Solar energy and grid parity

Following changes in cost of solar modules in 2011, we have decided to explore another area of interest for solar investors and that is the cost of generation of solar energy.

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Following changes in cost of modules in 2011, we have decided to explore another area of interest for solar investors, and that is the cost of generation of energy.  There are a number of interesting calculators out there helping home owners to understand costs and factors involved in cost of solar. It is peculiar that there is so much criticism about solar costs, but usually the data used is outdated and irrelevant. This leads to assumptions and mostly misunderstanding for greater population. This condition is explored without any scruples by various critics from popular media, who use assumptions for support of own political agendas or declare doubt about viability of solar energy.  To contrary, recently Bloomberg criticized Australian Government’s white paper on renewable-energy  costs for overstating them by 50%. Another rare media mention was Canada’s Queen’s University Professor Joshua Pearce, who was quoted stating that solar generation is shown with under performing conversions and using old data for costs going back two years or more. So there is a lot of confusion out there, and we wanted to see what the calculation looked like for ourselves.   We have decided to use the website http://www.findsolar.com/index.php?page=rightforme

to discover how the power is calculated. The first interesting point was that all calculators we used had 10 watts per square foot generation.  The average module size is 1650 mm by 990 mm, which is around 17.58 sq. ft. this means that an average module would only produce 175W. Today, module of this size is about 250W, so having said that the module generation per square foot is about 14. 2W or 42% more than the unit used in the calculator.  If we used 90% reduction of the power generation, these are still 28% better than any calculator. On the side note, we expect modules to generate 265 to 285W per the same size leading to 16.2 and 17% module conversion rates by the end of 2012

In US on average one kilowatt of energy costs 12 cents.  In order to compete with other sources, solar must meet this cost.  An average household uses 650 kWh of energy per month.  In this case, how much solar panels we would have to use?  In order to calculate this, we need standard irradiance or solar rating or amount of sun hitting the square meter of space. In US, this amount is averaged to around 4.8kw/square m/day.

http://www.solar-estimate.org/solar_radiance.pdf

What does this mean?  The module we used has a size of 1.63 sq. m having 250W of power and can generate 15.2% conversion. To calculate the output, we need 4.8*15.2%*1.63 =1.18kwh per day. There are 365 days in the year and 12 months, so on average 30.41 days in a month or 35kwh per month from this panel can be generated. Now take the 650 kWh and divide by 35, and we need around 19 modules, which will take a space of 30.97 sq. m or 334.02 sq. ft. to supply this energy.

How to calculate the cost of the energy

In case of the solar the cost is the capital expense or the upfront cost, there could be maintenance costs, but they should be minimal also output is guaranteed for the 25 years with the 20% degradation for last years of the guaranteed life. So let’s work backwards and find out what is the price needed to meet today’s 12 cents per kWh.  19 modules will generate 650 kWh per month for 12 months for 25 years. Let’s take a 10% loss on this generation in the span of this time so 650*12*25*90%=175,500 kWh of energy produced.  Using the 12 cents value per kWh we have $21,060 of energy value.  In order to compensate for a loss of 10% of energy, we will add another 3 panels. They will contribute 28,350 kWh in the same formula and $3,402 worth of energy at 12 cents.  The total household spent on electricity would be $23,400 (25 years at 12 cents per kWh at 650 kWh per month), we have overproduced a bit but that is fine. The combined value of the energy produced was $24,462. The physical amount of panels would be 22 each at 250W of power or total of 5500 watts. Dividing the total cost of the household at $23,400 by 5,500, the system would meet the parity with the cost of $4.25 per watt  in capital expenditure.  That does not sound too bad./Reality is that the current spot market price for modules is at $.85 per watt, with high-quality  modules reaching 250W rating at $1.10 per watt. In our example, the parity cost being at $4.25, the module price is 25% of the cost.

Based on the GTM research and Solar Energy Association average residential installation cost  was $6.42 in second quarter of 2011. This means that module price of $1.56 per watt at the time was also around 25%. Using our system at this cost the price of generated energy would be at .17 cents per watt.

So it is almost certain that costs of installations follow modules and installations will dip below $5 in 2012. Unofficial value for the second part of 2011 was $5.99 per residential system bringing the cost per watt to $0.16 per watt.

Residential systems are typically slow to adjust downward to price declines, due to a more third parties within value chain, including distributors, integrators, electrical contractors. Additionally, there is a higher proportion of non-component costs associated with residential systems, so the emphasis tends to be on reducing soft costs like permitting, interconnection, incentive applications, financing, and other fees versus the module costs./Non-residential systems were in Q2 at $5.20 per watt. Cost improvements, such as streamlining project development and installation procedures, influenced this decrease. A continued decrease of non-residential system prices can be expected in future quarters./In the utility segment prices were at $3.75 per watt in the second quarter. A continued decline in module prices (especially when purchased in large quantities), streamlined project development, and more efficient construction processes all contributed to the lower installed cost./Evidently, in the utility sector price of solar energy allows it to sell it profitably, whilst the cost per kWh is $.10 using our illustration system.

Word of caution. Our calculation is more of the back of the envelope and not a complex LCOE (levelised cost of energy) formula. We have not added following:

The maintenance adds .5% of the cost in general. We are not using a discount rate or the cost of the capital. Our installation has been paid in cash. We are not using any incentives or discounts on state levels or any feed in tariff initiatives. We had used 10% degradation; however, 20% degradation is foreseen after 20 years. We have also assumed that cost of energy will remain flat out 25 years going forward, which is obviously a futile assumption. However, with price of solar products going down in 2012, we foresee other elements like soft costs or other hardware costs to move down in similar fashion making this type of energy more and more affordable and certainly becoming in parity with other sources.