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In December, we published a report on the economics of solar power in Britain.
We found that solar power would prosper without subsidies in Britain as early as 2020, using the experience of Germany and the recent track record of cost reductions. We showed that solar power can be subsidy-free in Britain within a decade, and argued as a result for continued support to help grow the market with progressively falling support under a stable regime.
This study originated with the observation that full installed costs for large-scale UK solar power were falling to around £1/ watt – a British currency equivalent to the $1/ watt US SunShot initiative. It then developed into a grid parity cost analysis. That was because of British government plans to end dedicated support for large-scale solar farms, which could kill that market.
This was a cost modeling analysis, not a policy analysis. However, woven into the cost modelling is the policy assumption that UK support will be maintained under a stable, predictable regime, with progressively falling support until elimination. In other words, the modelled cost reductions won’t happen by themselves.
We noted some negativity in the media and agencies about solar power, as a context to this study.
For example, the UK’s Committee on Climate Change doubted the contribution of solar power in Britain because of a seasonal mismatch between solar and peak demand in Britain. But this need not pose a stability problem, and can be addressed by efforts in Britain to build more interconnectors with neighbouring countries, and we also note some seasonal complementarity between wind and solar power. And some in the media have criticised Japan’s heavy investment renewables, saying this depended too much on subsidies. We note that one of the advantages of solar power is its speed of construction. Japan installed nearly 7 gigawatts last year; and is on track for more this year. In the post-Fukushima context where Japan has lost its nuclear power generating capacity, this rapid rollout is exactly what it needed.
We note the speed of construction of solar PV in our report. UK planning data show solar PV is the fastest system to commissioning, at an average of 384 days from initial planning application to first electricity generation; that compared with the 12 years forecast by EDF Energy, from its application in 2011, to its 2023 forecast commissioning date. Speed is important because it reduces investment risk and so the cost of capital. The UK government’s own data show that when it applies technology-specific hurdle rates, solar has the lowest cost of capital emerges. Solar PV then emerges as the lowest cost form of UK power generation before 2025, using a simple levelised cost analysis measure.
Putting the case for investment in renewable power including solar, no-one could be more eloquent, informed or up to date than the CEO of E.ON. At the beginning of December, Germany’s biggest utility hived off its conventional generation and commodity trading businesses to focus on renewable power, distribution and customer services. The strategy was based not on an observation that the German government had broken the power market, but on the basis of expected continuing cost reductions in renewables, and accelerating investment.
We used a levelised cost analysis to calculate the cost of power generation from large-scale, ground-mounted solar farms. And we used payback periods to measure the economics of rooftop solar. In our study, we used data projections for module and full system costs in the UK, based on the learning rate experienced to date, and actual costs in Germany which serve as a benchmark for the UK, given a similar economic context, and much bigger, more mature solar market.
We are confident about these cost reductions. But there are other variables in cost modelling which are notoriously difficult to predict, such as power prices; self-consumption rate; and cost of capital. Like any modelling exercise, the results reflect such assumptions. The main message therefore is that grid parity is coming; the exact timing is less sure, because of the complexity of these assumptions; and there will be large impacts as illustrated by Germany.
Self-consumption refers to how much of the electricity that rooftop users generate they also consume, rather than feed into grid. The self-consumption rate is important for unsubsidized systems, because we would assume the feed-in rate would be the wholesale power price. The value of unsubsidised rooftop systems will therefore derive from savings as a result of lower utility bills.
We found that large-scale solar power nears parity with wholesale power prices in Britain by 2020, and is competitive with these by 2025. These are using DECC’s latest projections for wholesale power prices. We note that wholesale power prices may fall as renewable power grid penetration increases, in which case all technologies may need some support and parity for solar farms may be defined as competitiveness with gas.
We found that commercial rooftop solar power may be economic without subsidies as early as 2020 in the south of England. Commercial rooftop solar power has the benefit of a much higher self-consumption rate than residential rooftops, assumed to be 70%, versus 30% for residential.
Residential rooftop solar power will be nearing cost-competitiveness around 2020-2025, depending on assumptions. For example, we assumed a 5-6% cost of capital, in the middle of a range assumed by the National Audit Office. Grid parity would be sooner with a lower cost of capital. On the other hand, we also assumed a steadily rising self-consumption rate; if this stayed at the present 30% or so then grid parity would come later.
Interestingly, we found that residential systems were economic faster where these were operated alongside battery pack systems. That calculation assumed rapidly falling battery storage costs, in line with forecasts made by electric vehicle manufacturers such as Tesla. We found that residential solar battery packs could be cost-competitive without subsidies as early as 2020.
We also assessed the non-monetary costs and benefits of solar power, to demonstrate qualitatively that while solar power does involve grid balancing costs, it also has large benefits including its lower carbon and particulate emissions compared with fossil fuels, and its contribution to energy security.
Solar power may develop slower than we assumed. For example, if utilities started charging network fees on a flat-rate rather than the present usage basis. In this case, solar users would make smaller savings on their utility bill. There are signs that governments are moving in this direction, with a grid charge imposed on rooftop systems by Spain for example.
On the other hand, the market may develop faster, for example if costs fall faster as a result of developments in the technology, or in markets in China and India, for example.
As I said at the top, the modelled cost reductions wont happen without continued policy support; this applies equally to solar PV and batteries.; that would depend on public support for R&D and assumes meeting the EV industry’s ambitious projections for lithium-ion battery cost reductions.
Support for solar power can be diversified away from consumer power prices, for example through grants under Britain’s ECO scheme for batteries, or low-interest credit for example via the Green Investment Bank. These would both help take some of the burden of remaining, falling support for solar power away from consumer power prices.