Solar Subsidies are Saturated

Commentary by H. Sterling Burnett

Source: Energy Biz Insider

Solar photovoltaic is among the fastest growing segments of the energy market. Globally, grid-connected solar capacity increased at an average annual rate of 60 percent from 2004 to 2009, faster than any other energy source.

However, solar power still accounts for less than one-half of one percent of the world's electric power output and, even with significant subsidies, solar power is substantially more expensive than conventional power sources in most locations. All other factors being equal, if solar is to become a significant power source, it must compete with other energy sources on price.

Currently, even with subsidies solar energy costs between $0.22 per kilowatt-hour and $0.30 per kilowatt-hour. By contrast, the average cost of electricity nationwide is expected to remain roughly $0.11 per kilowatt-hour through 2015.

And how big are the subsidies? Per unit of energy produced, solar is among the most highly subsidized power sources.

According to the Energy Information Administration:

  • Natural gas and petroleum subsidies amount to $0.25 per megawatt-hour of electricity produced.
  • Coal subsidies amount to $0.44 per megawatt-hour.
  • Nuclear power subsidies amount to $1.59 per megawatt-hour of electricity produced.
  • Solar subsidies amount to $24.34 per megawatt-hour.

There are additional state subsidies and mandates for the use of renewable energy sources in the form of the increasingly popular renewable portfolio standards.

Favorable tax treatments, price supports, direct subsidies and state renewable portfolio standards have encouraged private investment in solar power. The result: In the United States, solar electricity production grew 55 percent from 2004 to 2008, and 15.5 percent in 2009 alone. Public and private investment has encouraged innovation and increased production efficiency, reducing the cost of solar panels considerably.

Thus, over the past 15 years, the cost of solar photovoltaic systems fell an average of 4 percent per year, whereas the price of electric power has generally risen. In 2009 alone, prices for solar panels dropped approximately 40 percent, largely because of the tremendous growth in China's solar panel production, which resulted in a glut in the market. This shift in production of solar panels to China caused the cost per kilowatt-hour for solar cells to fall. Moreover, the efficiency of solar cells has improved.

As a result, a November 2010, Energy Information Administration report, "Updated Capital Cost Estimates for Electricity Generation Plants," showed that the costs for natural gas plants remained largely unchanged since 2008. But the capital costs for new coal-fired, nuclear and even wind power plants increased considerably - on average, 25 percent higher for coal-fired and nuclear power plants, and 21 percent higher for wind farms. By contrast, solar fell by 25 percent because of increasing economies of scale and falling component costs.

The Competition

However, even with increased costs associated with coal, nuclear and wind power plants, and substantial declines in the cost of solar, the EIA finds that there is no location where solar's capital costs match or beat any competing electric generating technology, with the exception of nuclear power.

Capital costs are only one factor in determining the viability of competing generating technologies. Arguably, the annualized cost of newly built electricity generating facilities is the most important measure of the viability of solar power.

Solar's annualized cost is significantly higher than almost every other generating technology, primarily because of three factors: a low capacity factor (the relatively small amount of energy it can be expected to deliver daily), higher than average transmission cost and a shorter useful life than comparable facilities. For instance, using EIA data, the Institute for Energy Research, estimates, the average annualized cost of an advanced combined cycle natural gas is $63.10 per megawatt-hour. The average annualized cost of an advanced nuclear plant is $113.90 per megawatt-hour. The average annualized cost of an advanced coal-fired power plant (with carbon capture technology) is $136.20 per megawatt-hour. The average annualized cost of a solar photovoltaic plant is $210.70 per megawatt-hour.

Even accounting for differences in geography, climate and labor costs, for solar power to be competitive with conventional generating technologies in the near future would require continued substantial government support and, as importantly, the expectation that such support will continue in order to secure long-term financing and investment.

And there's the rub, under the economic conditions facing governments around the world, the current level of support for solar developments is unlikely to continue.

The House of Representatives substantially reduced funding for various renewable technologies in its proposed budget for the remainder of fiscal year 2011. Though all these cuts might not be enacted, less support in this and coming years seems likely from a Congress interested in reducing the budget deficit and national debt.

Support in Europe is already declining. The European Union has been the leader in installing solar. Indeed, from 2007 through 2010, EU countries accounted for more than 70 percent of solar energy demand.

For example, Germany's renewable energy act required utilities to pay generous prices - called feed in tariffs - for electricity produced by renewables. As a result, renewable power grew from 6 percent of generating capacity in 2000 to 16 percent in 2009.  Solar power accounts for  less than 2 percent of the total. However, because of fiscal constraints as a result of the global economic recession, the German government has cut tariffs for large solar power facilities by 25 percent and for individual roof-top solar energy production by 15 percent.

Spain, meanwhile, is reducing support for existing plants by more than 30 percent and for new plants by 45 percent. France, the United Kingdom and Canada either have or are considering cutting their subsidies to solar power.

Even demand driven by renewable portfolio standards are under threat. Some state legislatures are considering transforming renewable portfolio standards into clean energy standards, which would allow natural gas, clean coal or nuclear generated electricity to count toward the overall energy goal. If this occurs, solar demand will further decline.

Thus, it seems unlikely that solar power costs will continue to decline at the historically high rates they have in the past couple of years. The decline in solar generated electricity prices will arguably return to its historic average of 4 percent per year. If it does, all else equal, it would not become cost competitive in most locations until after 2020.

Dr. Burnett is a Senior Fellow with the National Center for Policy Analysis, a non-partisan, non-profit research institute based in Dallas, Texas