rooftop-solar-photovoltaic-arrayThis post asks the provocative question whether solar PV is really market ready yet. It goes on to suggest that it might be counter-productive for the long term growth of the sector to push solar photovoltaic adoption rates through the use of government subsidies, making the point that this may in fact be slowing down the adoption of needed innovation and process improvement that should ultimately make renewable energy more affordable.

by Joel West, professor of innovation and entrepreneurship at San José State University’s College of Business. Connect with Joel on Linkedin.

On Monday, Matt Hunter of CNBC asked provocatively “Does the Solar Industry Have a PR Problem?” The story was based on a fall study done by students at the SJSU Sbona Honors Program, and as someone who helped mentor the students, I was proud to see it published.

However, the conclusions reported by CNBC were different than those of the March webinar that discussed the report. To quote from Hunter’s report:

Jim Nelson, CEO of solar manufacturer Solar3D, says that, true to the perception, solar technology is not quite ready for prime time.

The problem, says Nelson, is that solar is generally still not price competitive with fossil fuels for energy generation, says Nelson. Paradoxically, government efforts to subsidize the purchase of solar panels actually slow down the adoption of innovation that should ultimately make renewable energy more affordable.

By encouraging consumers to buy immature and inferior solar technology right now, government subsidies risk locking people into solar systems that are inefficient, expensive, and may or may not ultimately pay off to the consumer. “They’re encouraging people to use things that don’t work,” he says.

At current kilowatt-per-hour rates, solar energy costs about 4 times more than power drawn from the grid, says Nelson. (Energy Secretary Steven Chu aims to bring down the cost by 70 percent to 75 percent by 2020.)

Reduce that by another quarter, and solar becomes attractive for both residential and industrial customers. (10 cents a kilowatt hour is the average cost of electricity in the U.S.)

See our related post: “DOE SunShot Initiative Aims for Cost Competitive Solar Energy by 2020“, to read more about the DOE initiative that Energy Secretary Steven Chu was refering to in the quote above.

Hunter quoted another expert that noted the payback period for residential PV is normally 10 years or more.

The reality is that today, solar makes economic sense for some people but not for others. (As Hunter notes, some people who are affluent or “passionate about green energy” may buy it even if it doesn’t pencil out.)

In our related post: “Solar Price Parity Achievable by Streamlining Cost of Permitting“, Bill Roth argues that permitting costs alone will add $1 billion to the price structure of rooftop solar PV over the next five years, and that if permitting process was modernized and codified the savings would help make solar PV achieve grid parity in many more markets than it does today.

There are five things that drive the economics o PV adoption:

  1. 1 – cost of the system
  2. 2 – subsidy for the system
  3. 3 – amount of sun
  4. 4 – cost of capital to finance the system
  5. 5 – the price of the substitute (grid power)

The press tends to focus on the first three. However, in talking to people in industry, the real action is where electric rates are high: with PG&E’s tiered rate structure, running an air conditioner in the Central Valley is prohibitively expensive and thus even an expensive PV system looks attractive.

Certainly the “grid parity” curves on PPT decks for the past decade assumed increasing fossil fuel prices (which may be a false assumption). In places like the Central Valley — or especially Hawai‘i — the substitutes are already expensive enough to make solar cost-competitive.

As it turns out, on Monday I had a farewell lunch with one of my coworkers, Gita Mathur of the SJSU College of Business. Gita noted that her 1985 first doctorate (of two) was on GaAs photocells, and the lab efficiencies she was demonstrating 25 years ago were almost the same as those for commercial products today. In her view, the subsequent innovation was mainly in the packaging — reducing the balance of system costs (including labor) to get those cells installed and available to generate power. This is certainly the area where industry continues to make strides, and in fact the basis of the low cost (and low efficiency) thin film startups. [See: Solar Takes Another Step Towards Grid Parity]

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© 2011, Joel_West. All rights reserved. Do not republish.

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Author: Joel_West (3 Articles)

Joel West is professor of innovation and entrepreneurship at San José State University's College of Business. His research and industry experience focus on profiting from technological innovation. He is a chronic blogger, including at his Cleantech Business blog, which focuses on the economics of renewable energy and energy efficiency from a Silicon Valley Perspective

  • Byozwiak

    Solar costs more, yes, we know that.  The energy produced for the life of the panels is done without adding anymore greenhouse gases to the atmosphere.  That is the reason why the subsidies need to continue – so that our energy is produced without killing ourselves with pollution or changing our envrionment.  Consider those costs when you look at the price of grid power.

