True Cost of Solar Power

Authors

Joel Conkling | Michael Rogol

Foreword

10 Cents/kWh by 2010

The decoupling of solar power prices from their underlying costs hides the low and rapidly falling cost structure of solar power. Today, the »true cost« of solar power is under 25¢ per kWh in most locations and is likely to reach 10¢ to 15¢ per kWh by 2010. This includes all costs of manufacturing and installing solar power systems from pre-silicon (i.e. TCS) to connected-installations without incentives or tax benefits.

Already, solar is at a cost level that makes it competitive with residential grid prices in the OECD's highest-priced markets. It is estimated that the cost of solar power is below the price of residential grid electricity for 5 to 10 percent of OECD consumption (200 to 400 TWh). This equates to 150 to 300 GW of solar power, compared to only 2.7 GW of solar cell/module production in 2006.

Over the next three years, it is expected that the typical fully-loaded cost of solar power will decrease at least 30 percent from $3.60 per W in 2006 to $2.50 per W. In consequence, by 2010, the cost of solar will be below the price of grid electricity for at least 50 percent of OECD residential demand, equivalent to around 1,500 GW of solar power. This is much larger than the 15 GW of cell/module production PHOTON Consulting anticipates for 2010.

This conclusion is based on rigorous bottom-up analysis of the cost structures of more than 75 solar power companies at various stages of the supply chain. This data comes from both public disclosures (including the financial statements of publicly-traded solar companies) and private sources (including internal cost structures provided by dozens of solar power companies under the condition that we share only synthesized data). All numbers in this report were peer-reviewed by several senior executives within the solar power sector

Executive summary

What is the true cost of solar power? A detailed review of the cost structure for crystalline silicon based solar power systems surprised us. Today, the fully-loaded cost (cost not price) of solar electricity is $0.25/kWh or less in most of the OECD countries. Within three years, the fully-loaded cost is likely to fall below $0.15/kWh for most of the OECD and reach $0.10/kWh in sunnier regions. These cost levels are driving three emerging trends: (1) vertical integration of the supply chain; (2) origination of power purchase agreements (PPAs) by solar power companies; and (3) unexpected risk for traditional Gencos, grid operators and turbine manufacturers. Overall, the rapid deployment of solar power on a much larger scale is nearly inevitable if interest rates remain low. This report presents detailed analysis of the current cost structure of the solar sector, estimates the cost of delivering solar power in 2010 and identifies companies most likely to benefit, including Conergy, REC, SolarWorld, SunEdison, SunPower, Motech and Suntech.

Grid parity in many markets today

Today: $0.25/kWh. While the price of installed solar systems is typically $7 to $8/W, the fully-loaded cost of these systems is under $4/W today. This takes into account all costs of manufacturing and installing solar systems from pre-silicon to connected installation without incentives or tax benefits. Similarly, the price of solar power without incentives is typically $0.50/kWh, but the fully-loaded cost is $0.25 or less. At these cost levels, solar power is currently at or below parity with the price of residential electricity for 5-10% of residential electricity consumption in the OECD.

By 2010: $0.10-$0.15/kWh. Incremental improvements in solar power manu-facturing, installation and financing will reduce the cost of solar power over the next four years. The most important drivers of cost reduction will likely be cell efficiency gains, increased scale, and other factors such as better financing terms for systems. Conservative estimates of cost are $0.15/kWh by 2010 for typical locations. Taking into account potential for faster cell efficiency gains and larger savings from vertical integration, $0.10/kWh is a realistic estimate of cost in 2010. 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, as long as grid electricity prices do not decrease through 2010. The other key risk to this view is significantly higher interest rates. Detailed analysis and interviews with companies from across the value chain confirm these results.

Emerging trends: Integration, PPAs, risks for traditional Gencos

Solar companies are aggressively pursuing vertical integration to ensure that they can deliver electricity below grid price. The leading examples are REC and SolarWorld with Conergy, SunPower and Suntech making significant moves toward full integration in recent months. The result: these companies are increasingly able to offer electricity instead of components. Companies that do not integrate will be forced to share profits with suppliers and customers, and may not be able to approach costs of $0.10 per kWh.

There may be significant first-mover advantage for companies that sign customers who currently pay high grid-based electricity prices into long-term solar power purchase agreements (PPAs), and signs of a »land-grab« for those customers are increasingly apparent. A rising number of customers in key market segments are entering into solar PPAs, including utilities, governments, big box commercial customers and residential customers.

Given the rapid pace at which solar production is expanding, solar electricity could emerge as a genuine threat to the economics of existing Gencos, grid operators and turbine manufacturers. Traditional electricity providers make a large portion of their profits at times of peak demand, which occurs almost precisely when solar electricity production is at its highest. As a result, even a relatively modest level of solar electricity production threatens to disproportionately affect the profitability of established electricity producers.

Potential winners and losers from a disruptive technology

The best-positioned companies to benefit from this trend are integrated solar players (REC, SolarWorld, SunPower, Suntech). In addition, downstream companies with the skills necessary to originate power deals in multiple markets have very strong growth potential (e.g. Conergy and SunEdison).

Beyond solar companies, the rapid growth of solar installations augmented by the emergence of long-term solar-fueled PPAs has potential to significantly alter expectations of grid economics. A shift in peak power price assumptions may enter net present value (NPV) models for existing baseload power plants, existing gas peaking plants and new turbines.

This report provides detailed analysis showing that the cost of solar is lower than most people think and will continue to fall through 2010.