Solar parity: A challenge for utilities02. December 2011 By: Mohinder Sawhney, GBI Research
Solar parity is fast becoming a reality, thanks to the decreasing costs associated with producing power from solar panels. Mohinder Sawhney from GBI Research writes that delaying it is just like postponing the inevitable. Therefore, rather than ignoring it, he says utilities must rise up to the challenge.
The power generated from photovoltaic cells located on rooftops has become so affordable and efficient that it can be generated at the same price as the traditional electricity sources - coal and natural gas - which are delivered by the utilities.
However, while it is a positive for many that solar power is becoming so competitive with conventional power sources, it is posing somewhat of a headache for the established utilities using higher-cost fuels, as they begin to realize the extent of the potential threat to their businesses.
Wholesale electricity prices, which currently reach very high levels during times of peak load demand, will remain low with solar parity, thus resulting in lower profits for coal-based power generation utilities.
The amount of revenue from coal generators is relatively high, due to the business model adopted by state utilities, which charge high prices for power during peak load hours. On average, around one quarter of the revenue from electricity sales each year is generated from the prices gathered from approximately 24 to 36 hours of peak production. This would drop significantly once solar power systems are extensively deployed, which has not been done until now, due to the high prices of solar modules.
This point can be succinctly highlighted in Australia, which was one of the first countries to reach 'grid parity'. After temperatures of around 44°C hit Victoria, Australia on January 29, 2009, demand for electricity spiked due to residents’ usage of air conditioners and fans. This demand pushed peak load prices to a record high of $10,000 per megawatt hour (/MWh) for around four hours, from the more normal prices of between $35 to $50/MWh. The revenue earned during the day was estimated to reach $550 million.
According to Mike Sandiford, Director of Melbourne Energy Institute, a study on Australia’s National Electricity Market - Victoria, Queensland and New South Wales - was conducted, which involved solar system modeling to understand photovoltaic penetration and its impact on electricity prices. The model was applied to the peak load scenario described above. It indicated that five gigawatts (GW) of photovoltaics would have been sufficient to fulfill the peak demand. Prices would have soared, but would not have gone over $300/MWh. However, total revenue for the day would have amounted to just $340 million - half of what was earned. The study has not been published yet.
Considering the state of affairs, there have been further delays in renewable energy projects on a large scale in Australia. Moreover, the utilities in European countries such as Italy, Spain, the U.K. and Germany, which are also approaching solar parity, have started seeing it as a challenge to their existing business models.
Long term prospects
Despite the speculations surrounding solar parity, several factors such as decreasing prices, modular flexibility, low maintenance and ease of installation make photovoltaic cells attractive long-term prospects for mass production and application in many parts of the world. Generally, solar modules comprise between 45 and 60 percent of the cost of a photovoltaic system - 40 percent for thin film - while inverters represent around 10 percent, and balance of system costs around 30 to 45 percent.
The price of solar modules is set to fall further, due to the decreasing costs of solar cells, which are benefitting from manufacturing technology improvements and economies of scale. The global annual growth rate for the photovoltaics industry has been approximately 25 percent per year, taking into account the recession in 2009. These inspiring growth rates have also led to improvements in manufacturing efficiencies in the industry.
Benefits of solar parity
The benefits of establishing solar parity and solar infrastructure can also be assessed through a cost analysis with a comparison of solar power to coal-based power systems. Most cost analyses are run over a 20-year period. According to a study conducted by George Washington University (2010), the correct way to evaluate long life assets like photovoltaic systems and nuclear plants is to extend the timeframe.
Photovoltaic systems with just half a percent degradation in performance can still run up to 100 years. Hence, such a system, even after 50 years of installation, has the potential to still produce electricity at 75 percent of its original performance. Systems, once installed, only need very little maintenance. Therefore, the total lifetime cost is mainly comprised of the initial price of equipment and land.
At $1.25 per watt, the cost of photovoltaics is cheaper through its life. At $2 per watt, it is cheaper after 40 years and at $3 per watt, it is cheaper after 80 years. Once the initial cost of the system is paid for, taking around 20 years, the cost of running a photovoltaic system is almost zero, whereas for coal and other fossil fuels there is the cost of fuel each and every year. Moreover, there are additional fluctuating costs for fossil fuels, influenced by raw material costs, shipping costs, and possibly carbon dioxide taxes.
As the conventional power generation sources like coal and natural gas run low, the world is looking towards renewable energy sources for possible solutions. Delaying solar parity is just like delaying the inevitable - it has to be given its due credit considering the cost benefits for the end users, in spite of utilities not liking it. It is for utilities to face the challenge instead of hiding from them, and to find a possible business model where both can coexist.
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