Finally in Sight, $1-a-Watt Solar Milestone Shows Long Road Ahead

This week energy forecaster GTM Research predicted that the price of building big solar-power farms will drop below $1 by 2020. That’s a big deal because it’s seen as the threshold below which building solar power arrays becomes competitive, without subsidies, with the cost of fossil-fuel plants. It’s also the target set in 2011 by the U.S. Department of Energy’s SunShot Initiative. But there are important caveats.

$1 per watt is not the “true cost” of solar. That figure is the price that a construction firm would bid to a utility or developer to build the solar installation—in other words, the upfront capital costs of installed solar capacity. Solar power brings with it a range of other costs, such as transmission lines to deliver the power, software to regulate the flow of intermittent solar power onto the grid, energy storage systems, and so on. “The ‘true cost’ of solar depends on so many factors that are very site-specific that it’s hard to generalize,” says Benjamin Gallagher, the author of the GTM report. “Depending on a host of factors, a $1 per watt [solar] plant will have a cost [of energy] in the neighborhood of 6 cents a kilowatt-hour,” says Andrew Mills, a research associate on electricity markets at Lawrence Berkeley National Laboratory. That’s comparable to the electricity cost from a natural gas plant—but natural gas plants run all the time, not just when the sun shines. Intermittency and the need for backup power can add around 20 percent to the “real” cost of solar power.

Solar still provides a small slice of electricity generation. Solar power is the fastest-growing form of power generation in the U.S., but it still accounts for just over 1 percent of U.S. electricity. Even with the robust growth rates forecast for utility-scale solar, that percentage will barely reach double digits by 2020. Power from all forms of renewable generation, including wind, solar, biomass, and hydroelectric, will total 15.6 percent of U.S. generation by 2020, according to the EIA’s Annual Energy Outlook 2016. Coal and natural gas will still account for 65 percent of our electricity—even with utility solar at $1 per watt.

Solar additions are likely to slow in coming years. The economics of solar power are such that, beyond a certain penetration level, new additions become less valuable. Strong growth in solar deployments will tend to suppress energy prices, says Frank O’Sullivan, the director of research and analysis for the MIT Energy Initiative. In other words, beyond a certain point, new solar installations start driving down the price of power not only from solar plants, but also from the always-on fossil-fuel plants that supplement intermittent solar power. That’s a good thing if you’re a customer buying cheap power. It’s not so good if you’re a power plant operator and need a return on your investment. If big solar power additions make it harder for owners of power plants to recoup their costs, that means that growth in the solar market is to some extent self-limiting. “Now that solar accounts for over 1 percent of U.S. electricity generation, that pace [of growth] will likely slow,” says Ben Ho, a professor of economics at Vassar College.

Too much solar power can be hard to handle. Simply adding large amounts of renewable energy to the system can bring with it a host of problems (see “Germany Runs Up Against the Limits of Renewables”). In places with an overabundance of solar power, like Germany, Texas, and California, power producers have at times had to pay customers to use excess energy on the grid (see “Texas and California Have Too Much Renewable Energy”). That won’t change unless there are cost-effective ways to store the power; new systems to balance supply and demand across the grid; and new grid infrastructure to send power over longer distances. “That’s an artifact of poor market design,” says Jonathan Koomey, a consulting professor at Stanford who studies the economics of climate change. Reforming electricity markets will not be easy, even with solar power at 99 cents a watt.