Don’t be fooled by technological uncertainty and the continued importance of regulation; solar will become more economically attractive.
Peter Lorenz, Dickon Pinner, and Thomas Seitz
A new era for solar power is approaching. Long derided as uneconomic, it is gaining ground as technologies improve and the cost of traditional energy sources rises. Within three to seven years, unsubsidized solar power could cost no more to end customers in many markets, such as California and Italy, than electricity generated by fossil fuels or by renewable alternatives to solar. By 2020, global installed solar capacity could be 20 to 40 times its level today.
But make no mistake, the sector is still in its infancy. Even if all of the forecast growth occurs, solar energy will represent only about 3 to 6 percent of installed electricity generation capacity, or 1.5 to 3 percent of output in 2020. While solar power can certainly help to satisfy the desire for more electricity and lower carbon emissions, it is just one piece of the puzzle.
What’s more, solar power faces challenges that are common in emerging sectors. Several technologies are competing to win the lowest-cost laurels, and it’s not yet clear which is going to win. Rapid growth has created shortages and high margins for early players, such as the silicon refiners Dow Corning, REC Solar, and Wacker, as well as the component manufacturers First Solar, Q-Cells, and SunPower. Fueled by ever-increasing flows of new equity from venture capital and private-equity firms—$3.2 billion in 2007—innovative new competitors are entering the sector, and with them the potential for excess supply, falling prices, and deteriorating financial performance for some time.
With competition heating up, the companies building the equipment that generates solar power must relentlessly cut their costs by improving the processes they use to manufacture solar cells, investing in research and development, and moving production to low-cost countries. At the same time, they must secure access to raw materials without tying themselves to the wrong technology or partner.
The evolution of technology looms large for utilities as well. If they hesitate to undertake large long-term investments until the dust clears, they risk losing customers to players such as panel installers willing to put up and finance solar units on the roofs of buildings in return for a share of the savings the owners enjoy. As always in the utility sector, it will be essential to deploy smart regulatory strategies, which in some regions might mean including solar investments in the capital base used to set rates for consumers. Government policies will also continue to influence the sector’s development heavily. Deciding when and how to phase out subsidies will be critical for creating a vibrant, cost-competitive sector.
Even in the most favorable regions, solar power is still a few years away from true “grid parity”—the point when the price of solar electricity is on par with that of conventional sources of electricity on the power grid. The time frame is considerably longer in countries such as China and India, whose electricity needs will require large amounts of new generating capacity in the years ahead and whose cheap power from coal makes grid parity a more elusive goal.
The birth of a sector
The solar sector includes a diverse set of players, including the manufacturers of the silicon wafers, panels, and components used to generate much of today’s solar power, as well as the installers who put small-scale units on individual roofs, utilities and other operators setting up enormous solar collection systems in deserts, and start-up companies striving for breakthroughs such as lower-cost thin-film technologies. All are operating in a dynamic environment in which long-held assumptions—subsidies, the primacy of incumbents, and the predominance of silicon-wafer-based technology—are being eroded.
Beyond subsidies
Government subsidies have played a prominent role in the growth of solar power. Producers of renewable energy in the United States receive tax credits, for example, and Germany requires electricity distributors to pay above-market rates for electricity generated from renewable sources. Without such policies, the high cost of generating solar power would prevent it from competing with electricity from traditional fossil-fuel sources in most regions.
But the sector’s economics are changing. Over the last two decades, the cost of manufacturing and installing a photovoltaic solar-power system has decreased by about 20 percent with every doubling of installed capacity. The cost of generating electricity from conventional sources, by contrast, has been rising along with the price of natural gas, which heavily influences electricity prices in regions that have large numbers of gas-fired power plants. These regions include California, the Northeast, and Texas (in the United States), as well as Italy, Japan, and Spain.
As a result, solar power has been creeping toward cost competitiveness in some areas. California, for example, combines abundant sunshine with retail electricity prices that, partly as a result of the state’s policies, are among the highest in the United States—up to 36 cents per kilowatt-hour for residential users.1 Unsubsidized solar power costs 36 cents per kilowatt-hour. Support from the California Solar Initiative2 cuts the price customers pay to 27 cents. Rising natural-gas prices, state regulations aiming to limit greenhouse gas emissions, and the need to build more power plants to keep up with growing demand could push the cost of conventional electricity higher.
During the next three to seven years, solar energy’s unsubsidized cost to end customers should equal the cost of conventional electricity in parts of the United States (California and the Southwest) and in Italy, Japan, and Spain. These markets have in common relatively strong solar radiation (or insolation), high electricity prices, and supportive regulatory regimes that stimulate the solar-capacity growth needed to drive further cost reductions (Exhibit 1). These conditions set in motion a virtuous cycle: growing demand for solar power creates more opportunities for companies to reduce production costs by improving solar-cell designs and manufacturing processes, to introduce new solar technologies, and to enjoy lower prices from raw-material and component suppliers competing for market share.
We forecast global solar demand by estimating the payback period for customers in different countries and regions. (Payback estimates rest on projected system costs and power prices, as well as local sunlight and incentive schemes.) Our analysis suggests that by 2020 at least ten regions with strong sunlight will have reached grid parity, with the price of solar electricity falling from upward of 30 cents per kilowatt-hour to 12, or even less than 10, cents. From now until 2020, installed global solar capacity will grow by roughly 30 to 35 percent a year, from 10 gigawatts today to about 200 to 400 gigawatts3 (Exhibit 2), requiring capital investments of more than $500 billion. Exactly where within this range actual installed capacity falls will depend upon the evolution of solar costs, carbon costs, and power prices (which in turn are heavily influenced by natural gas prices). Even though this volume represents only 1.5 to 3 percent of global electricity output, the roughly 20 to 40 new gigawatts a year of installed solar capacity would provide about 10 to 20 percent of annual new power capacity over that period. This level of installed solar capacity would abate some 125 to 250 megatons of carbon dioxide—roughly 0.3 to 0.6 percent of global emissions in 2020.