  • David Sweetman

    While the fossil fuel industry is heavily subsidized, PV modules will also need some subsidies to compete. The basic economics, without subsidies are such that widespread adoption of PV modules for residences makes reasonable economic sense now.

    However, the PV industry is very immature. The primary evidence of this is the virtual complete lack of standards, other than for safety (NEC). The lack of standards significantly increases cost in many areas, particularly for design and installation in urban areas where permitting, licensing, inspection fees have crippling NO-VALUE ADDED costs that could be reduced if the industry would work together to produce freely available standards for Quality, Reliability, Education, Design, Installation, Operation, Maintenance (Preventive & Corrective), Packing, Shipping, and Interface (hardware, software, firmware).

    Look to see what JEDEC accomplished to convert the IC industry from a specialty provider to DoD and NASA to a consumer based industry.

  • Mr. Sunshine

    Do  subsidies lead to the scale-up of inherently expensive technologies? Probably. Does it also provide high prices for initial stages of lower-cost technology? Yes, the subsidy is technology agnostic. However, I do feel that a lot more money should be awarded to gutsy ideas – like what is done with the ARPA program, only more money and internationally (not all great ideas are American). 

    Fossil fuel prices have little correlation with PV – unless we are talking offgrid (genset vs panels) or perhaps in Hawaii. 
    Even if it did, that article from early 2009 quoting $40 a barrel – we are now back at $120, so if they were correlated it would be great for PV.  

  • Elizabeth

    One has to be committed to the idea.  For me, it was financial as well as freedom from the utility companies.  With or without subsidies, Solar is a good value over the long haul.  I have solar on my Arizona home.   I have no electric bill for 9 out of 12 months.  The other three months, I am paying less than half what my neighbors pay.  Because utilities continue to increase their prices, my system is being paid off even faster. 

    I am encouraging my employer to get solar for the facility I work at.

  • http://www.ekland.co.uk Solar PV Devon

    Whether or not Solar PV subsidies hurt innovation, the fact that they stimulate demand and therefore lead to a reduction in prices makes them an investment in the industry, and also the country’s future security as it reduces dependence on external energy supplies.

    Obviously individuals have to weigh up whether to risk being locked into owning a less efficient system, but  I think the people who consider investing in PV are usually either early adopter types, or are making an financial investment and have the sense to do the maths and see if makes sense for their own situation.

  • http://www.facebook.com/people/Konsyltacii-Analytics/100002672775120 Konsyltacii Analytics

    English:

    Do not believe those who say that investing in”green” industry are unprofitable. It is extremely profitable for the producer and investor in the absence a high cost of a technologies. However, huge amounts of money being spent on new technology. But a users  a same solar panels pay a huge price for them. But look at the device a same of solar panels, what it is made, what materials need to manufacture solar panels and photovoltaic cells, and you’ll realize that “green” technology – is not only good for the environment, but also extremely profitable for the investor and the manufacturer, and for the consumer, and the environment. This is – a profitable business, not charity!

    По-русски:

    Не верьте тем, кто говорит, что инвестиции в “зеленую” промышленность неприбыльны. Это является сверхприбыльным для производителя и инвестора при отсутствии больших затрат на технологию. Однако огромные деньги тратятся на новые технологии. Но пользователи тех же солнечных панелей платят огромную цену за их. Однако посмотрите устройство солнечной панели, из чего она состоит, какие материалы идут на производство солнечных панелей и фотоэлементов и Вы поймете, что “зеленые” технологии – это не только полезно для окружающей среды, но и сверхприбыльно и для инвестора,  и для производителя, и для потребителя, и для окружающей среды. Это –  выгодный бизнес, а не благотворительность!

  • http://www.facebook.com/people/Konsyltacii-Analytics/100002672775120 Konsyltacii Analytics

    English:

    Smart people will immediately recognize where to invest. Good when the cost is almost minimal, and profits – are very high.

    По-русски:

    Умные люди сразу поймут куда инвестировать. Хорошо когда затраты почти минимальны, а прибыль – очень высокая.