Commercial solar power is now cheaper than the prices utilities charge just to deliver energy.
Here’s another way to think about it. Imagine you could buy a pizza making machine that makes pizza identical to your favorite pie ordered from your favorite restaurant. The pizza from your machine is great because it doesn’t cost nearly as much as the pizza from your favorite restaurant. In fact, your machine pizza costs so little that it wouldn’t even be enough to pay the delivery guy to make the trip before even considering the cost of the food he’s delivering. That machine is your solar array and your favorite restaurant is the utility. Goodbye utility. Hello cheesy goodness.
The holy grail of electricity generation has always been a power source so abundant and low cost it was virtually free. With the advent of nuclear power after World War II, scientists were confident that technological advancements in nuclear would lead to electricity that was too cheap to meter. Unfortunately, just like flying cars, free energy did not materialize. Now though, the cost of point of use solar, also know as distributed solar, has dropped so far that even if utilities were able to generate electricity for free, they still couldn’t compete with solar generated at the point of use. The cost of utility infrastructure alone is more than the cost of distributed solar. That doesn’t make solar virtually free. Virtually free would still have some marginal cost added to the cost of delivery. No, it’s not virtually free, it’s better. The cost equivalent to distributed solar is a central generation plant that makes energy for you and pays you to use it thereby reducing the cost of delivery.
To pull back the curtain and show you that solar pricing has finally edged lower than the utility’s transmission and distribution costs, read on.
Transmission and distribution costs
The prices that utilities charge for electricity can be broken down into three main categories: generation, transmission and distribution.
- Generation: making electricity
- Transmission: moving electricity over long distances, either from creation source (generating plant) to utility or simply from region to region
- Distribution: moving electricity around local areas. You can think of distribution as your local utility company’s power lines and other equipment that supply homes, businesses and industry.
According to the U.S. Energy Information Administration (EIA), transmission and distribution make up 34% of electricity prices. When combined, transmission and distribution can be thought of as electricity delivery.
For this analysis, I’ll use commercial numbers for both electricity pricing and solar installation pricing. Electricity prices vary considerably by state and region. The EIA records the average price of electricity for each state in their publication Electric Power Annual. The Pacific Contiguous region is very interesting. In this region you have both California and Washington. California has some of the highest priced electricity in the contiguous U.S. and Washington has close to the lowest.
Commercial customers in California received average pricing on electricity of 15.62 cents/kWh from utilities in 2014. The 34% attributable to delivery was 5.3 cents/kWh. That gives us the baseline that businesses need to beat with point of use solar to make utility power uncompetitive even if utilities were able to generate electricity for free.
The price of solar energy
The SEIA and GTM Research provide national average pricing for solar each quarter. In the first quarter of 2016, pricing for commercial scale solar was $1.90/watt of panel capacity.
Every location has different incentives. In order to provide an analysis that is as broad as possible, I’ll only include the 30% Federal Investment Tax credit which is available nationwide. For a full list of incentives in your area, check out the DSIRE website. It provides a huge list of renewable and energy efficiency incentives, not just solar incentives.
Applying the 30% tax credit to the average national solar installation cost, we find the cost of solar drops to $1.33/watt.
A one-hundred kilowatt solar array
To determine array production we can use the National Renewable Energy Laboratory’s solar calculator, PV Watts. The calculator determines how many kWhs per year can be be generated from a given array based on location. These are the criteria for the array that I selected in the PV Watts calculator.
- Solar array size: 100 kWdc
- Location: Los Angeles, CA
- Standard modules
- Fixed roof mount
- 10% system losses
- 30% panel tilt
- 18o degree azimuth
- Energy value: $0.15/kWh
These were the results.
The Los Angeles 100 kW array had a total annual production of 168,293 kWhs.
For comparison purposes these are production numbers for a 100 kW array in other locations. Except for the change of location, all of the other parameters remained constant.
Dallas: 158,847 kWh/year
Denver: 163,172 kWh/year
Chicago: 135,353 kWh/year
New York: 136,731 kWh/year
Miami: 153,026 kWh/year
Loan type and interest rate available
PACE programs provide energy efficiency and renewable energy loans for no money down. The programs are supported by local and state governments and currently have rates between 4.75% and 7%. We will use a 6% interest rate and a 20 year loan.
