Reducing Soft Costs Will Bring Success Beyond 2016
By TONY CLIFFORD
Solar needs to reach a marketable price point before the federal tax credit expires in 2016. While there’s debate about what that price point will be, I’m not really concerned with hitting a specific number. The industry simply needs to reach a “tipping point” at which the photovoltaic (PV) industry can sell into high-cost electricity areas, without dependence on state and federal incentives. Once PV systems have demonstrated that they are reliably cost-competitive with grid-sourced electricity, a waterfall of demand will sustain the industry. I think this tipping point will first be reached in distributed generation (DG) applications, notably in net-metered residential and commercial PV systems. Net-metered systems compete with the grid at retail, so they can be cost-competitive at a higher price point than utility-scale systems, which must meet the wholesale cost of utility power.
The industry must drive the cost structure down to where we can install PV systems profitably at less than $2 per watt.
Over the next four years the industry must drive the cost structure down to where we can install PV systems profitably at less than $2 per watt. Getting from $2.50 to $1.75 is going to be a real challenge. There is still room for cost reduction on the hardware side, but we really have to attack the soft costs of installing PV systems: Financing costs, legal costs, permitting, interconnection and other costs must come down substantially.
Financing of commercial solar projects must become much easier. Right now, only very large banks, with tax appetites, can finance solar projects, and they do so on much more expensive terms than they’ll offer a new office building or apartment complex. As conventional banks become more familiar with solar projects, larger institutions will finance solar projects on more favorable terms than we realize today. Bankers will see less technology risk and less construction risk. Lower perceived risk means lower interest rates for solar developers. That will reduce the overall cost of installation. We must educate financial institutions about the promise and potential of solar energy.
The U.S. Department of Energy’s Sun-Shot program has already begun to help reduce other soft costs. Through the innovative ideas that SunShot fosters, and with the continued support of state energy offices, we have plenty of opportunity to streamline the permitting process and reach lower interconnection costs.
The $2 Barrier
Right now, we can install ground-mounted 1-megawatt (MW) systems at prices ranging from $2.75 to $2.25 per watt. In order to be competitive with the grid in DG applications, I believe the industry needs an installed cost of less than $2 per watt. How much below $2 depends primarily on what grid power is going to cost in future.
Over the past 50 years, the cost of grid power has risen at an average of about 5.2 percent per year. It will continue to rise going forward — not that fast, but still outpacing inflation. Much has been made of the rock-bottom price of natural gas, and this cheap energy source has indeed tempered the rise of energy costs in the United States. But over the next four years, the price of natural gas will rise. There are many domestic applications for this inexpensive energy source, more coming online every day. We are going to export natural gas. Its price will be determined by the global marketplace, and the demand for electricity will increase as the economy improves. Factoring in the costs associated with aging grid infrastructure and those of moving to a smart grid, it becomes clear that the price of electricity will rise significantly.
From numbers we have run at Standard Solar, at $1.75 per watt installed cost (and no 30 percent investment tax credit), we can competitively install 1-MW PV systems with a power purchase agreement price between $0.11 and $0.12 per kilowatt-hour. I am quite comfortable forecasting retail costs of electricity being in this range or higher in many states by the beginning of 2017. At that point, if we have reduced our soft costs, we will see the PV industry tip. I, for one, am looking forward to that day.
Tony Clifford is CEO of Standard Solar.