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With the cost of solar power plunging and retail electric prices rising, 100 million Americans in the nation’s largest cities will be able to “go solar” for a lower price than grid electricity in the next ten years.  Seizing this opportunity requires rethinking electricity policy and planning even while solar produces less than 1% of the nation’s electricity.  Investments in new centralized power plants and transmission could divert billions of ratepayers dollars from a democratization of the electricity system.  At the same time, energy subsidies – for fossil fuels and solar energy – must be gradually transformed into barrier-breaking incentives that maintain the pace of growth and push solar into all corners of the country. 

One Third of Americans Reach Solar Grid Parity by 2021

The solar opportunity is driven by converging economics: the installed cost of solar has fallen 10% per year since 2006 and grid electricity prices have averaged a 2% annual increase in the last decade. 

If the trends continue, there may be an outbreak of economical solar.  The following chart illustrates the number of Americans (from the top 40 metropolitan areas) that would be at solar grid parity and the potential amount of solar capacity that could be added to the grid at less than retail electricity prices in the next decade.  Nearly 100 million Americans could install over 60,000 megawatts of solar at less than grid prices – without subsidies – by 2021.

The potential for solar grid parity may be much larger than the chart suggests because it is limited to residential rooftops in the top 40 metropolitan areas of the United States.

Expanding the analysis to the entire country, and to non-residential rooftops, could more than triple the solar potential and drive down costs. 

Furthermore, innovative time-of-use electricity pricing could help advance the year of the solar crossover.

Democratizing the System

The opportunity of solar grid parity goes beyond the benefits of solar power for the masses.  It suggests a future that transforms Americans from energy consumers into producers and gives them a stake in electricity production and energy policy.  Each house with a solar rooftop has (on average) two voters who will strongly support smart solar policies.  And when half of Americans can install solar for less than the cost of grid electricity, it makes a majority that favors local ownership of localized energy production long before solar power becomes a significant portion of total electric generation. 

Policy Can Overcome Technical and Regulatory Barriers

A major technical roadblock to realizing the full potential of solar grid parity is the so-called 15% rule, a common state regulation that limits the amount of solar on a utility’s distribution grid to 15% of the peak demand.  However, recent research shows that the 15% rule is too conservative, and that there are minimal impacts when distributed solar supplies 25% or more of the power to the local electricity grid. 

Other barriers can also be overcome by the proper policy design.  One concerns permitting fees. Currently permitting fees alone can currently amount to as much as 20 percent of the cost of a solar PV array, but new best practices (such as expedited review based on a checklist, email rather than in-person permit submission, etc) have cut fees in some communities fivefold, to less than 4 percent of project costs. 

Net metering is another policy that needs an overhaul.  Simply put, net metering allows for a buyback of solar power at the retail rate for electricity consumed on site and new “community net metering” lets people share the output from a common, off-site solar project.  But a number of states cap the number of net metering systems at 5% of total system load or less.  The policy can also lead to less cost-effective solar, as individuals are encouraged to optimize the balance between consumption and production, rather than optimizing the economies of scale of solar by covering their rooftop.  Net metering may also prove problematic in the long run, as the cost of solar dips far below the retail rate (leading to overpayment to solar producers) or if solar drives down the cost of electricity (leading to insufficient payments).  Net metering is a good policy to get solar started but moving to a much higher level of energy self reliance will require new thinking and new approaches. 

An Opportune Time to Plan for Phasing Out Solar Subsidies?

The most serious barrier is the potentially serious disruption posed by the looming expiration of the federal 30% tax credit (in 2016).  A thoughtless extension will enrich solar developers in some regions of the country at the expense of taxpayers; an abrupt expiration will seriously affect the solar market in the many regions that have not reached solar grid parity by 2016.  A hybrid policy approach is needed, whether to phase out the federal tax credit in a fashion that is geographically equitable or to shift to a feed-in tariff strategy to be more comprehensively prepared for the economic issues of grid parity.

The best transition policy may be a feed-in tariff, as is used in solar-leading countries like Germany. 

This solar financing tool is not a tax credit, but is a combination of a long-term power purchase contract, a guaranteed grid connection, and a contract price sufficient for a modest return on investment.  The contract provides secure financing for solar projects, reducing borrowing costs and the cost of solar electricity. 

In contrast to the hodge-podge of incentives for installing solar, it would provide an all-in, long-term contract for solar producers that would remain transparent and predictable and flexible as market conditions change.  The feed-in tariff would also solve the two major problems of the tax credit, the inability of schools, cities, and other public entities to use it and the inherent inefficiency of finding project partners who can consume tax credits.

Even without a feed-in tariff, the federal government could replace the tax credit with a cash-based production payment that would provide revenue for solar projects in addition to local net metering rates (a Feed-In Tariff Lite), or simply switch the tax credit to a cash payment.  In either case, the incentive could decline over time, while still solving the inefficiency problem of tax credits.

Update 1/12/12: added two missing maps.  Thanks to commenter Sean Barnes for the catch.

Solar grid parity is considered the tipping point for solar power, when installing solar power will cost less than buying electricity from the grid.  It’s also a tipping point in the electricity system, when millions of Americans can choose energy production and self-reliance over dependence on their electric utility.

