taxpayer) when nuclear containment breach occurs, I think you might find the number to be far higher compared to the 64 cents suggested above.

  7. “Today, you’d need to charge $375 per megawatt hour to justify investment in new solar equipment—nearly four times the average US retail price of electricity. That’s why solar energy requires steep subsidies.”

    This is a somewhat misleading statement. I”d not only be curious as to where Ms. Wood got this value but I”d also be curious as to why she has chosen to ignore the current trends in solar panel efficiency and reduced manufacturing costs. As someone who helps manage investments in a large portfolio of PV companies, I am bullish on solar in the medium to long-term as the technology matures and without major changes to the political environment.

  8. Ms. Wood: utility scale projects are being built in California today with contracts for under $100/MWh (adjusted for TOD factors) and zero escalation. I”m sure your analysis is an honest attempt, however, it seems perhaps that your assumptions are off base.

    best regards.

  9. I’m excited to uncover this web site. I need to to thank you for ones time for this particularly fantastic read!! I definitely really liked every bit of it and I have you book-marked to see new stuff on your blog.

  10. Very informative site. Grid parity is like forecasting the weather. Time will tell.

  11. Industry expert

    Projects in California are fully contracted at less than $70/MWh for solar. Take out the ITC, and prices would still be less than $100/MWh. Busbar costs for combined cycle capacity are over $100/MWh now. Sorry, but we have already reached parity in parts of the country.

  12. To Know More

    I didn”t see any discussions of fuel cells in this energy debate. I watched a CBS Sunday report about a private firm called Bloom Energy where some of the largest Silicon Valley firms were utilizing Bloom Energy boxes to power their energy needs for their campus facility. I believe in the report Bloom Energy was working on a scaled down version of their boxes for residential use and utilize natural gas as a backup. What are the prospects of fuel cells compared to Solar and is their an investment opportunity in this energy sector?

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