Forbes - 8 Jul 08

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305
(Copied 16 Dec 09)

The Economics Of Solar Power

By Peter Lorenz, Dickon Pinner and Thomas Seitz
July 8, 2008

A new era for solar power is approaching. Long derided as uneconomical, it is gaining ground as technologies improve and the cost of traditional energy sources rises.

Within three to seven years, unsubsidized solar power could cost no more to end customers in many markets, such as California and Italy, than electricity generated by fossil fuels or by renewable alternatives to solar. By 2020, global installed solar capacity could be 20 to 40 times its present level.

But make no mistake, the sector is still in its infancy. Even if all of the forecast growth occurs, solar energy will represent only about 3% to 6% of installed electricity generation capacity, or 1.5% to 3% of output in 2020. While solar power can certainly help to satisfy the desire for more electricity and lower carbon emissions, it is just one piece of the puzzle.

What's more, solar power faces challenges that are common in emerging sectors. Several technologies are competing to win the lowest-cost laurels, and it's not yet clear which is going to win. Rapid growth has created shortages and high margins for early players, such as the silicon refiners Dow Corning, REC Solar, and Wacker, as well as the component manufacturers First Solar, Q-Cells, and SunPower


Fueled by ever-increasing flows of new equity from venture capital and private equity firms--$3.2 billion in 2007--innovative new competitors are entering the sector, and along with them, the potential for excess supply, falling prices and deteriorating financial performance for some time.

With competition heating up, the companies building the equipment that generates solar power must relentlessly cut their costs by improving the processes they use to manufacture solar cells, investing in research and development, and moving production to low-cost countries. At the same time, they must secure access to raw materials without tying themselves to the wrong technology or partner.

The evolution of technology looms large for utilities as well. If they hesitate to undertake large, long-term investments until the dust clears, they risk losing customers to players such as panel installers willing to put up and finance solar units on the roofs of buildings in return for a share of the savings the owners enjoy.

As always in the utility sector, it will be essential to deploy smart regulatory strategies, which in some regions might mean including solar investments in the capital base used to set rates for consumers. Government policies will also continue to heavily influence the sector's development. Deciding when and how to phase out subsidies will be critical for creating a vibrant, cost-competitive sector.

Even in the most favorable regions, solar power is still a few years away from true "grid parity"--the point when the price of solar electricity is on par with that of conventional sources of electricity on the power grid. The time frame is considerably longer in countries such as China and India, where electricity needs will require large amounts of new generating capacity in the years ahead and where cheap power from coal makes grid parity a more elusive goal.

The Birth Of A Sector

The solar sector includes a diverse set of players, including the manufacturers of the silicon wafers, panels and components used to generate much of today's solar power; the installers who put small-scale units on individual roofs; utilities and other operators setting up enormous solar collection systems in deserts; and start-up companies striving for breakthroughs such as lower-cost thin-film technologies.

All are operating in a dynamic environment in which long-held assumptions--subsidies, the primacy of incumbents and the predominance of silicon-wafer-based technology--are being eroded.

Beyond Subsidies

Government subsidies have played a prominent role in the growth of solar power. Producers of renewable energy in the U.S. receive tax credits, for example, and Germany requires electricity distributors to pay above-market rates for electricity generated from renewable sources. Without such policies, the high cost of generating solar power would prevent it from competing with electricity from traditional fossil-fuel sources in most regions.

But the sector's economics are changing. Over the last two decades, the cost of manufacturing and installing a photovoltaic solar-power system has decreased by about 20% with every doubling of installed capacity. The cost of generating electricity from conventional sources, by contrast, has been rising along with the price of natural gas, which heavily influences electricity prices in regions with large numbers of gas-fired power plants. These regions include California, the Northeast, and Texas (in the U.S.), as well as Italy, Japan, and Spain.

As a result, solar power has been creeping toward cost-competitiveness in some areas. California, for example, combines abundant sunshine with retail electricity prices that, partly as a result of the state's policies, are among the highest in the country--up to 36 cents per kilowatt-hour for residential users. Unsubsidized solar power also costs 36 cents per kilowatt-hour, but support from the California Solar Initiative cuts the price customers pay to 27 cents.

Rising natural-gas prices, state regulations aiming to limit greenhouse gas emissions and the need to build more power plants to keep up with growing demand could push the cost of conventional electricity higher.

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