Solar Economics and ‘what next to subsidize?’
Wholesale solar module prices have stabilized around $0.70/watt, down from over $2 in 2009. Balance of system (labor, aluminum, inverter) costs now exceed module tabs, meaning that solar PV is, essentially, an E&C business, where the arbitrage between cost, subsidy, and power values has primarily accrued to the financier (Solar City,, individual homeowners, etc). In leading US markets, a rooftop system is still a very good investment (http://geostellar.com/site/feeds/geostellar-solar-index), with unlevered returns over 10% in thirteen of the fifty states. The LCOE (Levelized Cost of Production) runs between 10-12 cents/kwh (when the sun shines) – right on the average cost of retail power, nationally.
Meanwhile, emerging market demand is soaring. All-in installation costs are $1.25-1.50/watt (and falling!!), requiring almost no subsidies in key markets. The LCOE is between 6- 8 cents/kwh in China and India – where combined new generation capacity is forecast to more than double this year. Unlevered project returns run around 10% in those markets. Meanwhile, the combination of high power costs and capacity shortage (Japan), is driving renewed volume growth — more than double 2012 – The net, including much weaker European trends, is that global installations will rise by 15-20% as Europe – once 75% of global demand (2009) shrinks to 45% this year.
The net of this is that, after a decade of subsidy-driven volume growth and dramatic cost/price reduction, solar power is now grid competitive with modest or no subsidies, in most of Africa, Asia, and about half of US markets. Unfortunately, for many manufacturers, the result is profit-less prosperity (think ‘1980s disk drive industry’).
Europe has a different problem – the knock on effect of renewable generation on higher variable cost (coal, gas) – fired power. Germany, in particular, has struggled with reduced grid efficiency, as solar/wind generation can effectively render base load worthless during sunny summer days. Part of this is due to overload of a fairly modern grid to the substantial (25% of capacity) renewable generation mix. What to do?
Well, for some, the next opportunity is to figure out a way to incent/store excess renewable capacity, allowing conventional generation to maintain reasonable utilization rates. So Germany has implemented a ‘storage subsidy’ for homeowners who can store, for personal use’ renewable power, rather than feed it into the grid. Never mind that it might be a LOT cheaper/more effective to store conventional (overnight) generation for use during peak demand. The new subsidy offers over $850/kwh for ‘personal storage’ systems – about the capital cost of a full scale combined cycle gas plant, half of coal-fired power – to reduce capital costs to divert 1500 kwh/year (worth about $150-$200). Not a bad return, but not nearly as good as the incremental value of higher baseload rates ‘round the clock.