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Economics of solar energy

June 28th, 2009 by kalyan89 in PV-General, R&D reports, Solar Energy - general

by Peter Lorenz, Thomas Seitz , Dickon Pinner

Solar energy is becoming more economically attractive as technologies improve and the cost of electricity generated by fossil fuels rises. By 2020, hundreds of billions of dollars of investment capital will probably boost global solar-generating capacity 20 to 40 times higher than its current level.  New era for solar power is approaching. Long derided as uneconomic, it is gaining power as technologies improve and cost of traditional energy sources rises. Within three to seven years, unsubsidised solar power could cost no more to end customers in many markets, such as California or Italy, than electricity generated by fossil fuels or by renewable alternatives to solar. Solar power faces challenges that are common in emerging sectors. Several technologies are competing to win the lowest-cost laurels, and it’s not yet clear which is going to win.

But even in the most favourable regions, solar power is still a few years away from true “grid parity” – the point when the price of solar electricity is on par with that of conventional sources of electricity on the power grid. This time frame is considerably longer in countries such as China and India, whose electricity needs will require large amounts of new generating capacity in the years ahead and whose cheap power from coal makes grid parity a more elusive goal. All players of solar sector are operating in a dynamic environment in which long-held assumptions – subsidies, the primacy of incumbents, and the predominance of silicon-wafer-based technology – are being eroded.

Over the last two decades, the cost of manufacturing and installing a photovoltaic solar-power system has decreased by about 20 percent with every doubling of installed capacity. The cost of generating electricity from conventional sources by contrast has been rising along with the price of natural gas, which heavily influences electricity prices in regions that have large numbers of gas-fired power plants. As a result solar power has been creeping toward cost competitiveness in some areas. During the next 3 to 7 years, solar energy’s unsubsidized cost to end customer should equal the cost of conventional electricity in parts of the United States (California and South West) and in Italy, Japan, and Spain. This markets have in common relatively strong solar radiation, high electricity prices, and supportive regulatory regimes that stimulate the solar-capacity growth needed to drive further cost reductions. This conditions set in motion a virtuous cycle: growing demand for solar power creates more opportunities for companies to reduce production costs by improving solar-cell designs and manufacturing processes, to introduce new solar technologies, an to enjoy lower prices from raw materials and component suppliers competing for market share.

By 2020 at least ten regions with strong sunlight will have reached grid parity, with the price of solar electricity falling from upward of 30 cents per kilowatt hour to 12, or even less than 10, cents. From now until 2020, installed global solar capacity will grow by roughly 30 to 35 percent a year, from 10 gigawatts today to about 200 to 400 gigawatts. Exactly where within this range actual installed falls will depend upon the evolution of solar costs, carbon costs, and power prices (which in turn are heavily influenced by natural gas prices). Even though this volume represents only 1.5 to 3 percent of global electricity output, the roughly 20 to 40 new gigawatts a year of installed solar capacity would provide about 1to 20 percent of annual new power capacity over that period. The level of installed solar capacity would abate some 125 to 250 megatons of carbon dioxide – roughly 0.3 to 0.6 percent of global emissions in 2020.

Solar energy is becoming more economically attractive. Component manufacturers, utilities, and regulators are making decisions now that will determine the scale, structure, and performance of this emerging sector. Technological uncertainty makes the choices difficult, but the opportunities – for companies to profit and for the world to become less dependent on fossil fuels – are significant.