The coming of grid parity keeps receding into the distance like a desert mirage. Over the last six years, executives at solar energy firms and their consultants have projected repeatedly that solar energy will reach grid parity—become cost competitive with other power sources—in three to five years—only to push its expected time of arrival further into the future. My colleague Brett Winton explains why.
SunTech, a solar power manufacturer, projected that grid parity was three to five years away in November 2007, and five years away in February 2009, November 2010 and November 2011, as the display below shows.
If I were a cynic, I would suspect that company executives were trying to encourage analysts to include a growth spurt in the more distant years of their earnings models. But even a massive growth spurt would not make the economics of solar work, in our analysis.
The US Department of Energy’s SunShot Initiative has been more circumspect in its forecasts. At the end of 2011, it said its “aspiration” was to reach grid parity by 2020. What I can say with confidence is that we are many years from grid parity today, despite decades of subsidies intended to help the industry build economies of scale.
To understand the concept of grid parity, imagine you’re an electric power company executive poised to invest in new generating capacity. You can invest in any technology you want, using any kind of fuel. All you care about is whether the net cash flow from selling the electricity would provide a reasonable return on invested capital. Your first order of business would be to see what price you’d have to charge for the electricity you produce to justify the investment.
Today, you’d need to charge $375 per megawatt hour to justify investment in new solar equipment—nearly four times the average US retail price of electricity. That’s why solar energy requires steep subsidies.
Other power-generating technologies require a much lower price of electricity to attract new investments—from $95 per megawatt hour for new-built nuclear power generators to $130 for new-built wind power generators. Investments in gas-powered and coal-powered generating plants require a price between these two, even if you factor in paying $50 per metric ton to offset the carbon emissions and gas prices more than double their current level.
And these calculations don’t include the cost of backup power or energy storage to supply power when the sun isn’t shining. A backup power system or battery would add roughly 25% to the electricity price required to justify new investment in solar power.
Finally, these calculations ignore the cost of the real estate upon which a solar panel sits, because most smaller scale installations are on a rooftop that would otherwise go unused. For utility-scale installations, however, ignoring real estate costs is not fair. The cost basis for what will be the largest utility-scale solar power installation in Japan more than doubles if you take into account the value of the real estate that the solar panels will occupy.
Defenders of solar power understand that it’s relatively expensive. They argue that investments and subsidies are needed to get the technology to a cost-competitive scale. They leave a key question unanswered, however: how much scale is required?
I’ll provide an answer in a future blog post.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Catherine Wood is Chief Investment Officer—Thematic Portfolios and Brett Winton is a Research Analyst, both at AllianceBernstein.