Solar panel longevity and degradation of energy generation
Industry standard solar panels have warranties of 25 years. However, there are currently panels on homes that are over 30 years old and still working to spec. Many additional installations are still going strong after more than 30 years using older and less durable technology than today’s panels. 3rd party testing of some current solar panels shows that those panel will still will be producing at 82% of original capacity after 35 years. One premium manufacturer has provided testing indicating that their panels will still be producing at above 85% rated capacity at 50 years of age. For my purposes I’ll assume a panel life span of 35 years. To simplify my calculations, instead of decreasing electricity production each year, I’ll assume the panels will generate at 91% capacity for all 35 year of the assumed lifespan. That is identical to the assumption of equal degradation of panel capacity each year for 35 years down to 82% in the final year. This decrease in efficiency is on top of the 10% system losses assumed in the PV Watts calculations.
Cost of solar versus utility delivery costs
Putting all of these pieces together we can find the overall cost of solar and compare it to transmission and distribution costs in a variety of areas. Since transmission and distribution accounts for only 34% of the overall price of electricity and commercial electricity prices in all areas are lower than residential prices, the idea that solar can provide electricity for less than the delivery portion of energy costs is amazing.
The first and most obvious take away from the table above is that solar costs in these cities range from 43% to 73% cheaper than utility rates. Solar is, by far, the cheapest option in every city. In Dallas, solar is 45% cheaper than utility rates even though utility rates in Texas are 25% below the national average.
More impressive still is the last line of the table. When we compare the total cost of solar to just the delivery cost portion of utility supplied energy, solar is still cheaper in 1/3 of the cities. In Los Angeles and New York solar has already crossed below the utility’s delivery cost threshold. In Denver, Miami, and Dallas solar is not even 2 cents above delivery costs. Finally in Chicago where electricity prices are 14% below the national average and solar production is the lowest of any of the cities on the list, the cost of electricity from solar is just 2.15 cents more expensive than utility delivery costs.
Both of these comparisons make clear that utilities can not compete with distributed solar. On average, utilities would have to cut prices by 56% just to match the price of solar this year. Since solar is a technology as opposed to a finite commodity such as a fossil fuel, prices for it are likely to continue to drop each year for the foreseeable future. From the first quarter of 2015 to the first quarter of 2016 solar prices fell by 13%.
Inflation, an aspect of electricity pricing not considered in these calculations, would also favor solar. Since the figures for solar depend upon a fixed rate loan, the cost of solar listed in the table would not be affected by inflation. However, utilities’ electricity delivery costs will undoubtedly increase in response to inflation just as they always have.
There will never be a formula that fully encompasses the real world. There is always imprecision. Regardless it is still important to share ideas and knowledge even if you have to round off your estimates to the closest million. Even though I think the conclusion is solid, here are the places cut corners.
- States averages are not the same as city specific utility rates. I used the state averages instead of city specific rates.
- No one knows how long current solar panels will last. Stress testing is good but could not possibly replicate real world conditions. The 35 year lifespan was drawn from reasonable assumptions, but it is possible panels will not last that long. On the other hand, it is possible they will last longer.
- 6% interest rates are highly dependent on perceived risk, Federal Reserve policy, and a number of other factors. This number could go up or down in the future.
- The U.S. Energy Information Administration provides a national percent average for transmission and distribution. While it is likely the cost for the delivery of energy is very close to the $/kWh used here, the number was based on the 34% national average calculated by the EIA. It should be accepted that there would be a margin of error when applying that percentage to individual utilities.
None of these invalidate the thesis, nor the conclusion, they simply speak to the accuracy of the result.
In some locations, solar already costs less than just the price of electricity delivery. The implications surrounding that are monumental. Central generation facilities can no longer compete with distributed, point-of-use solar generation. Some central generation plants would not be competitive even if their facilities were able to produce electricity for free. With the cost of solar continuing to fall, unsubsidized, distributed generation will likely soon be below the current cost of subsidized solar. In Germany, the cost of solar is already below U.S. subsidized costs. Distributed solar is the way of the future. Even if global warming were not an issue, the economics of distributed solar make it the undisputed worldwide energy source of tomorrow. We are at the end of the era of central generation by a monopolies. It turns out monopolies just can’t compete.
The Next Step
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