Solar energy “grid parity” is considered achieved when the Levelized Cost of Energy (LCOE) to generate 1 kilowatt-hour (kWh) becomes equal to what it costs to generate 1kWh of the current cheapest form of electricity: Coal-fired power plants. That means until the cost of PV technology reaches coal’s 6 cents per kWh, grid parity will not be reached.
But a new report suggests that LCOE for solar has been falling and the public is not getting clear information about PVs reaching grid parity in some areas in North America. The December study from Queen's University in Ontario concludes:
“Given the state of the art in the technology and favorable financing terms it is clear that PV has already obtained grid parity in specific locations and as installed costs continue to decline, grid electricity prices continue to escalate, and industry experience increases, PV will become an increasingly economically advantageous source of electricity over expanding geographical regions.”
The Queen’s University study, “A Review of Solar Photovoltaic Levelized Cost of Electricity,” was led by Joshua Pearce, Adjunct Professor, Department of Mechanical and Materials Engineering and published in the December 2011 issue of Renewable and Sustainable Energy Reviews.That report takes issue with the proper methodology of calculating LCOE and attempts to correct the long held assumptions found throughout past studies currently being relied on by the electric utility industry to determine the true cost of electricity.
Calculating LCOE
Analysts look at many variables to determine the LCOE of PV systems, including the cost of the PV panels, all balance of system costs, installation and maintenance costs, finance charges, the system’s life expectancy, and the amount of electricity it generates.
The study focuses on the assumptions behind many of the past studies of LCOE and notes that rapidly declining PV costs combined with more accurate LCOE calculations can supply numbers that are closer to the reality of what consumers in many North American areas actually pay for their electricity.
“As the solar photovoltaic (PV) matures, the economic feasibility of PV projects is increasingly being evaluated using the levelized cost of electricity (LCOE) generation in order to be compared to other electricity generation technologies,” concludes the report. “Unfortunately, there is lack of clarity of reporting assumptions, justifications and degree of completeness in LCOE calculations, which produces widely varying and contradictory results.”
Varying Costs
The report notes that some past studies don’t consider the 70 percent decline in the cost of PV panels since 2009. Pierce says his research now indicates the productivity of the latest PV panels only drops between 0.1 and 0.2 percent annually, which is much less than the 1 percent used by most electric utility analysts. With these more accurate numbers Pearce says PV systems are near the “tipping point” where they can generate electricity for about the same price as the benchmark of coal power.
For PVs, like all forms of electric power, the equipment costs are determined based on dollars per watt of electricity produced. According to Pearce, one widely quoted 2010 study estimated the PV cost at $7.61, but his study indicates “the real cost in 2011 is under $1 per watt for solar panels purchased in bulk on the global market, though he says system and installation costs vary widely.
Indeed, those system and installation costs can vary widely, according to “installation volumes and revenue survey” results reported December 15, 2011, by the American Solar Energy Society.
Source: American Solar Energy Society
The ASES/IDC Energy Insights’ “Community of North American PV Installers” reported that the average price per watt of residential and commercial PV was $5.44 in Q3 2011. ASES’ Community of North American PV Installers is made up of “PV installers and project developers focused on residential- and/or commercial-scale solar projects in the United States and Canada.” According to their survey results, “most community members are in the $5 per watt or below range, but a significant percentage of respondents are at higher price points.”
A New LCOE Template
According to the Queen’s University study, the most useful LCOE tool for comparing energy options would actually total all the costs to generate electricity, including the initial capital, maintenance and operating expenses, fuel costs, and environmental costs. Factoring all these parameters would determine “the lowest cost at which a unit of energy can be sold for while ensuring that the source of electricity remains financially self-sustaining.”
“Many analysts project a higher cost for solar photovoltaic energy because they don’t consider recent technological advancements and price reductions,” said Pearce. “Older models for determining solar photovoltaic energy costs are too conservative.”
After the researchers analyzed the standard methods of determining LCOE, they developed a system that avoids the older broad assumptions. Instead, the researchers used more recent PV research data for residential-scale installations: The fact that the latest generation of PVs degrades in efficiency slower than assumed and that PV costs have dropped radically in recent months. Pearce’s team also factored in solar insolation and current financing available using Ontario as a model - which the researches determined was consistent with much of the northern parts of the United States as well.
The result is that the report offers a “template” of the most important variables – including values for specific locations and specific equipment prices - for better reporting the LCOE results for PV in order to better influence policy mandates or make investment decisions.
Conclusion
Solar grid parity is considered the tipping point for PV power and the report from Queen’s University seems to indicate that the solar industry may be poised to reach that point soon. The cost of PV panels have been dropping quicker than any form of electric power generation and following that price trajectory means that solar grid parity could only be a few years away.
One of the important aspects of the Queen’s University is the emphasis on the fact that determining Levelized Cost of Energy (LCOE) – the average cost of a PV installation over its lifetime – is a “location specific” computation. Taking all these factors together could spell good news for the PV supply-demand disparity currently being experienced by the solar industry as a whole.