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Energy Policy 38 (2010) 32703273

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Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Viewpoint

Reconsidering solar grid parity

Chi-Jen Yang
Technology Policy Analyst Center on Global Change Duke University, USA

a r t i c l e in f o
Article history: Received 5 November 2009 Accepted 4 March 2010 Available online 24 March 2010 Keywords: Solar energy Grid parity Distributed energy

a b s t r a c t
Grid parityreducing the cost of solar energy to be competitive with conventional grid-supplied electricityhas long been hailed as the tipping point for solar dominance in the energy mix. Such expectations are likely to be overly optimistic. A realistic examination of grid parity suggests that the cost-effectiveness of distributed photovoltaic (PV) systems may be further away than many are hoping for. Furthermore, cost-effectiveness may not guarantee commercial competitiveness. Solar hot water technology is currently far more cost-effective than photovoltaic technology and has already reached grid parity in many places. Nevertheless, the market penetration of solar water heaters remains limited for reasons including unfamiliarity with the technologies and high upfront costs. These same barriers will likely hinder the adoption of distributed solar photovoltaic systems as well. The rapid growth in PV deployment in recent years is largely policy-driven and such rapid growth would not be sustainable unless governments continue to expand nancial incentives and policy mandates, as well as address regulatory and market barriers. & 2010 Elsevier Ltd. All rights reserved.

1. Solar exuberance The cost of manufacturing photovoltaic (PV) cells has gradually declined from over $100 per watt in the 1970s to about $1 per watt today (Perlin, 2000; Renewable Energy World, 2009). The dramatic decline in cost leaves plenty of room to imagine the possibilities of increased usage. There is considerable speculation of a near-term possibility of solar energy becoming competitive with fossil-red electricity. Some have predicted that PV will become the dominant energy technology for a large majority of locations and applications worldwide. PV enthusiasts believe that a solar revolution is inevitable as soon as photovoltaic electricity becomes cost-competitive (Bradford, 2006). According to such predictions, replacing fossil-red energy with PV would be an enormous step in ghting climate change. Enthusiasts have named the symbolic milestone when the cost of solar energy becomes competitive with conventional gridsupplied electricity grid parity. Many people believe that once consumers are offered environmentally friendly electricity from a renewable resource at an equal or lower price than they can get it from the grid, they will choose to purchase solar electricity technology (Brown, 2005). However, the denitions of solar grid parity in these discussions are typically vague and inconsistent. A basic problem is that many analysts are not amortizing all elements of the costs to end consumers. Many of these analyses rely on a simple round number milestone$1/W. Some dene grid

E-mail address: cj.y@duke.edu 0301-4215/$ - see front matter & 2010 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2010.03.013

parity as $1/W in silicon cost (BusinessGreen, 2009). Some see $1/W in PV manufacturing cost as the milestone (Hutchinson, 2009). Others say it is $1/W for PV module retail price plus another $1/W for balance of system (BOS), which includes supporting racks, wiring, switches, inverter, transformer, etc. (Song, 2009; Sinke, 2009). These inconsistencies have caused confusion because although no company sells their PV modules at manufacturing cost, many commentators appear to equate the manufacturing cost to retail price. While some companies have achieved $1/W in manufacturing cost, the average retail price of PV modules remains around $4.38/W (as of October 2009) in the United States (Solarbuzz, 2009). The margin between the direct manufacturing cost of PV panels and the retail price includes prot as well as a recovery of the research and development (R&D) and other miscellaneous costs. For a typical residential system, the PV module retail price accounts for roughly half of the total installed cost. The other half goes to BOS, installation, design, permitting, and other miscellaneous costs. The following table shows the cost structure of a typical residential roof-top PV system in the United States. The following nancial spreadsheet (Table 2) is adapted from one published by Michael Stavy (2002). It compares the levelized electricity costs from a typical residential roof-top PV system at current price as well as at grid parity price. The grid parity price here is dened as the total cost to consumers of PV electricity equal to retail grid electricity price (the U.S. average was 11.6 cents/kWh in 2008). The interest rate is changed to six percent to better reect the recent market situation. The capacity factor is assumed to be 20 percent (Drury et al., 2009).

