Baseload, Solar

Price parity for US solar: Is the goal within sight?

Issue 6 and Volume 10.

Rising fossil fuel costs and a dramatic up tick in solar installations may at last help the US solar industry achieve its goal of price parity with grid power. Elisa Wood reports on state and federal efforts.

From his corporate headquarters in Maryland, Jigar Shah hears a lot these days about a US$1.8 billion transmission line being planned to push coal-fired generation to his state from West Virginia, 460 km away. As founder of SunEdison, a major US solar services and installation company, Shah thinks about the project differently than others might. ‘If it is not a subsidy to the coal industry, than what is it?’ asks Shah. And, he further posits, what might the price of solar look like if it were to receive such a boon? Or what if distributed resources could meet the state’s energy need without the investment required in transmission?

Shah’s musings strike to the heart of an issue that continues to beguile the US solar industry – price or ‘grid’ parity – the ability to accurately compare how solar energy prices stack up against grid power and to use that information to create a level playing field. Solar advocates argue that it is difficult to pinpoint because the true cost of grid power is masked. The more established fuels for electricity generation enjoy the benefits of a system built largely to meet their needs. Subsidies are so entrenched – like the transmission line – that they are not perceived as a hand-out to the status quo.

But now, several analysts say price equality may not be far off. US shipments of photovoltaic panels jumped more than 50% between 2005 and 2006, according to an October 2007 report by the Energy Information Administration (EIA). Such rapid-fire growth is expected to continue, driving down panel costs as production expands. The Solar America Initiative, a programme of the US Department of Energy (DoE), has set a goal of bringing solar to grid parity by 2015 – reducing photovoltaic energy for residential consumers from a benchmark 2005 price of 23 cents–32 cents/kWh to 8 cents – 10 cents/kWh. With the industry expected to emerge from its silicon shortage in two years, analysts say the DoE’s goals look plausible. Morgan Stanley analysts recently reported that solar prices could drop by half in five years. And in a joint paper, the Worldwatch Institute and the Prometheus Institute say a fast drop in costs will make solar a mainstream power option in just a few years.

The deregulation miscalculation

It is not falling prices, alone, that will help solar achieve parity. The true cost of fossil fuel needs to be revealed, say solar advocates. And help is coming, in part, as a result of a miscalculation made when several states liberalized their markets several years ago.

At the time, lawmakers struck deals with utilities to freeze rates in return for various concessions. The thinking was that by the time the rate caps were lifted, deregulation would have worked its magic and customers would have a wide choice of low-cost power products. What the deregulation crafters could not foresee was that a series of hurricanes would cripple the US Gulf Coast in 2005, spiking already rising gas prices.

In a confluence of events unfortunate for the consumer, this was about the same time that price caps began to come off in several states. Utility rates skyrocketed – in some cases to record highs, in such states as Connecticut, Delaware, Maryland, Illinois and Rhode Island.

The result was the US’ largest hike in electricity rates in 25 years, according to the EIA. While prices rose in all parts of the country, the biggest increases occurred in 14 eastern states, and the main cause ‘was the lifting of retail electricity price caps,’ according to the federal agency. Many consumers blamed deregulation, spurring some states to rollback elements of restructuring.


US-based manufacture can contribute to cost reduction. This 8.6 kW system is located in Portola Valley, CA akeena solar

The eastern states have been far slower than California to embrace solar energy. But the dramatic hikes in utility power are forcing consumers and policymakers in these states to consider alternatives. ‘Whenever we see rates go up, the phones started ringing,’ said Julie Blunden, vice president of public policy and corporate communications at SunPower, a major US solar player that designs, manufactures and delivers systems from its home base in California.

The eastern states have been far slower than California to embrace solar energy. But the dramatic hikes in utility power are forcing consumers and policymakers in these states to consider alternatives.

Now, awake to the volatility of gas prices, lawmakers increasingly appreciate the stable price of fuels like wind and solar power. That fact, combined with growing concern about carbon emissions and US energy independence, are inspiring state political action to bring more renewables and distributed generation into the mix.

For example, in Maryland, where rates increased as much as 70% after caps were lifted, the state is striving to meet new load growth through solar installations. The mid-Atlantic state is expected to become one of the nation’s largest solar markets as the result of Senate Bill 595, signed into law by Gov. Martin O’Malley in April. The law is designed to add up to 1400 MW of solar power in the state over the next 15 years. ‘By passing this bill, Maryland will diversify its energy portfolio and grow solar power to the size equivalent of the Calvert Cliffs nuclear plant,’ said Rhone Resch, President of the Solar Energy Industries Association (SEIA). ‘The state will get an infusion of economic investment, new jobs, and emissions-free renewable energy. Large-scale deployment will drive down the cost of solar to become competitive with electricity rates, ensuring that Maryland consumers who go solar will avoid the economic hardship of large electric rate increases in the future,’ he added.

