Future prospects of solar energy

Workers fix construction panelsConstruction workers fix solar panels for a new solar power plant in Germany | REUTERS/Michaela Rehle

Nearly everyone thinks that generating electricity via solar power is good for the environment, but there's much less agreement on whether it makes sense from an economic point of view. At what point will solar power be competitive with electricity generated by conventional, fossil-fuel plants, and how long will subsidies need to remain in place before the solar industry can stand on its own? Those are some of the questions addressed in "The Prospects for Cost-Competitive Solar PV Power, " a new working paper by Professor Stefan Reichelstein of Stanford GSB, and Michael Yorston, graduate student in the Department of Management Science and Engineering at Stanford. Their paper breaks new ground in studying the life-cycle cost of electricity generated by solar photovoltaic, paying particular attention to key factors such as location, public subsidies, and the long-term learning effects in manufacturing solar panels.

Here is an excerpt from our discussion with Professor Reichelstein:

Stanford GSB: Why did you decide to study the economics of solar photovoltaic power at this time?

Renewable energy and solar in particular remain rather controversial in the public debate about energy policy. Passions have been running high. What motivated me is the bewildering range of statements you have out there regarding the cost effectiveness of electricity based on solar PV. Given the range of opinions, I wanted to do my own analysis. I'm looking at it from the point of view of a business economist who is interested in measuring the life-cycle cost of this abundant energy source.

Your main conclusions?

Solar PV is not yet competitive with fossil fuel, like natural gas, from the perspective of a utility that can either build a new natural gas power plant or invest in solar installations.

For a commercial power user, say a business with plenty of rooftop space, the cost of generating your own electricity is now on par with what the business would need to pay in retail electricity prices. In that sense, grid parity has been achieved for commercial-scale installations. However, I need to add immediately that this is subject to two important qualifiers. The facility has to be in a favorable location, such as the Southwestern United States, and secondly the business must be able to take advantage of the current federal tax subsidies.

Concerning the future, and this may sound like a pun, the future of solar PV looks rather bright. The industry has consistently been able to lower the cost of solar panels. If this trend can be maintained for the next 10 years, and if subsidies are continued for that period, there is a real prospect for solar to become cost competitive on its own (that is, without a subsidy), at least for commercial installations. Utility-scale installations will take longer to become competitive; possibly 15 years, though it obviously becomes murkier to make projections that far into the future.

What happens if subsidies disappear or are sharply reduced?

The current federal tax subsidies come out of the Economic Stabilization Act of 2008 and will be in place until 2016 unless Congress changes the rules. The solar panel manufacturing industry has been on a remarkably steady learning curve for several decades now, which has pushed down the systems price of solar panels at a dramatic rate. However, this learning curve seems very much dependent upon production volume. So, if the tax subsidies were to cease, new production volume would probably be lower, and the effect of that would be to slow down the rate of cost improvements.

Source: www.gsb.stanford.edu
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