By Dr. Srinivasamohan “Mohan” Narayanan

Riding the Grid Parity Wave

Grid parity has already been achieved in a small number of power markets but is years away in others. It’s a function of material costs, consumer electric rates, wholesale generation rates, the amount of sunshine (insolation) in a given place, and the local cost of installing solar PV arrays. For example, in a sunny island market such as Hawaii--with diesel-generated electricity, electric rates approaching US$0.30/kWh, and falling module prices--it makes economic sense for power consumers or utilities to install solar arrays, with the right infrastructure and regulations in place.

For similar reasons, a host of other markets--Italy, Spain, Australia, Germany, Japan, and the U.S. (California, Texas)--are expected to achieve grid parity within five years. Driving growth beyond grid parity in these different locations will involve customized strategies.

The Price Rebound Effect

As large markets such as Italy or California reach grid parity, surges in demand for solar PV may push up installation costs. As a result, grid parity will be achieved only temporarily.

Supply bottlenecks for various components or in services, such as system integration, availability of trained personnel for installation may slow the surge and raise prices, increasing overall system costs. It may take time for local industry and international suppliers to finally break through to a sustainable level below grid electricity prices. Changes in feed-in tariff policies, perhaps offering a 10-year vs. a 20-year price guarantee, may still prove valuable at this point, but will still be susceptible to changes by respective governments depending upon economic conditions--like those experienced in Europe recently. In general, PV materials manufacturers should plan for demand surges by building out capacity with the understanding that local policy and downstream players are ready for long-term market build-out.

A Question of Policy

An idealized vision of grid parity contends that preferential policy support for solar PV will become a thing of the past. This overlooks both the current physical and economic realities of the grid, as well as the energy transition requirements for large-scale PV. These factors include:

1. In some markets, ongoing support for preferential grid access must continue to maintain the growth of the distributed PV market;

2. If there are infrastructure barriers to penetration of distributed PV, a critical mass of support for pro-financing policy and building infrastructure (grid-attached storage, smart meters, intelligent grid controls) may be necessary;

3. In markets without current political support for PV, work to generate supportive policy could face political hurdles, as utilities, regulators, and legislators may be hesitant to ‘make room’ for distributed energy and photovoltaics on the grid.

PV manufacturers and downstream players should continue to foster policy and infrastructure conditions that serve all market segments.

Subsidy support for PV has been brought into question during the present, global economic crisis. An example is in Germany and Spain, two leading PV markets, where the subsidy or the increased tariff rate runs into billions. However, subsidy activity has generated employment coupled with, of course, the added environment benefits.

Utility-scale Vs. Distributed PV

When solar PV electricity cost matches retail rates, the latter looks less and less preferable given constant market fluctuations, and the non-renewable source of the electricity (fossil fuel, nuclear). However, this overlooks the increasing attractiveness that large-scale solar PV power plants have for utilities. Retail power rates are more easily matched by PV vs. wholesale generation rates. Conversely, utility-scale installations will continue to enjoy lower installed costs per watt.

In certain markets, utility-scale installations may compete for resources. Utilities can save costs and please regulators by installing large-scale installations that will shave peak generation requirements. Keeping in touch with both utility and distributed markets will continue to be at the top of the agenda for both PV manufacturers and project developers.

When Grid Parity Is Less of a Factor

In some markets, non-solar vs. solar electricity costs are not a key criteria for decision making. For example, the cost parity between solar vs. non-solar building materials has the potential to drive wholesale BIPV adoption, regardless of whether or not grid parity has been achieved. Several factors make BIPV a more viable option than ever:

1. Reductions in cost and gauge, and increased robustness of photovoltaic materials, will make PV integration into roofing and building-facing materials only nominally more expensive vs. non-solar materials;

2. Factory-built housing components and methods will make BIPV almost as affordable as building components without photovoltaic capability;

3. Along with net-zero energy building ordinances, the cost per watt of electricity produced will be calculable but secondary, even in low insolation markets;

4. Because of prescriptive ordinances for whole house energy use, BIPV will function as code compliance and an energy efficiency measure, a form of ‘electrical power insurance’ for new buildings.

