(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON Dec 9 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
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
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)