The Solar PV Economics Conundrum

Will rooftop solar photovoltaics be the most economical way to deploy today’s hottest new generating technology, or will central utility solar PV systems be the best economic bet? Is there a third way? The answer appears to be “yes.”

Solar photovoltaic (PV) power has emerged as the hottest new trend in renewable energy generation, primarily because the costs of the silicon cells that turn sunlight into electricity have fallen dramatically. One of the results of that economic development has been an intense argument about how to best deploy the technology.

The debate rages among the advocates of rooftop solar owned by homeowners and third-party financiers; utility-scale PV systems; and the hybrid community solar model. Mirror, mirror on the wall, which is the most economically desirable of all?

While the argument flourishes among the advocates of each approach to sun power, the questions appear to be unanswerable today. The image in the mirror is wavy and unfocused. That doesn’t even consider the parallel and often more intense dispute over net metering (the policy of requiring distribution utilities to subsidize rooftop PV-generated power at the expense of all other customers—from one perspective—by paying rooftop solar generators for power sent back to the utility grid, or, from another perspective, to provide payment for power sent to the grid in excess of what the self-generating customer uses).

Falling Costs

In 2014, the consulting firm McKinsey&Company discussed the “disruptive potential” of rooftop solar. It said, “Sharply declining costs are the key to this potential. The price US residential consumers pay to install rooftop solar PV (photovoltaic) systems has plummeted from nearly $7 per watt peak of best-in-class system capacity in 2008 to $4 or less in 2013.  Most of this decline has been the result of steep reductions in upstream (or ‘hard’) costs, chiefly equipment. Module costs, for example, fell by nearly 30 percent a year between 2008 and 2013, while cumulative installations soared from 1.7 gigawatts in 2009 to an estimated 11 gigawatts by the end of 2013, according to GTM Research.”

These costs, said McKinsey, will put residential solar in the U.S. “within striking distance, in economic terms, of new construction for traditional power-generation technologies, such as coal, natural gas, and nuclear energy. That’s true not just for residential and commercial segments, where it is already cost competitive in many (though not all) geographies, but also, eventually, for industrial and wholesale markets.”

Subsequently, the publicity about home battery storage, particularly Elon Musk’s rolling out of Tesla’s “Powerwall” lithium-ion batteries as home electricity storage options, has added to the buzz for home-based photovoltaics. Storage has long been a limiting factor for renewables, but that could be changing. A recent report from the Rocky Mountain Institute predicted, “Over time, as retail electricity prices from the grid increase and solar and battery costs decrease, customers logically reduce their grid purchases until the grid takes a backup-only role. Meanwhile, solar-plus-battery systems eventually provide the majority of customers’ electricity.”

Utility Scale Wins If Economics Are the Only Consideration

In a blog post for the Energy Collective, veteran energy economist Severin Borenstein at the Haas School of Business at the University of California, Berkeley, notes that those pushing rooftop solar—including PV manufacturers, installers, vendors, and financiers—advance the notion of  “personal power,” consumers taking control of a function previously the sole role of the centralized electric utility.

“The new emphasis on distributed generation,” wrote Borenstein, “has created a very unusual coalition between some traditional environmentalists and some anti-government crusaders. Parts of the tea party movement have joined the Sierra Club in advocating for ‘DG-friendly’ residential tariffs, which mean high volumetric electricity charges in order to make rooftop solar economic.”

Conventional electric utilities and the suppliers of utility-scale solar PV generation have pushed back mightily against the rooftop revolution. In July, the Brattle Group published a study, commissioned by FirstSolar, a supplier of utility-scale PV systems, with support from the Edison Electric Institute, the investor-owned utility lobby, comparing rooftop solar economics with utility-scale PV systems. The study was based on data from the Xcel Energy Colorado system.

Brattle said its study found that “customer generation costs per solar MWh are estimated to be more than twice as high for residential-scale systems than the equivalent amount of utility-scale PV systems.” The 2019 utility-scale PV costs would range from $66/MWh to $117/MWh, while the rooftop systems’ costs would be between $140/MWh and $237/MWh, according to the Brattle analysis. That compares to a national average retail electricity rate in 2014 of $125/MWh.

“The large gap in per-MWh costs between utility and residential-scale systems,” said Brattle, “results principally from: (a) lower total plant costs per installed kilowatt for larger facilities; and (b) greater solar electric output from the same PV capacity (300 MW-DC) due to optimized panel placement, tracking and other economies of scale and efficiencies associated with utility-scale installations.” According to Brattle, residential PV systems cost $195 million more over 25 years than utility PV in the case the consultants constructed.

The gap between rooftop solar and utility-scale installations may be increasing. Utility Dive, an online newsletter, reported recently that a Lawrence Berkeley National Laboratory (LBNL) study found that utility-scale PV costs are falling so rapidly that they could soon rival the costs of new natural gas generation. Mark Bolinger, the author of the LBNL report, said, “Utilities should take another look at utility-scale solar because they may be surprised at how much prices have come down. Prices from just two years ago are now grossly out of date.”

