Utility-scale solar, the focus of this article, is reaching “grid parity” (i.e., cost equivalency) with traditional generation in more areas across the country. And solar received a major boost when the federal tax incentive was recently extended through 2021. The amount of the incentive decreases over time, but the solar industry may be able to offset the lower tax incentive if costs continue to decline. New changes in policy and technology may further boost its prospects.
Record year for utility-scale solar
Some of the world’s largest solar plants came on-line in the U.S. during the past year, such as the 550-megawatt (MW) Topaz Solar plant in San Luis Obispo County, California and the 550MW Desert Sunlight plant in Desert Center, California. Last year saw a record increase in the amount of new utility-scale solar photovoltaic generation installed – about four gigawatts (GW), a whopping 38 percent increase over 2013, and enough solar power to supply electricity to 1.2 million homes. This number is expected to increase in 2015 when the final numbers are in.
The first reported contract for solar power under five cents per kilowatt-hour (kWh) occurred in 2014: Austin Energy’s 25-year power purchase agreement (PPA) with SunEdison for 150 MW of solar power. The trend continued in 2015, when Nevada Energy secured a 4.6 cent per kWh PPA with SunPower.
But perhaps the most impressive milestone for utility-scale solar in the past year is that it is increasingly reaching grid parity with traditional generation.
The industry uses a “levelized-cost analysis” to compare the cost of different power sources. The analysis reviews all the costs needed to produce power for each type of plant – such as construction costs, operation and maintenance expenses, and fuel costs – as well as the amount of power generated by each type of plant. Then the “levelized” cost to produce a single megawatt-hour (MWh) of power for each plant is calculated. This allows for an apples-to-apples comparison of how much it costs to produce a single unit of power.
A natural gas combined cycle plant has the lowest levelized cost for traditional power plants (including coal and nuclear), at $61/MWh to $87/MWh. The levelized cost for large solar, when including the federal tax incentive, has been reported as low as the $46/MW (see the Nevada Energy and SunPower PPA examples above). When the cost of environmental externalities, including air pollution, greenhouse gas emissions, or water withdrawals, are fully accounted for, utility-scale solar provides even greater benefits.
Solar owes its gains to several factors. The cost for PV solar panels has decreased over 60 percent since 2010. A flurry of projects is coming on line now, before the tax incentive decrease takes effect. State policy is also a major driver of the increase in solar installations. But this growth is really expected to explode in the coming years.
Future outlook is bright
Future decreases in the tax incentive present a challenge. In addition, falling natural gas prices will make it more difficult for large solar plants to remain competitive with combined cycle plants unless policies can be put in place to recognize the cost of environmental externalities. But a number of factors point to a bright, long-term future for utility-scale solar plants:
- Changes to state and federal energy policy: We saw two historic advancements in 2015 that could result in big gains for utility-scale solar in coming years: the Paris climate accord, signed by 195 nations this month, and the Clean Power Plan, finalized this summer to limit carbon emissions from existing fossil-fuel power plants for the first time in history. As a result, many older, fossil-fueled plants will likely close and electricity from traditional power plants will become more costly. This will help large-scale solar plants remain cost-competitive. On the state level, policymakers are ratcheting up their renewables goals. For example, California passed SB 350 in September, raising the California renewable portfolio standard from 30 percent to 50 percent by 2030. This will create additional demand for solar over natural gas or other fossil fuel generation.
- Continuing price declines: The price for solar panels has decreased significantly during the past five years. To the extent that manufacturers can continue to decrease their price, this will lower the cost to build solar plants. The Topaz Solar and Desert Sunlight plants each have nine million solar panels, so even a small decrease in panel cost can result in major savings in the cost to build a plant. While natural gas prices appear to have bottomed out, the price decreases for PV solar panels have not shown any signs of stopping. This cost decline will also make solar an easier choice for utilities to include in their integrated resource plans.
- Technology improvements: Researchers have steadily increased the amount of electricity solar panels can generate. Crystalline silicon solar panels, the most prevalent type of panels, have become much more efficient in recent years and manufacturers keep reporting new efficiency records. Thin-film solar panels, which have a smaller market share, have increased their efficiency by over 20 percent in recent years. If these technology gains continue, the output from large solar plants will increase, making these plants more cost competitive with traditional generating plants.
- Advancements in energy storage: If energy storage can be developed on a commercial scale, this would increase the value of solar because it would allow grid operators to dispatch power when the grid needs it. This future may be sooner than we think. California has established an energy storage standard, requiring utilities to implement 1.325 GW of energy storage by 2020. And earlier this year, Oregon passed HB 2193, establishing an energy storage standard. Finally, the largest U.S. battery storage project was announced earlier this year – a 200 MW project by Alveo Group for Customized Energy Solutions, an energy storage service provider.
Utility-scale solar has seen tremendous gains during the past few years. Achieving grid parity with traditional generation is a remarkable achievement. This resource will face headwinds when the federal tax incentive decreases in 2017, but a number of factors point to a sunny outlook for large-scale solar.