Peter Lowenthal, executive director of the Maryland-DC-Virginia chapter of SEIA concurred, adding: ‘This bill will allow Maryland to meet all new in-state electric growth with distributed solar power. By the programme’s end, Maryland’s solar industry will produce enough energy so that we will never need to build another transmission line across the state or a central power plant. Solar will become less costly than fossil fuel-derived power.’ Among other things, the bill requires that Maryland retail electricity suppliers secure at least 2% of their electricity portfolio from solar home-owners and businesses by 2022. The bill also allows net metering for systems up to 2 MW and directs the state to adopt ‘best practices’ standards for interconnecting systems to the grid. In addition, it creates 15-year contracts for solar renewable energy certificates.


Figure 1. As the cost of electricity from solar PV decreases so market penetration increases. This figure indicates a massive upturn by 2020 Source: US DOE

States which have yet to lift price caps are learning lessons from the states that already faced the crisis. In Pennsylvania, where most utilities are scheduled to lift rate caps by 2010-2011, Governor Edward Rendell is working on averting rate spikes through an $850 million energy independence strategy (House Bills 1200, 1201 & 1202). The bills, currently under debate in a special session before the Pennsylvania General Assembly, make large investments in clean energy and efficiency to diversify fuels and flatten costly consumption peaks. The legislation also allows for long-term supply contracts for up to 20% of utility load. This is significant because many liberalized states forbid, or severely limit, utilities from signing long-term deals. ‘We believe in the marketplace. We think conservation and renewables compete much more effectively in a deregulated marketplace. But to hold on to deregulation, we know we cannot stick our heads in the sand,’ observed Kathleen McGinty, secretary of Pennsylvania’s Department of Environmental Protection.

The state hopes to avoid rate shock and avert the call to roll-back liberalization that has occurred in other states when price caps came off. ‘We’re trying to thread a very important needle,’ McGinty added, saying: ‘There is a sweet spot in terms of prices that will enable renewables and conservation. Below that price, we will not see the market respond and invest in alternatives. But shockingly above that price, you will see a ‘Back to the Future’ occur – a return toward mandated rates that do not reflect full costs and therefore do not enable innovation in the marketplace.’

Airing their pricey laundry

Pennsylvania’s overall goal is to reduce energy costs by $10 billion in 10 years. And McGinty said the state hopes to achieve this, in part, by making consumers ‘smart energy shoppers.’ Thus, Rendell’s plan calls for greater use of smart meters, which allow consumers to see the changes in electricity price during various times of day. Utilities would be required to prove they have aggressively pursued this strategy before the state will sanction any new power plant construction.

Several other states are also looking to smart meters and real-time pricing as a way to slice peak demand. Illinois now has a pricing programme under way that encourages customers, including domestic ratepayers, to use real-time pricing. Connecticut is discussing mandatory real-time pricing for large customer groups. And ISO New England, a regional grid operator, has been pressing several states to consider real-time pricing. By letting customers see the true cost of their actions, such as doing laundry during afternoon peak periods, provides consumers with a choice to either pay for the electricity or engage in electricity-intensive activities in the evening when demand, and therefore prices, go down. Some programmes call for hourly pricing, especially for large customers, while others switch prices two or three times a day.

Real-time pricing is significant to photovoltaic (PV) power because solar’s peak production is often the same time of day as peak grid demand. Revealing the true cost of peak power may make consumers more likely to see the value of solar energy. Furthermore, in this case solar can act to reduce peak demand.


Figure 2. Fuel costs for electricity generation 1993-2006 Source: EIA

Nonetheless, like wind energy, solar faces questions from utilities and grid planners who wonder about unforeseen impacts and costs of integrating large amounts of a non-dispatchable resource into the grid. Left unanswered, these questions may keep utilities from venturing forward to use solar as a demand resource. Realizing this, in spring 2007 the DoE launched the Renewable Systems Interconnection (RSI) study. The study is generating 14 reports that look at solar resources, technology development, grid integration, and other issues arising out of solar energy’s dramatic growth. To make the vision a reality, the DoE is also working on a companion research and development strategy.

‘Utilities would be confronted with a challenge with mass integration of PV,’ said Craig Cornelius, technology manager at the DoE Solar Energies Program. ‘Aside from revenue growth being curtailed, how would they control a grid where 20% to 25% of peak is a distributed intermittent resource?,’ he added.

