Solar Energy Prices Slide Toward Grid Parity

CNet/Martin LaMonica/February 24, 2009

A look at the numbers driving the solar-panel industry leads to one conclusion: prices are falling fast.

Photon Consulting, which advises solar companies, this week released a summary of a study that predicts that a number of solar companies will hit a long-pursued industry target of $1 per watt by 2012.

That race toward a $1 per watt manufacturing cost is leading to brutal price competition and a potential shakeout among solar suppliers, according to analysts.

For consumers and businesses, though, the race means that within a few years solar photovoltaic modules, or panels, will be able to generate electricity cheaper than the grid in many regions of the world.

"With $1/W for modules and $1/W for BOS (balance of system), solar electricity in sunnier areas will be (less than) $0.10/kWh by 2012, creating a large addressable market that is the grand prize in solar's race to $1/W," according to the report summary.

The average retail price for electricity in the United States over the 12 months ending in November was 11.26 cents per kilowatt-hour for consumers and 10.24 cents per kilowatt-hour for businesses, according to the U.S. Energy Information Agency. Prices vary significantly within the country, ranging from below 5 cents per kilowatt-hour in Idaho to 15 cents per kilowatt-hour in New York, for example.

Costs of solar electricity are falling through a combination of factors including better cell efficiency and improvements in solar manufacturing. Also, financing contracts where customers, usually a business, purchase electricity generated by rooftop panels over 20 or 25 years can result in a predictable and lower cost, according to analysts.

Photon Consulting in another study calculates that solar power is poised for far greater adoption because of falling costs. "Grid parity," or meeting the cost of electricity from traditional sources of power generation, is close for many places but Photon Consulting did note that there are economy-related risks to hitting that mark.

"Even at $0.15/kWh, the cost of solar power will be below grid parity for more than half of residential customers and 10% of commercial customers in the OECD (Organization for Economic Development countries), as long as grid electricity prices do not decrease through 2010. The other key risk to this view is significantly higher interest rates," Photon Consulting said in its report.

In the financial industry bailout package last year, the 30 percent tax credit for solar-electric investments was extended for eight years and the $2,000 federal tax credit cap was lifted. There are also a handful of companies offering financing options, such as leases, which lower the upfront cost of installing panels significantly.

Although the falling equipment prices make solar power more attractive for buyers, it spells real challenges for solar manufacturers.

Lux Research, a firm that does emerging technology research including green technologies, last week released a report that predicted a bruising economic environment for solar companies in 2009.

The prices of silicon--the most commonly used solar cell material--were relatively high in the past few years because the supply did not keep pace with demand. But that dynamic has been reversed, with a silicon glut pushing the prices of panels down, according to Lux Research.

"Starting in the fourth quarter of 2008, the global solar boom has sharply, and with little warning, peaked and turned into a global solar shakeout, as an oversupply of solar modules and a drying up of project financing has led to a drop in prices and a build-up of inventories, placing many firms in peril," according to the Lux Research report summary.

In addition, the difficulty in getting venture capital could derail large-scale production of low-cost thin-film solar cells.

Photon Consulting identified First Solar, REC Q-Cells, SolarWorld, SunPower, and Suntech as companies who are leaders in electricity costs.

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