A Third Way

What about community solar, or “solar gardens,” as a hybrid combining some of the economies of scale with the advantages of customer ownership? (See “Solar Gardens: A Fast-Growing Approach to Photovoltaic Power” in the May 2015 issue at powermag.com.) The National Renewable Energy Laboratory’s (NREL’s) “Guide to Community Solar: Utility, Private and Non-profit Project Development” describes how these projects can expand the market for PV solar to homes and businesses that can’t take advantage of convention rooftop generation, capture some of the advantage of economies of scale, optimize siting, and get access to utility financing or low-cost public power financing.

Other Economic and Grid Considerations

In the end, the question of who’s the economically fairest of the PV technologies appears to have no definitive answer. Too many variables in the economic equations mean no unequivocal answer. One obvious variable, for example, is location. NREL looked at the “economic potential” for renewables and highlighted location, including the amount of sunlight, transmission interconnections, the location of competing technologies, and land use constraints as among the key determinates.

In response to the Brattle report, the Washington, D.C.–based Institute for Local Self Reliance argued that “utility solar may cost less, but it’s also worth less.” That’s because utility-based solar has to use the grid to distribute its electricity, while rooftop solar avoids transmission costs. Utilities responded that the grid-connected rooftop systems impose costs on all the other users of the grid who don’t have solar panels on their property.

In his blog, Cal’s Borenstein discussed the unquantifiable attributes of distributed generation and energy autarky (independence or self-sufficiency) that many advocates of home PV systems advance. He said he is “among the people who get no special thrill from making our own shoes, roasting our own coffee, or generating our own electricity. I don’t think my house should be energy independent any more than it should be food independent or clothing independent. Advanced economies around the world have gotten to be advanced economies by taking advantage of economies of scale, not by encouraging every household to be self-sufficient.”

Nevertheless, says Borenstein, there is a case for renewable energy distributed generation “for some people at some locations.” These include “some very poor countries where affordability is a real barrier and electric access is life-changing.”

DG “has many advantages” compared to grid-scale renewables, says Borenstein. These include “no line losses, which typically dissipate 7%-9% of grid-connected electricity before the power gets to your house. In addition, DG solar occupies your rooftop, a space that doesn’t have a lot of alternative uses, so the real estate cost is essentially zero. And as an extra bonus, those solar panels also shade part of your roof, reducing the heat gain on hot sunny days.”

DG, in some cases, he says, “delays distribution system upgrades as demand on a circuit grows, because less power has to be shipped into the circuit on sunny days. It can also reduce the need to build new transmission lines to carry power from distant grid-scale generation.” Spatial diversification—spreading the generation around—“can make the system more resilient to natural or man-made disasters, such as storms or sabotage.”

On the other hand, says Borenstein, DG has “some serious drawbacks.” The first is that the rooftop systems miss the economies of scale of grid-scale utility systems, which are “10,000 to 100,000 times larger than a typical residential installation.” That means that the individual rooftop systems typically “cost a lot more than per kilowatt-hour than grid-scale solar, probably about twice as much these days.”

Systems installed for the private benefit of homeowners, says Borenstein, “can actually destabilize distribution circuits when they pump too much power back into the grid,” already a serious concern in Hawaii (Figure 1). Solar PV today, he adds, “doesn’t have the smart inverters or the onsite storage that would be necessary for the systems to remain operational when the grid goes down.” (Editor’s note: This is no longer accurate. See “The Future of Load Control for Solar PV” in the December 2015 issue of POWER or at powermag.com.)

1.Solar is hot in Hawaii. In 2014, 21% of the power used by customers of Hawaiian electric companies came from renewable energy resources, including wind, solid waste, geothermal, hydro, solar, and biofuel energy. The state wants to produce 100% of its power from renewables by 2045. Courtesy: POWER/Gail Reitenbach

1. Solar is hot in Hawaii. In 2014, 21% of the power used by customers of Hawaiian electric companies came from renewable energy resources, including wind, solid waste, geothermal, hydro, solar, and biofuel energy. The state wants to produce 100% of its power from renewables by 2045. Courtesy: POWER/Gail Reitenbach

What to Make of Competing Claims?

Faced with the unanswered and possibly unanswerable questions about rooftop or community solar versus utility installations, what’s the proper course of action? Massachusetts Institute of Technology (MIT) last May issued a report that could provide guidance. Under the direction of Richard Schmalensee, who has been pondering energy and economic policy for decades, the MIT study, “The Future of Solar Energy,” recommends an eclectic approach to solar energy policy. It calls for policies that prepare the electric system “both technically and from a regulatory standpoint, for very large–scale deployment of solar generation—which tends to vary unpredictably throughout the day.”

The current subsidies designed to encourage solar generation, at both the state and federal level, said the MIT report, “should be reconsidered, to increase their cost-effectiveness, with greater emphasis on rewarding production of solar energy.” State renewable energy portfolio standards “should be brought under a unified national program that would reduce the cost of meeting set mandates by allowing unrestricted trading of credits [for renewable energy generation regardless of technology]”.

—Kennedy Maize is an energy journalist and frequent POWER contributor.