Price parity for US solar: Is the goal within sight?

Originally Published for Renewable Energy World Magazine:

By Elisa Wood

Rising fossil fuel costs and a dramatic up tick in solar installations may at last help the US solar industry achieve its goal of price parity with grid power. Elisa Wood reports on state and federal efforts.

From his corporate headquarters in Maryland, Jigar Shah hears a lot these days about a US$1.8 billion transmission line being planned to push coal-fired generation to his state from West Virginia, 460 km away. As founder of SunEdison, a major US solar services and installation company, Shah thinks about the project differently than others might. ‘If it is not a subsidy to the coal industry, than what is it?’ asks Shah. And, he further posits, what might the price of solar look like if it were to receive such a boon? Or what if distributed resources could meet the state’s energy need without the investment required in transmission?

Shah’s musings strike to the heart of an issue that continues to beguile the US solar industry – price or ‘grid’ parity – the ability to accurately compare how solar energy prices stack up against grid power and to use that information to create a level playing field. Solar advocates argue that it is difficult to pinpoint because the true cost of grid power is masked. The more established fuels for electricity generation enjoy the benefits of a system built largely to meet their needs. Subsidies are so entrenched – like the transmission line – that they are not perceived as a hand-out to the status quo.

But now, several analysts say price equality may not be far off. US shipments of photovoltaic panels jumped more than 50% between 2005 and 2006, according to an October 2007 report by the Energy Information Administration (EIA). Such rapid-fire growth is expected to continue, driving down panel costs as production expands. The Solar America Initiative, a programme of the US Department of Energy (DoE), has set a goal of bringing solar to grid parity by 2015 – reducing photovoltaic energy for residential consumers from a benchmark 2005 price of 23 cents–32 cents/kWh to 8 cents - 10 cents/kWh. With the industry expected to emerge from its silicon shortage in two years, analysts say the DoE’s goals look plausible. Morgan Stanley analysts recently reported that solar prices could drop by half in five years. And in a joint paper, the Worldwatch Institute and the Prometheus Institute say a fast drop in costs will make solar a mainstream power option in just a few years.

The deregulation miscalculation

It is not falling prices, alone, that will help solar achieve parity. The true cost of fossil fuel needs to be revealed, say solar advocates. And help is coming, in part, as a result of a miscalculation made when several states liberalized their markets several years ago.

At the time, lawmakers struck deals with utilities to freeze rates in return for various concessions. The thinking was that by the time the rate caps were lifted, deregulation would have worked its magic and customers would have a wide choice of low-cost power products. What the deregulation crafters could not foresee was that a series of hurricanes would cripple the US Gulf Coast in 2005, spiking already rising gas prices.

In a confluence of events unfortunate for the consumer, this was about the same time that price caps began to come off in several states. Utility rates skyrocketed – in some cases to record highs, in such states as Connecticut, Delaware, Maryland, Illinois and Rhode Island.

The result was the US’ largest hike in electricity rates in 25 years, according to the EIA. While prices rose in all parts of the country, the biggest increases occurred in 14 eastern states, and the main cause ‘was the lifting of retail electricity price caps,’ according to the federal agency. Many consumers blamed deregulation, spurring some states to rollback elements of restructuring.

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