(The author is a Reuters market analyst. The views expressed are his own.)
By Gerard Wynn
LONDON Dec 9 (Reuters) - Solar power prices have plunged to levels that are nearly competitive with conventional grid power, without subsidies, and at a pace that has wrong-footed lagging estimates by consultants.
Prices of solar equipment are dropping as Chinese manufacturers ramp up capacity at the same time as key markets Italy and Germany pare subsidies. New economic turmoil will curb demand and pressure prices further.
Bankruptcies and profit warnings suggest western manufacturers are nearing their limits on cutting prices, but the costs of producing solar panels are still likely to follow an historical trend of falling around 20 percent for each doubling in world production as they benefit from a technology learning curve.
Concerns about manufacturers' financial struggles should not distract from this deeper shift in solar economics.
One proxy for the cost of solar power in Europe is Germany's support price. The world's biggest demand market is mature, and its subsidies have fallen incrementally to more closely reflect falling installation costs.
The feed-in tariff in Germany guarantees a solar power price for 20 years. From next January it falls to 23-24 euro cents per kilowatt hour for large roof-top installations. For the first time that's about the same level as consumer power prices.
The same applies to sunnier Italy, where roof-top solar tariffs are now 25-27 euro cents per KWh, slightly above the country's grid price.
This is not quite reaching the industry's holy grail of so-called grid parity, when it becomes as cheap to install a solar panel as to buy power from the grid and when the industry could go mainsteam without subsidies.
It's one thing to finance a project on the back of a government-guaranteed, 20-year revenue stream, but quite another to fund a business plan based on consumer power prices even if they're providing the same return.
Finance costs are critical given the high proportion of upfront capital required in solar investments.
For the sector to survive without subsidies, solar costs will have to fall further and deliver a better payback period than the current level in Germany, roughly 10 years.
Grid parity is nearer in Spain. It will be reached in a number of countries over the next several years as costs and subsidies fall, and that point will be based on each country's grid price, cost of credit and climate.
Consultants' estimates of the costs of solar power generation are based on equipment prices plus installation costs, which are smoothed or depreciated over time to produce a cost per unit of power generation.
This levelised cost of energy (LCOE), the usual measure to compare the costs of different electricity generation technologies, is inevitably backward-looking, using recent equipment prices which in the past few years have dated rapidly for solar.
Other assumptions include the cost of finance and the lifespan and performance of solar installations.
An important problem is that the end result will always be an overestimate of the economic cost in countries with generous support for solar power, where installers simply charge what they know customers can afford.
In other words, if you halve the subsidy, you cut the LCOE as well, "massively" in the words of one consultant who supplies LCOE estimates and did not want to be named.
A good example is Britain, where until this month the feed-in tariff was about double the support in Germany and Italy and is about to be halved.
LCOE estimates for new projects in 2011 in Britain are correspondingly high -- estimated at about 0.34 pounds (0.4 euros) per KWh by consultants Mott MacDonald or 0.31 pounds by Arup, or about 60 percent more than German support levels.
While these may be good snapshots of actual costs in a country with a vastly inflated feed-in tariff, arguably they are not much use in setting future subsidy levels, picking investments or plotting a country's future energy mix.
The Paris-based International Energy Agency also seems to be on the conservative side, given the pace of price falls now, with its recent forecast of roof-top solar costs at $0.12-0.23 per KWh (0.09-0.17 euros) in 2020.
Analysts compare the competitiveness of roof-top solar power with grid retail prices because both deliver electricity at the point of consumption in the home.
Bigger solar installations would have to compete in lower-priced wholesale power markets with gas, coal and nuclear power plants. Such wholesale price parity is still some way off. ($1 = 0.7512 euros) ($1 = 0.6398 British pounds) (Reporting by Gerard Wynn)