With the cost of solar continuing to fall rapidly (50 percent in the past five years) and electricity prices rising steadily, if slowly, the approach of solar grid parity is near. The following chart illustrates the trajectory of solar cost and electricity price, hinting at the coming intersection. The chart compares the cost of a residential solar installation to the cost of electricity for a residential property. The numbers are national averages, and do not reflect the wide variation in the cost of electricity (from $0.067 per kWh in Seattle to over $0.170 per kWh in New York City, for example).
(Note: The electricity price was calculated using the Bureau of Labor Services electricity price index and data from the Energy Information Administration. The cost of solar is primarily from Lawrence Berkeley Laboratory’s Tracking the Sun series, with earlier data calculated based on the solar resource in St. Louis, MO.)
In particular, the two lines have been converging rapidly since 2007. The key moment for solar is the crossover, when electricity from solar — without subsidies — costs less than grid electricity. The following analysis identifies this moment of “solar grid parity” for the top 40 metropolitan areas in the United States (representing just over half of the national population). For the list of the metro areas, see the Appendix (although Hawaii is already at solar grid parity, we did not include the Honolulu metro area as it ranks #53 in population).
In our analysis, we focus exclusively on residential solar grid parity, rather than commercial solar (and commercial electricity prices) or utility-scale solar with electricity sold on the wholesale market.
Solar Grid Parity Analysis
To determine the year of grid parity for major cities, we compare the cost of solar power installed on a residential property averaged over an expected project lifetime — the “levelized cost” — with the expected change in the average residential retail electricity rate.
The First Half of Grid Parity: The Cost of Solar
The levelized cost of solar is calculated with the following assumptions. First, we use an installed cost for residential solar power of $4.00 per Watt. This number may seem low, as the average cost of residential solar installations in mid-2011 was $6.40. But at the same time, residential solar installations completed under a group purchase have received significantly lower prices. In Los Angeles, for example, the Open Neighborhoods group purchase achieved an installed cost of $4.40 per Watt. Some solar industry experts and observers have suggested costs are even lower. Furthermore, installed costs for small-scale solar in Germany average $3.40 per Watt or less, suggesting that there are near-term opportunities for lower cost solar in the U.S.
The cost of capital for residential solar installations is calculated at 5 percent based on the historically low interest rates that persisted in 2011. We also assume that homeowners will finance 80 percent of the cost of the installation. To account for the changing value of money over time, we use a 5 percent discount rate (equal to the cost of capital) and a 3 percent inflation rate (the historical U.S. average) to account for the smaller cost of payments made on debt in later years.
The project life of solar was estimated at 25 years, based on the the longevity of early installations and the quality of current solar panels. Operations and maintenance costs were estimated to be 1 percent of the initial installed cost, a slightly higher assumption than that used in many other studies. The output of the solar array is based on the local solar insolation data from the National Renewable Energy Laboratory’s PVWatts calculator. Panel out-put was forecast to degrade by 0.5 percent per year.
We used the same installed cost for solar nation-wide, ignoring variations that currently exist in the solar market. We assume that as the national market for solar grows, regional variation in prices will become insignificant.
Based on these assumptions, the levelized cost of solar today — without any incentives — varies from around $0.19 per kilowatt-hour (kWh) in Los Angeles to $0.29 per kWh in Seattle. For more discussion on the cost of solar, see the Appendix or for some context, see the Sensitivity Analysis.
Solar Incentives and the Cost of Solar
Currently, there are a variety of incentives that reduce the cost of solar electricity. At the federal level, a 30 percent investment tax credit and accelerated depreciation (worth an additional 20 percent discount) significantly reduce the levelized cost of solar. In many states and utility service areas, rebates and other incentives are added to the federal incentives.
With incentives, commercial- and utility-scale solar is already competing with new fossil fuel power plants. California utilities have 4.5 gigawatts of signed contracts for solar below the cost of a new natural gas combined-cycle power plant (the “market price referant”). San Antonio’s public utility, CPS Energy, asked for bids for 50 MW of solar and was so pleased with the prices that they increased their order to 400 MW.
Even residential solar can be competitive with grid prices, especially with the rising popularity of third-party ownership models. Solar leasing allows residential property owners to have solar installed with no or low upfront cost, and typically means they will see an immediate reduction in their electricity bill, even when factoring in the lease payments to the third party. The third party is able to capture the federal tax incentives (including depreciation, otherwise not available to residential users) and therefore can compete favorably with those making cash purchases of solar power for their homes.
The cost of these incentives is not insignificant. For example, the federal tax credit allows solar projects to get back 30 percent of the installed cost. Claimed by nearly all solar projects, in 2010 the tax credit amounted to nearly $1.6 billion (for 878 megawatts of solar at an average price of $6.20 per Watt). The following chart illustrates how the exponential growth of solar means an exponential growth in the cost of the tax credit, despite significant forecast price decreases. Values after 2011 are forecast, with a best fit line estimated for solar capacity additions, and a 7 percent annual decline assumed for the installed cost of solar.
The cost of the tax credit will reach $22 billion a year by 2016 and the tax credit isn’t the only subsidy. The federal government estimates that accelerated depreciation for solar and geothermal projects costs about $300 million per year, forecast to rise to $7 billion by 2016. With solar capacity growing rapidly and costs coming down, the following analysis suggests that it may be time to re-evaluate incentives for solar power. For more on this issue, see Planning for Phasing Out Incentives.
To avoid complication in the analysis all solar costs in this report, with the exception of the preceding section, reflect the unsubsidized cost of solar power.
The Second Half of Grid Parity: The Cost of Grid Electricity
Using the unsubsidized cost of solar reported earlier for each metropolitan area, we contrast it with each city’s average residential retail electricity price, as reported by the PVWatts calculator (and derived from the Energy Information Administration). Once again, there is wide variation. Prices varied from $0.067 per kWh in Seattle to $0.175 in New York City.
To determine when cities reach residential solar grid parity, we assumed that electricity prices would continue to rise at 2 percent per year (the historical average — electricity prices for the residential sector have increased by 2.4% per year from 1997-2010) and that the cost of solar would decline at 7 percent per year (less than the 5-year average of 10 percent). It is possible that the cost of solar will plateau, or that electricity prices will rise much more slowly, and we have conducted a sensitivity analysis to examine some of those contingencies.
The following chart illustrates the number of Americans in the top 40 metropolitan areas who could go solar for less than the retail grid electricity price by year, from 2011 to 2027. San Diego is the first city at grid parity, in 2013. Seattle is the last, in 2027. Geographic regions are listed on the chart when cities in those regions reach grid parity. For a table showing the chart data through 2021, see the Appendix.
In the short-term, Southern California reaches grid parity with moderately high electricity prices and excellent sunshine, with New York coming soon after due to particularly high grid prices. By the end of the decade, 1 in 4 Americans in the largest metropolitan areas could go solar at better than grid prices.
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