Renewables are at a disadvantage now because of the way utilities view them in planning. ‘Utilities plan their distribution systems assuming no wind power or PV is on the system. They size their transmission and distribution so that they can meet peak load as if none of those renewable resources are there,’ Cornelius continued, ‘and as they plan the dispatch of assets, they plan the operations for their base-load plants, intermediate and peaking plants, assuming there will be no wind or PV in their system. That undervalues those renewable resources because it forces the utilities to maintain higher spinning reserves.’ The DoE’s goal, he said, is ‘to get these assets to the point where they area predictable source for utilities so that they can reduce the size of their transmission and distribution infrastructure.’

As a solution, the DoE envisions integrating PV with building controls that would allow a solar energy system to communicate with a utility. If the solar energy system incorporates batteries, it could be told by the utility when to discharge, so that the utility could shape load within a building or distribution area. The PV system, or an aggregate of systems, then can act as a virtual peaking plant or as a demand management resource.

‘The key is to have a communication device between building and grid operators, probably advanced metering that allows pricing information to be delivered on a real-time basis to customers,’ Cornelius said, adding that such technology is now on hand. ‘There is no basic science needed to do this. We have the communication components. We certainly have demonstrated software or power electronics technology, storage technologies; what we lack are standards for communications and advanced metering. They have been put together utility by utility. There is not a single advanced metering protocol for utilities. We may not need something that monolithic, but some standards are needed,’ he concluded.

The next step is creation of government policy that folds these business approaches into the regulatory system, factoring in different ownership and control models. For example, regulations would be required so that utilities can purchase and install distributed storage on a customer location, but not purchase the PV energy.

Comparing apples with oranges

Price parity is difficult to quantify in the US because it varies from state to state. Average prices of grid power range from a high of 18.84 cents/kWh in Connecticut to 6.15 cents /kWh in Idaho, according to the EIA. Prices on the margin can be considerably higher. For example, in California many residential customers pay on peak rates between 30 cents – 40 cents/kWh. Solar prices also vary state-to-state, influenced by local weather patterns and state policies governing interconnection, net metering, incentives, portfolio standards, availability of PV installers and other factors.

‘Given the fragmented nature of electricity markets, regulations and incentives in the United States, PV economics needs to be assessed on a local basis,’ says the PV Market Penetration Scenarios report of the RSI study. The paper was prepared by Navigant Consulting and was undergoing peer review as REW goes to press. The full release is scheduled for December.

The speed at which PV pricing drops will vary based on how quickly the technology integrates into the market. The Navigant study looked at several scenarios that can influence the market penetration of PV technology.


One key finding of the RSI study is that grid integration issues are likely to emerge much more rapidly than many analysts expect. In some regions of the United States, this issue could create barriers to future growth within the next five to 10 years. For example, in California a number of new subdivisions are currently being built with PV systems as a standard feature on all new homes. ‘With these types of developments already occurring in the marketplace, it is clearly time to begin planning for the integration of significant quantities of distributed renewable energy onto the electricity grid,’ said the study.

California’s rising market is only the ‘tip of the iceberg,’ according to the report. Policy developments at both the federal and state level, coupled with technology improvements funded by the Solar America Initiative, are helping to create a more receptive marketplace for PV in the US. Indeed, scenarios developed as part of the RSI study forecast that annual installations of grid-tied PV could reach 3.6 GW – 6.4 GW by 2015, resulting in a cumulative installed base of 12 GW–21 GW by 2015.

Barriers to the best case

Many variables could deter the US from reaching this best-case scenario, according to the report. For example, net metering policies and the federal investment tax credit appear to have the greatest ability to spur installations. The worst case scenario for solar installations would involve an end to the federal tax credit, no carbon legislation and a dramatic decline in electricity prices. If Congress fails to extend the federal tax credit, the industry may also experience a labour shortage. The credit is set to expire at the end of 2008 and its renewal is now under discussion in Congress. Navigant expects an adequate supply of installers through 2008. After that, continuation of a strong labour supply is dependent on the extension of the production tax credit, according to the consulting firm.

Pull quote: Net metering policies and the federal investment tax credit appear to have the greatest ability to spur installations

But for now, it appears the solar industry is on turbo charge, heading down the right road for grid parity. Recently released EIA statistics show domestic shipments reaching 206,511 kWp last year, nearly 54% above the 2005 domestic shipments of 134,465 kWp.

For industry leaders like SunEdison’s Shah, the statistics are no surprise. He has seen the mind-spinning growth in his own business. Shah launched SunEdison in 2004 with a handful of employees. Now, with clients like Whole Foods, Staples, and Kohls, and an equity partnership with Goldman Sachs, SunEdison added 200 employees this year, increasing its total headcount to 300. Grid parity may not have arrived yet, but with that kind of growth, it is no surprise that industry insiders say it may not be far off.

Elisa Wood is US correspondent for Renewable Energy World
e-mail: [email protected]