When an actor or musician bursts onto the public scene, we often find that they had been honing their craft for a decade. Inspired by a 2004 NREL report co-authored by Marv Keshner, First Solar and several other solar firms ramped up to commercial scale, setting up a period of cost reductions and consolidation in the industry. In First Solar’s management’s comments on 4Q12 earnings to stock analysts, they mentioned that their installed system costs had dropped to $1.39/W, down over 10% from 4Q11. If costs drop another 10% in 2013 as expected, system costs will be around $1.20/W about 10 years after the NREL report.
With a gross margin of 25% and 5.25% 30-year project financing and discounting a 30% ITC and 5-year MACRS depreciation, the cost of electricity will be around $0.02/kWh for the EPC contractor. With an O&M budget of $0.005/kWh, the cost of power is lower than natural gas, wind, nuclear and most hydro power. This is why more solar will be installed than wind in the U.S. in 2013 and beyond. In 10 years, solar has become an overnight success.
2012 was an amazing year for solar price reductions and for solar cost reductions. Solar prices dropped 34% from the end of 2011 to the end of 2012 (from $1.00/W to $0.66/W) but costs dropped 34% as well (from $0.90/W to $0.59/W). These new prices usher in a new era for solar – grid parity and 10X growth. Depending on location, solar power is already cheaper than wind power. In 2013, for the first time, added solar capacity is expected to exceed added wind capacity which led all additions to U.S. electric power capacity in 2012. As volumes pick up, BOS costs should decline over time to roughly the cost of modules or about $0.50/W for a total of $1/W in the 2016 timeframe for utility-scale solar. A recent First Solar project in Macho Springs, New Mexico is selling power to El Paso Electric for $0.058/kWh in a long-term PPA (Purchase Power Agreement), and this is at the start of the solar learning curve.
Utility-scale solar is being installed in China for $1.43/W and for $1.80/W in the United States. If costs drop another 10-15% per year, getting utility-scale installations for $1/W and generating solar electricity for $0.04/kWh are achievable in the 2015-2016 timeframe. Within 5 years. we should see $0.75/W and $0.03/kWh as the industry adopts HVDC.
The U.S. Department of the Interior’s Bureau of Land Management has set aside about 0.1% of the land under their control for utility-scale solar farms. These 285,000 acres in six western states should be provide a path for large-scale solar farms that drive down the cost of permitting, installation and overhead. Today Germany and the United Kingdom are able to install utility-scale (>10MW) solar farms for $1.80/W. These costs are possible in the U.S. (see below), and are expected to drop further as this extensive acreage gets developed into up to 60GW, with an LCOE of $0.05/kWh. At the end of 2012, the U.S. should have 7GW installed, so this acreage allows the U.S. to grow 10X in solar installations.
Beyond this initial acreage, the BLM has identified 19 million acres for solar development, with a potential of another 5000GW or 50X today’s worldwide installations. At a cost of $1/W installed, 5-year depreciation, a 15-year payback and a cost of capital of 6% but with no 30% Investment Tax Credit, the LCOE of solar in the near future should be $0.04/kWh plus solar field maintenance costs which should be near zero in the first 15 years.
California’s SB843, the Community Shared Solar bill, was passed by the appropriations committee in the California Assembly on August 23, 2012. A vote by the full Assembly is expected by mid-September. This will enable renters and homeowners to get credit on their electric bills for electricity they buy from local solar farms. Depending on the arrangement with the landowner, perhaps the local government, the cost of the electricity could be less than half of what they pay the local utility.
For example, the output of a $3/W 100kW installation might serve 30 to 40 ratepayers. At a 7% cap rate for 25 years, the cost of electricity could be as low as $0.04/kWh, lower than SDG&E’s lowest rate of $0.075 and only one-quarter of its highest rate of $0.16/kWh.
Recently, the average wholesale cost of solar modules dropped below $0.75/W. Trina Solar reported that their non-silicon costs have dropped below $0.50/W and wholesale silicon wafers have averaged $0.26/W, for a total of $0.75/W or about breakeven at current pricing. New equipment and higher utilization rates are expected to drop Trina’s module costs to about $0.45/W within two years.
GTAT says their new equipment can bring the cost of silicon down to $14/kg. At $20/kg, assuming 4g/W and 50% recycling, silicon wafers can drop to $0.12/W or about half of the cost today. LDK is substituting plastic for glass, cutting cost and weight while improving module efficiency. Shyam Meht of GTM calculates that the actual material cost using best-in-class manufacturing techniques can be as low as $0.21/W assuming 20% efficiency modules. Further, substitution of materials for costly silver paste, glass, and aluminum frames can drop costs roughly in half over the next 2-3 years. Processing equipment, chemicals, labor and energy drive costs higher but automation, chemical recycling, and lower-cost energy drive costs lower. All told, module costs will drop so prices can reach the $0.60/W level needed to survive without subsidies by 2016.
Based on Step 10 statistics from www.californiasolarstatistics.ca.gov, SunPower leases account for over 80% of the installations of San Diego’s four biggest installers. By taking advantage of MACRS 5-year depreciation and the 30% Investment Tax Credit, at a $5/W installation cost, the cost of electricity can be as low as $0.07/kWh with 7% 20-year financing, assuming a nominal customer buyout at the end of the lease.
With quicker and simpler installation techniques from Zep Solar, we should soon see 10-year leases with fixed buyout options at year-end of years 5, 7, and 10. Eventually, we will see trade-in allowances just like in car leasing.
Substituting copper for silver conductors, steel or plastic for aluminum frames, and thin tempered glass for regular glass will drive down costs. So will getting MonoCast upgrades of existing equipment. GTAT’s new silicon furnaces will produce up to 2X current capacity which is 2X their original capacity. More automation, higher cell efficiencies due to better doping, reduced losses between cell efficiencies and module efficiencies, all portend to bring the cost of modules below $0.50/Watt and prices below $0.60/Watt where we will see installed PV systems costs below $1/Watt.
With a density of .2MW per acre, a 640-acre farm would support a 120MW solar field, costing about $240M and generating about $19M in income at $0.10 per kWh FIT and about $1M/yr for the farmer if he got 5% of the yield or about 2X what he would make growing corn at 200 bushels per acre.
The Abengoa project in California’s Imperial Valley is for 200MW at a contract cost of $360M. At a 6% cost of capital and with the 30% ITC, this project should produce electricity at a cost between 4 and 5 cents per kilo-watt-hour. This is the beginning of grid parity for solar.
See the attached PV-Tech story that describes how Grid Parity is achieved at FIT levels, at the consumer level, and at the utility level.