Congress just voted to unleash the solar beast. Here’s what it means

Best Week Ever

Solar energy is coming off its best week ever. It was a one-two punch. Congress extended the 30% solar Investor Tax Credit (ITC) through 2019. After 2019, it will step down gradually through 2022. And in California, the Public Utilities Commission (CPUC) issued a decision to keep California’s net energy metering (NEM) policy going, albeit with a small tuneup. NEM allows residential and commercial solar customers to effectively “sell” their excess PV back to the utility at the full retail rate. For a good explanation on why NEM is so important to the economics of solar, check out this post by my friend Brian Korgaonkar.

So what does this mean for the residential solar industry? In short, rapid growth continues and accelerates. Prior to the vote, the industry was very much at a crossroads and bracing for a demand cliff in 2017. Now that goes away. Costs have come down and the market for residential solar has moved from the innovators to the early adopters. The market is ready to take off, but how much?

Quantifying the Opportunity

In sizing the market for solar, it’s instructive to compare the cost of solar to the cost of energy from the grid. When the cost of a kWh of solar is less than or equal to the cost of a kWh from the utility grid, we say that solar is at “grid parity.”

I modeled the distance to grid parity for all 50 states and was surprised to find that residential solar will be at grid parity in 40 states by 2017. Imagine this: solar in Alaska! Where the winters are like Game of Thrones. Solar across the Midwest, where cheap coal is king. Consider that SolarCity, by far the biggest player in residential solar, is in 19 states today, and this is nothing short of incredible.

solar sensitivity

Table 1: Heatmap of distance to grid parity by install cost. Residential solar will be at grid parity in 40 states by 2017

Grid Parity: Not Good Enough

Of course, for solar to continue its trajectory into the mainstream it has to do better than grid parity. How much better? 10 to 15% better feels right. Solar is overcoming 100 years of inertia from the utility, which has generally provided pretty reliable service, at least in the US. People aren’t used to shopping around for power. Add to that the time it takes to learn about solar and the inconvenience of scheduling a consultation and install, and solar needs to do considerably better than the utility to overcome the natural momentum toward the utility. How much would you have to save to switch from your utility?

To test out this notion, I took the average projected utility cost per kWh in all 50 states and discounted it 15 percent. This is the new target for solar to beat. I reran the grid parity model and found that even at a 15% discount to the utility, solar will be lower priced than the utility in 23 states by 2017, and within a penny in another 17 states.*

Nifty grid parity map


*Note: Oregon is not on the list because it has cheap power (mostly hydro) but state incentives, which I didn’t model, still make it a good state for solar

So what’s a solar company to do? If I were one of the big guys I’d be taking a hard look at the well heeled suburbs of northern Virginia, among other places. I’m sure they’re doing that already.

This is only half of the story. The other half is NEM. Again, NEM is the policy that allows you to “sell” your excess PV energy back to the utility at the full retail rate. It is critical to the economics of residential PV because it compensates you for your PV whether or not you are home to use the energy.

Utilities throughout the US have been trying to do away with net metering in their annual rate cases before regulators. With the CPUC’s latest decision, which will go to a vote on Jan 30, it looks like NEM is safe in California. While NEM is really a state by state policy and other states are free to roll NEM back (as Hawaii has pledged to do), California is a leader in energy policy. If NEM is not safe in California, it’s not safe anywhere. That’s why this decision is so important. It takes the momentum away from the roll back NEM crowd.

Of course, nobody in the solar industry thinks that NEM will be around forever. As PV goes mainstream, utilities are talking about disallowing or disincentivizing the export of excess PV to the grid and changing rate structures to time of use. The industry is starting to talk about deploying batteries with solar as a hedge against net metering going away. I’ll address that in future posts.

Model assumptions:

  • 6 kW string inverter system w/ failure in year 11
  • $2.90 install cost per watt (note that SolarCity, SunRun, and Vivint are already well below this)
  • 20 year project period starting in 2017
  • PPA with 2 scenarios: (1) cost is the full projected utility rate per kWh in 2017 (2) cost is a 15% discount off the projected 2017 utility rate
  • 2.9% utility rate escalator
  • 8% discount rate
  • NEM

Sources:

  • Average utility rate data: EIA
  • Average install costs: SolarCity 10Q, Vivint 10Q, SunRun 10Q
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