26 July 2006

PV at the Tipping Point

A variety of observers of the PV industry don't seem to "get it":

The EIA, NREL, and Alan at Monkeysign are all highly intelligent and basically suggest that PV is not yet here to stay. On the other side, Michael Rogol [http://www.photon-consulting.com/] has strongly argued that PV will grow 40% per year for the forseeable future.

I pretty much agree with Rogol. Here's why.

Most observers seem to think that PV will not be widely installed until the average homeowner figures that they can make a profit at standard average retail rates. In the U.S. the average price of electricity is about $0.08/kwh. The price of PV generated electricity is on the order of $0.25/kwh to $0.40/kwh depending on the assumptions one makes.

However, for now and for the medium term future, PV does not have to compete with average retail electricity prices.

Let's think for a minute what a mature PV industry would look like. A best case scenario for the U.S. would be to install PV on all new construction. Say that in 30 or 40 years the PV industry effectively provides roofing tiles that cost about the same as standard roofing shingles. They would last about 30 years and cost about the same as standard roofing tiles to manufacture and install. So when you build a new house, you use PV tiles because not only do they keep out water, but they also generate electricity.

Under this scenario, a mature PV industry will replace about 3% of the roofs every year. As roofs wear out, or as new construction is built, that construction uses PV tiles. Sure, a few people might rip up 15 year old roofs and install PV because they are techno-greens, but they will be a strict minority. Since the residential sector builds about 2 million houses per year and a house uses about 3KWp or so of PV and since the industrial and commercial sectors are each about as large as the residential sector, the total amount of PV installed per year in the U.S. by a mature industry would be about 18GWp.

The important thing here is that a mature industry only needs to replace about 3% of the electricity production in the U.S. A younger industry only needs to replace the most expensive 3% of electricity production in the U.S to be cost effective. A much younger industry can replace far less than 3% of electricity and can choose the electricty that is most cost effective to replace.

Of course, if all electricity in the U.S. costs $0.08/kwh, then PV is pretty much screwed. Fortunately, though, not all electricity costs the same amount. We can get an approximation to the distribution of electric costs. The lowest prices for residential electricity are about $0.06/kwh. This suggests that baseload coal, nuclear, hydro and maybe some natural gas, which cost about $0.04/kwh at the power plant gate, can be sold for retail at $0.06/kwh. Nationwide, these technologies account for somewhere around 80% of generated electricity [http://www.eia.doe.gov/cneaf/nuclear/page/analysis/nuclearpower.html]. This suggests that the remaining 20% of our electricity costs $0.16/kwh. [0.8*$0.06 + 0.2*$0.16 == $0.08.]

Of course, the most expensive 20% of our electricity does not all cost the same amount. Let's assume that that electricity also follows a similar 80/20 rule: 80% of the most expensive electricity costs $0.12/kwh to produce, and 20% costs $0.32/kwh to produce. Yes, its a big assumption and I'm going out on a limb here, but it's probably a reasonable assumption. This suggests that about 4% of the electricity generated in the united states costs about as much to produce as does electricity produced from Solar PV.

Well, that's nice. But wind costs a heck of a lot less to produce electricity than does Solar. So why would the above suggest that Solar PV is at a tipping point? The reason is that the most expensive electricity is produced when the sun is shining. We ramp up the least efficient gas or oil fired power generation, not when the wind is blowing, but when the sun is shining. During the day we go to work, turn on our office lights, start up machines, and when it gets a little warm, turn on our air conditioners. Coal, nuclear, hydro, wind, and natural gas cannot displace the most expensive 4% of our electricity production, but Solar PV can.

Note that we aren't just comparing Solar PV which costs $0.32/kwh plus or minus 25% with gas-fired electricity at $0.32/kwh. We are comparing Green solar PV that will produce electricity at a fixed rate for the next 30 years with brown gas-fired electricity whose price fluctuates from year to year. Since green fixed-price electricity is worth about 20% more than brown variable priced electricity, we are really comparing $0.32/kwh solar pv with $0.38/kwh grid electricity. [http://www.nrel.gov/docs/fy06osti/38800.pdf]

So, from the point of view of society as a whole, PV is currently advantageous. We can lower our overall electric production costs by building PV. As long as we can save money, we will find ways to adjust the market via incentives or other means in order to allow this efficiency to be captured.

So, we are at the tipping point. In the U.S. PV will grow as fast as the industry can build the necessary factories. By the time the industry has installed 18GWp, prices will have fallen to about $0.08/kwh, allowing the industry to continue growing as fast as it can by replacing the next least efficient 12% of production which costs an average of $0.12/kwh to generate. Beyond that point, the price of PV will have dropped to $0.06/kwh, and PV will be competitive with retail prices.

But there may be a caveat. See the next posting...

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