In this context, solar manufacturers should continue to optimize photovoltaic materials for even better building integration, including standardization of electrical leads, connectors, and DC to AC interfaces.

Financing Issues Remain Key

Fuel costs may contribute 70% or more to marginal costs driving electricity purchased from the grid. This means that the costs of solar PV electricity implementation must be paid ‘up front’ and are typically financed. The cost of this capital expenditure, either from an interest rate or required return on equity, will impact the cost of electricity produced by a photovoltaic array. For example, given typical 20-year financing for power plants and power purchase agreements, an increase in lending rates from 6% to just 9% increases the cost of solar electricity by 25% or more.

Therefore, holding the price of solar PV electricity at or below grid parity depends upon:

1) maintaining continuity in project financing mechanisms or 2) lowering finance costs further by increasing investor security.

To date, the most secure way to keep finance costs low for solar PV has been the feed-in tariff. They provide a highly predictable cash flow projection, upon which to base loans and investments. Some have suggested that, at grid parity, net metering might replace feed-in tariffs, enabling project owners and householders to collect what may be a higher rate per kilowatt-hour (kwh). However, despite the prospect of higher per kWh rates with net metering, the uncertainty driven by fluctuations in rates, will be less attractive to lenders, although the more risk tolerant may be tempted. In any case, the net result will be higher financing costs.

Another scenario: at grid parity, if the feed-in tariff is set at a price slightly below the cost of grid electricity, the reduction in financing makes the feed-in tariff rate preferable. It will lower total electricity costs for grid users. If the project is entirely self-financed, taking a risk on net metering is viable. Self-financing will represent a minority of installations, so it makes sense for industry players to make sure that policies that keep the cost of capital low are still in place.

Off-grid Installations May Boost Prices      

As photovoltaic system components become more affordable, and if we see growth in battery manufacturing capacity with lowered prices, demand for off-grid systems will rise in areas of the world where electrical service is either non-existent or unreliable. While the exact point of grid parity has no direct effect in these markets, the increasing supply and affordability of solar modules will spur demand for photovoltaics and batteries. Thus, international supply-constraints may cause prices to rebound in other markets, delaying or temporarily ‘repealing’ grid parity.

As first-time consistent access to electricity will represent a large net gain in utility for energy users in developing countries, we will see a relatively price inelastic demand for these off-grid arrays once the approximate affordable price range has been reached. Luckily for cell and module makers, assuming increased battery manufacturing capacity, this increased accessibility can result in a predictably increasing market for which production and marketing efforts can focus.

Another factor which will increase the deployment of PV in off-grid applications is the ability to improve business opportunities for small business. A parallel example lies with the adoption of mobile phones, which have enabled many small business operators to significantly increase their business reach.

Grid Parity: A Milestone Along the Way

Grid parity will be the catalyst to still greater acceleration in industry growth. Vertically integrated PV manufacturers and other upstream materials suppliers  should be prepared to balance capacity build-out with adequate market intelligence about the development of downstream markets. Cell, module, and thin-film manufacturers can expect more points of synergy with the building supply industry as photovoltaic roofs and facades become more affordable options, especially with increasing green building regulations. Depending on the cost curve, regulatory, and technical developments, BIPV market share may become increasingly significant.

However, continued overall growth at and beyond grid parity will involve an effort to maintain or optimize the policy institutions that helped bring markets to grid parity in the first place. Feed-in tariffs, even at market or below-market rates, will remain useful as a price stability mechanism and way to reduce capital expenditure financing costs. Three major market segments, in particular, will need adequate policy support and attention from the financial community: 1) distributed rooftop solar, 2) utility-scale solar, and 3) off-grid or grid-optional solar installations.

In the end, the long grid parity wave will be just one stage in the still longer and very bright future for solar power. Grid parity will provide an ideal opportunity to refocus the dialogue about solar PV and its potential.

Dr. Srinivasamohan “Mohan” Narayanan is Vice President of Technology at Solarfun (www.solarfun-power.com). Dr. Narayanan leads the company’s research and development team for improving product performance and innovation, and streamlining manufacturing operations.