Solar grid parity

Wherever you are in the world, solar-powered electricity is much more expensive than all the alternatives. Yet in the last few decades, huge progress has been made in solar's cost and efficiency, while the full price of conventional power has only risen.

Assuming that these trends continue, this has led to serious speculation about the future date of solar grid parity (SGP). No longer a green fantasy, SGP - you will come to know - is the point at which the lifetime cost of an installed photovoltaic electricity system is equal to or cheaper than mains supplied electricity to the customer.

In certain environmental circles, SGP does inspire a semi-messianic devotion and that's understandable. In 2006, the world produced just 0.04 per cent of its electricity from solar, with pretty much all the rest coming from large grid-connected power plants. So a revolution is potentially in the offing.

SGP is regarded as the Holy Grail by the industry because, at this point, solar production will literally take-off - without need of subsidy. In this scenario, solar power will finally make economic sense because, as a forward purchase of electricity, it is cheaper over the lifetime of the system than to buy it from electricity suppliers and the environmental dream of a highly distributed grid becomes a reality.

But, in the face of such optimism, sceptics are rightly entitled to ask: is it really going to happen; will solar energy technology costs only go in one direction - down - forever?

Rising energy costs

They have a point. Most recently, according to a recent report by Photon Consulting, the price of solar power per installed Watt is still an eye-watering $7.43. A big disappointment to the UK government of late was that, instead of falling gently over time, its forecast 'learning curves' in offshore wind turbines doubled in a few short years to £3m per installed megawatt, sending potential offshore windfarm investors running for the hills. And, of course, the cost of capital in the credit crunch has increased the investment premium for all energy systems, not least for financing nuclear power.

Yet the answer to the question on the future reality of SGP is a highly qualified yes. And, as this article will show, the full answer will please neither environmentalists as much as they'd like nor much dissuade the sceptics either. The affirmation that SGP can take place can only be understood by answering four smaller questions that cover price, time, date and for which customer.

In other words:

• at what price will SGP occur?
• where will SGP first happen?
• when will SGP arrive?
• what kind of customer - corporate or retail - will see it first?

Right now, according to SolarBuzz, a leading solar electricity consultancy, the price of solar electricity can be measured in six indices (see table below).

Whether it is sunny or not is very important to the final power output. This is explained by the level of solar radiation per square metre - typically 1,100W (watts) in the UK or 2,500W in parts of Spain. Now, if you compare these to the latest available range of electricity prices across Europe and the 51 States of the USA, a clear picture emerges of overall grid disparity.

At the retail end in Europe, the highest electricity prices are concentrated in the Northern Cloudy part like Denmark (26.5 eurocents or 34.85 US cents per kilowatt hour), Germany (21.48/28.25) and Belgium (19.72/25.95), while some of the lowest prices are in the South, like Malta (9.93/13.07). At first glance, SGP is not about to happen.

Let's conceive a scenario in which these indices stays exactly the same over the next 25 years and conventional electricity prices rise by 3 per cent per annum. If you allow for a 3 per cent annual increase in the retail cost of conventional electricity over a generous 25-year lifespan of the solar panels and related equipment, then you could predict that Greek Cyprus, Spain, Italy and Portugal will achieve grid parity within ten years.

Subsidy-free?

If you look at the US, the prospects of subsidy-free grid parity in the near future are much less as average retail electricity prices are just under 11 US cents per kilowatt hour thanks to the abundance of cheap coal. Even though then President, George W Bush, set 2015 as the date for the US to achieve grid parity, this seems highly unlikely.

The one bright spot for American solar though is in Hawaii. Here, the retail price of electricity is 24 US cents per kilowatt hour and for commercial and industrial users, 22 and 19 US cents respectively. Hawaii, thanks to its climate and the expense of being a remote and energy-dependent island chain in the middle of the Pacific, can fairly attest to more or less subsidy-free grid parity for the commercial customer.

But in this benign scenario - a world where solar prices stay where they are and conventional prices keep going up - there is only one possible outcome. There is, however, another more positive outlook where many believe that a major fall in solar prices is around the corner.

Increased efficiency

New technology they say, will deliver much greater efficiency combined with the economies of scale that come with increased production. The technology game-changers, they argue, are: thin film (cheaper and continuously manufactured); rising efficiency (up to 1 per cent per annum from 15 per cent today); non-silicon-based modules (cheaper and no supply issues); and, just maybe, concentrated solar power in the North African desert.

For all that, you should also consider the likelihood of external negatives like the onset of peak oil, war in the Middle East, or a gas supply crunch in the middle of the next decade which could massively raise the cost of conventional power and usher SGP in through the back door.

Appealing as the technological optimist case may be, over the last ten years the reality is that there has been a small avalanche of solar startups promising technology at $1 a Watt, but none of them have come even close. This has been predicted for some time, while the price has actually been remarkably stable over the last few years.

The problem is not the scale of production, but the slow progress and the short lifespan of the technology. Solar panels typically last for 25 years and their output decays by up to 1 per cent a year, while the inverters, batteries and charge controller would probably last not much more than ten years. If a solar system could be given a 50+ year lifespan at the same price, then builders would automatically be adding them to new houses the world over.

As the table to the right shows, increased production has not led to falling prices because of the silicon supply shortage - a major feedstock cost for the solar industry. Demand has outstripped supply in silicon and this has sent prices higher.

The price of high-grade silicon per kilo has risen from $15 in 2000 to $70 in 2006 and sometimes as high as $200. Thanks to the recession hitting the semiconductor industry, this silicon shortage is now easing - in 2008 polysilicon supply to the solar industry grew by 127 per cent in megawatt terms, faster than the 110 per cent growth in the industry.

However, while the module prices have fallen (typically 60 per cent of the total), the overall installation cost doesn't appear to have changed. This is due to the rise in the cost of labour and little or no change in the cost of inverters, charge controllers and batteries.

Over the next ten years, there is a moderate chance of a further 20 per cent fall in global solar prices and a 10 per cent increase in efficiency (1 per cent per annum) to 25 per cent.

My gut instinct is that the case for early grid parity has been uncritically overstated, perhaps a bit like peak oil, which is still at least a few years off.

But the pessimists may be wrong, too. I'm going to lean heavily towards the pessimists and state that grid parity may become a reality in some sunny, major parts of the world by 2020. But it will not be revolutionary.

For the foreseeable future, it will merely, at most, shave off a few percentage points of demand in the summer months in a few relatively wealthy countries, with sunny climates and high (and insecure) conventional grid prices. If there's a surprise in store, it will be the Middle East's conversion to concentrated solar power in order to longer preserve their hydrocarbon reserves.

That's why, until the onset of SGP, this will be an industry dominated by government subsidies.

The irony is that it is these very subsidies which have reduced the incentive for producers to lower costs and bring in SGP a little bit sooner.

Dan Lewis is a research director at the Economic Research Council [new window]