Finding Economies of Scale in Solar

October 08, 2012

Advocates of solar energy have argued for years that the industry only needs subsidies to gain the economies of scale that would make it cost competitive. We think that day may never arrive.

Solar power is expensive to produce because the equipment is expensive and only works a fraction of the time—30% of the time in the optimal spots for solar energy, such as the Las Vegas desert. Nuclear or coal power plants, by contrast, can run almost round the clock, day in and day out.

We estimate that the cost of an installed solar power panel would have to fall from about $4.40 per watt today to $1.40 per watt to become cost competitive with a newly built natural gas–fired plant, assuming the gas plant had to pay $50 per metric ton for carbon emissions. It would have to fall to about $1.10 per watt to accommodate the cost of energy storage. But to get to that price, massive economies of scale would be required.

In the power business, there’s a rule of thumb: each time you double the cumulative installed base of power-generating infrastructure, the cost of a new installation should fall by 20%. Since 1976, the cost of solar power has declined somewhat less, by 18% on average, for every doubling of installed capacity. Over the past ten years, costs have fallen 13% for every doubling.

But let’s say the cost declines return to the 18% rate. How much solar power would have to be installed before incremental solar panels would be truly cost competitive? 9.6 million megawatts, or more than 100 times the capacity in place today, as the display below shows. With an area of 20,000 square miles, these panels together would be large enough to cover Vermont and New Hampshire, and produce annual quantities of electricity sufficient to exceed demand for the entire world through 2025.

Reaching Grid Parity Would Require Massive Capacity for Solar

So when is solar going to become cost competitive without subsidies? In three to five years? Try never. But if it did, society would have to pay out trillions of dollars to get there.

That doesn’t mean solar energy is a complete dead end. Solar power may indeed be the cheapest way to provide base electric power in rural India, or in parts of Africa devoid of infrastructure. Even in select markets with developed infrastructure, a small amount of solar power may prove valuable to provide electricity during the hottest parts of the day.

But should governments provide massive subsidies to support solar energy in places where electric power can be generated at a much lower cost?

I think not. Much of the money is likely to be wasted. Germany, for example, has subsidized the solar industry to the tune of $50 billion, yet it only gets 6% of its electricity from solar power. The marginal tax dollar would find a better home in the research labs of universities, where fundamental technological breakthroughs are more likely to yield a big increase in efficiency and corresponding decline in price.

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.

Finding Economies of Scale in Solar
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