But this simple concept conceals a great deal of complexity.  And given the stakes of solar grid parity, it’s worth exploring the details.

The Cost of Solar

For starters, what’s the right metric for the cost of solar?  The installed cost for residential solar ($6.40 in 2011), or commercial solar ($5.20) or utility-scale solar ($3.75)?  Even if we pick one of these, it’s difficult to compare apples to apples, because grid electricity is priced in dollars per kilowatt-hour of electricity, not dollars per Watt.

Enter “levelized cost,” or the cost of a solar PV array averaged over a number of years of production.  For example, a 1 kilowatt (kW) solar array installed in Minneapolis for $6.40 per Watt costs $6,400.  Over 25 years, we can expect that system to produce about 30,000 kilowatt-hours (kWh), so the “simple levelized cost” is $6,400 divided by 30,000, or about $0.21 per kWh.  

But people usually borrow money, and pay interest, to install solar power.  And there are some maintenance costs over those 25 years.  And we also use a “discount rate” that puts heavier weight on dollars spent or earned today compared to those earned 20 years from now.  A 1 kW solar array that is 80% paid for by borrowing at 5% interest, with maintenance costs of about $65 per year, and discounted at 5% per year will have a levelized cost of around $0.37.  

That means that “solar grid parity” for this 1 kW solar array happens if the grid electricity price is  $0.37 per kWh.  But this calculation is location specific.    

In Los Angeles, that same 1 kW system produces 35,000 kWh over 25 years, lowering the levelized cost to $0.31.  The timeframe also matters.  

If we only look back at the Minneapolis project with a levelized cost of $0.37, but instead look at the output over 20 years instead of 25 years, it increases the levelized cost to $0.43 because we have fewer kWh of electricity over which to divide our initial cost.  

We choose 25 years because solar PV panels have a good chance of producing for that long.

We also use a lower installed cost that the U.S. average.  Residential solar projects may average $6.40 per Watt, but there are some good examples of aggregate purchase residential solar projects costing $4.40 per Watt.   The levelized cost of solar at $4.40 per Watt in Minneapolis is $0.25; in Los Angeles it is $0.21.

The following map shows the levelized cost of solar, by state, based on an installed cost of $4.40 per Watt, averaged over 25 years (click for a larger version).

This map shows half our grid parity equation, the cost of solar.  But what about the other half, the grid price?  It’s another complicated question.

The Grid Price

Utilities like to compare new electricity production to their existing fleet, which means comparing new solar power projects to long-ago-paid-off (amortized) coal and nuclear power plants that can produce electricity for 3-4 cents per kWh.  But this is apples to oranges, because utilities can’t get any new electricity for that price, from any source.  

A more appropriate measure of the grid price is the marginal cost for a utility of getting wholesale power from a new power plant.  In California, this is called the “market price referent” and it’s around 12 cents per kWh.  The figure varies from state to state.  

But while the market price referent provides a reasonable comparison for the cost of utility-scale solar, it’s not the number that matters for solar installed on rooftops or near buildings.  In those cases, the power is used “behind the meter,” and depending on the type of state policy for net metering, the customer can essentially spin their electric meter backward when their solar panels produce electricity.  That means that solar power is really competing against the energy cost on a utility bill, known as the “retail price.” 

The following map shows the average retail electricity price by state across the U.S.  It ranges from 8-10 cents in the interior to 15 cents per kWh and higher on the coasts (click for a larger version).  

In general, the residential retail electricity price is the generally accepted grid parity price.  With this price and our previous map of the levelized cost of solar, we can assess the state of solar grid parity.  The following map shows the ratio of the levelized cost of solar to the grid parity price in each state.  Only Hawaii has reached solar grid parity without incentives.  

As time rolls ahead, and grid prices rise while solar costs fall, the picture changes.  In five years (2016), three states representing 57 million Americans will be at solar grid parity: Hawaii, New York, and California.

There are other considerations in the grid parity calculation.  

Time-of-Use Rates

Some utility customers pay “time-of-use” rates that charge more for electricity consumed during times of peak demand, such as when a hot sunny day has everyone using their air conditioners.  Under these rates, a solar project can be replacing electricity that costs upwards of $0.30 per kWh.  Over a year, time-of-use rates can (on average) boost the cost of electricity – at peak times, when solar panels produce a lot of power – by about 30 percent.  Assuming every state implemented time-of-use pricing (and that it was equivalent to a 30 percent increase in grid prices during peak times), solar grid parity would be a reality in 14 states in 2016, instead of just 3.

Solar v. Grid Over Time

There’s one other calculation.  Let’s say that in 2011 solar still costs just a bit more than the grid electricity price, but that the grid price is rising at a modest rate each year.  In this case, solar may still be the right choice because the lifetime cost of solar (at a fixed price) will be less than the rising cost of grid electricity.  We can use an accounting tool called net present value to estimate the savings from solar compared to grid power over 25 years, and we find that for every percentage point annual increase in electricity prices, solar can be ~10% more expensive that grid power today and still be at “parity.”  We find that with electricity price inflation of 2% per year, solar grid parity shifts up two years using this method.

To further explain the concept of solar grid parity, I’ve also created this slideshow.  Click below to see it explained with a lot of graphical assistance.