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Table 1 Cost structure of a typical (3.8 kW) residential PV system (source: Solarbuzz, NREL Solar Advisor Model 2009). Cost PV module BOS Installation Miscellaneous Total $16,644 $4368 $2880 $9280 $33,172 Cost/W $4.38 $1.15 $0.76 $2.44 $8.73 Percentage (%) 50 17 9 28 100

This calculation indicates that the installed PV system cost must be reduced to around $2/W in order to reach grid parity. Several recent reports suggest that solar grid parity in sunnier areas will be reached by 2012 (iSuppli News, 2008; Hutchinson, 2009; Song, 2009). This would require a reduction in installed PV system costs $8.73/W$2/W in three years, unlikely based on historical experience curves. Currently, the cost of the PV module accounts for roughly half of the PV system cost. Assuming the same cost structure (Table 1), for the system cost to reach $2/W, the PV module price must be dropped to roughly $1/W and the rest of the costs also be reduced to $1/W. Historical experiences suggest that the price of a given PV module drops by roughly 20 percent for each doubling of the cumulative volume of units produced. If that trend continues, the cumulative volume of PV must increase 98 times (or 6.6 doublings) for its retail price to decline from $4.38/W to $1/W. It is hard to imagine this level of growth in the near term. If a more conceivable compound annual growth rate (CAGR) is assumed, say 40 percent, it will take fourteen years to achieve the necessary cost reduction. A more conservative 20-percent CAGR would put off the date by a further eleven years to 2034. Meanwhile, this also assumes that the associated installation and miscellaneous costs would decline as fast as the price of a PV module. This assumption is unwarranted because the cost curves of non-PV elements have not been well studied. At least one study indicated that the progress ratio for inverters is limited at 9196 percent, which means the prices only drop by 49 percent for each doubling of the cumulative volume (Schaeffer et al., 2004). In addition, a great deal of the installation and miscellaneous costs is labor cost. As installers gain experience, they may be able to work more efciently, but a labor cost reduction of over 80 percent in the near-term is likely optimistic. The vision for nearterm grid parity seems to be based on both unrealistic optimism regarding demand growth and unwarranted assumptions regarding the progress ratio of associated costs.

2. From cost-effectiveness to crossing the chasm Putting aside the question of how soon PV grid parity may be achieved, this paritys potential inuence on demand should still be examined. Experience with another solar energy technology solar hot water (SHW) may provide some insight. With 128 gigawatts (GW) installed capacity worldwide, SHW systems are without a doubt the most mature type of solar energy (Weiss et al., 2008). The price quotes for a SHW system vary widely. The U.S. Department of Energys A Consumers Guide: Heat Your Water with the Sun indicates that most solar thermal systems cost $2000$4500 without specifying the size of the system. In an article in a homeowners magazine, Marken and Sanchez indicate that the installed cost of a typical 4-person household SHW system with a 6-square-meter collector, a direct forced-circulation antifreeze system, and 180-gallon tank is in the range $80009000 in the United States (Marken and Sanchez, 2008).

However, Marken and Sanchez indicate that in regions where the climate is mild enough to require no antifreeze design, the cost can be thousands of dollars less than this example. To be conservative, this analysis uses $80009000 as a cost estimate. According to the standard conversion factor developed by the International Energy Agency and solar energy associations, one square meter of SHW collector is equivalent to 0.7 kW (IEA, 2004). A typical SHW system with a 6-square-meter collector would be rated as 4.2 kW. The installed system cost of the SHW ($8000 9000) divided by 4.2 kW would come to about $2/W; i.e. the grid parity target. A closer look at the SHW market in Hawaii reveals the limit of cost-effectiveness in driving market penetration. In Hawaii, where the antifreeze systems are not required, the equivalent (saved) electricity cost of SHW should be signicantly lower than the grid parity price. The average residential retail electricity price in Hawaii in 2008 was 32.5 cents/kWh (EIA, 2009), which is much higher than the U.S. average 11.6 cents/kWh. It should be safe to say that the cost of SHW is by far below grid parity price in Hawaii. According to the vision of solar grid parity, one would expect that SHW has already dominated the water heater market in Hawaii. The market penetration of SHW in Hawaii is quite impressive but not dominant. The Hawaiian Electric Company estimates that one out of three single-family homes in Hawaii is equipped with solar water heating (Hawaiian Electric Company, 2009). In order to further promote the use of SHW, the Hawaii state legislature has mandated SHW installation in all new homes starting in 2010. If cost-effectiveness could guarantee the market dominance of distributed solar energy, this mandate would not be necessary. The SHW experience in Hawaii suggests that cost-effectiveness alone may not be as powerful a driver for market expansion as many solar enthusiasts are hoping for. The overall market penetration of SHW in the United States is very low. Various estimates indicate that less than 1 percent of U.S. households use SHW (Davidson, 2005). High-tech marketing expert Geoffrey Moore described a chasm in the technology adoption lifecycle (Moore, 2001). The chasm typically appears between visionaries and pragmatists. Visionaries are early adopters of novel technologies. They are willing to try unfamiliar products for the excitement of the novelty. These early adopters are a rare breed and form a distinctly separate market from mainstream consumers. Mainstream consumers are pragmatists, who are careful to examine proven benets of a product. The large, upfront costs of SHW compared to gridsupplied electricity for water heating could also be a barrier to adoption. Judging from the limited market penetration of SHW, its cost-effectiveness and environmental benets have not been enough to cross the chasm to appeal to pragmatists in most parts of the world. Perhaps even the conservative grid parity estimate of $2/W installed cost is not sufciently low because it does not account for the indirect costs of purchasing a new hot water system. The time and troubles of shopping for a solar hot water system, contacting installers, waiting at home for installers to come and learning to maintain the unfamiliar system may seem large compared to the saving of a few dollars on a monthly electricity bill. Although solar hot water can save them money in the long run, the savings are simply not large enough to justify the inconveniences. To provide pragmatists with a compelling reason to install residential PV systems, it is unlikely that cost-effectiveness is sufcient. Another common feature between PV and SHW is high upfront capital investments, and the capital requirement for PV is certainly higher than that for SHW. The barriers that have prevented the widespread adoption of SHW may be similar or even higher for distributed PV systems. Commercial customers

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Table 2 Financial spreadsheet for a typical residential PV system. Capital cost Current price 8730 2% 0.25 25 6% 0.0782 20% 1752 Grid parity price 2025 2% 0.25 25 6% 0.0782 20% 1752 cent/kWh years $/kW

Capital cost per kW Yearly operating cost Annual xed O&M % of capital cost Variable O&M Capital recovery computation Physical life of PV plant Interest rate Capital amortization factor Capacity and energy generated Capacity factor Energy generated per year Levelized annual cost Annual amortization Annual xed O&M Annual levelized cost Total cost calculated Total levelized cost

kWh/ 1 kW $/1 kW $/kWh cent/kWh Fig. 1. PV deployment by country. (Source: Solarbuzz.)

683 175 0.49 49.20

158 41 0.11 11.60

presumably would place more emphasis on cost-effectiveness than residential users. The adoption for SHW in the commercial sector, however, is similarly unimpressive. One might argue for utility-scale centralized PV power to avoid the aforementioned market barriers for distributed units. For PV to be cost-effective at the utility scale, it needs to be competitive at wholesale electricity prices (roughly 6 cents/kWh) (EIA, 2008), putting off the arrival of grid parity by decades. To lower the market barriers to distributed PV requires not only technological progress, but also policy, managerial, regulatory, and institutional innovations. Signicant changes in consumer behaviors may also be necessary. For example, third-party ownership is a business model that may reduce the management cost of installation and maintenance. In the United States, many state governments utility regulations, however, do not allow third-party PV owners to sell electricity at retail price to end users. Another example of an innovative practice is buildingintegrated PV (BIPV), which presents opportunities to reduce BOS cost. However at low levels of market penetration, BIPV lacks economies of scale and therefore is difcult to become commercially competitive. Without political mandates to force the adoption, the market entry barriers may be insurmountable. Given the current very low share of PV electricity in the overall power mix, it is far too early to celebrate the arrival of solar grid parity. Worldwide solar electricity deployment saw spectacular growth in recent years. A closer examination shows that this growth is limited in a very small number of countries and the demand is largely policy-driven. The German feed-in tariff launched in 2004 was the primary driver for the PV boom from 2004 to 2007. Spain instituted a generous feed-in tariff in 2007 and triggered an outburst of solar installation (see Fig. 1). Thanks to this feed-in tariff, PV installation in Spain grew from an insignicant share before 2007 to the second largest in the world in 2007 and rst in the world in 2008. The sudden increase in demand, however, overwhelmed and led to a back-peddling in the policy. Spain has since revised its solar policy, imposing a cap on subsidies to PV and lowering its feed-in tariff. Unless governments continue and expand their nancial incentives and policy mandates for solar energy, the recent high growth rate will not be sustainable. Without enhanced political supports, it is plausible that the commercialization lifecycle of PV may be similar to that of SHW.

After its cost reaches grid parity, PV may penetrate the market to a level similar to what SHW has today. SHW is a signicant source of clean energy but still possesses tremendous untapped potential. Both SHW and PV are clean and abundant sources of energy. They are necessary parts of the equation in our efforts at carbon mitigation (Pacala and Socolow, 2004). Policymakers, however, must recognize that dropping costs in solar technology will not automatically resolve our energy problems. If policymakers wish to help distributed solar technologies across the chasm into commercialization, political mandates to further encourage their adoption would be necessary.

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