In a recent landmark deal, solar energy was sold at 5 cts/kWh to a Texas utility company. If you want more details, a lot has been written about this deal, including here, here and here. At this price level, how competitive is solar as a source of electricity?
The only subsidies going to this Texas project are a 30% Investment Tax Credit (ITC) and accelerated depreciation benefits, both provided by the US Federal government. Back of the napkin calculations place the unsubsidized price at roughly 8 cts/kWh. As a comparison, the all inclusive cost for gas generation (with fuel, investments, maintenance, etc.) is currently around 7 cts/kWh in the USA. Keep in mind that solar is on a downward sloping cost trajectory and that a carbon tax, if it were levied, would increase the cost of gas fired generation (a 50$/ton tax would add about 1.5 cts/kWh).
Sunlight is not constantly and reliably available (night, poor weather…), so even cheap solar does need some kind of back-up, either in the form of a battery or an idle power plant ready to kick-in whenever needed. How expensive is it really to provide this backup? A gas fired power plant operating 80% of the time, charging 7 cts/kWh for the electricity is just as profitable as the same plant charging 8 cts/kWh but operating only 50% of the time (the modest rise in cost due to depreciation and fixed cost being spread over fewer kWh). In other words, providing a back-up is not necessarily as expensive as one could think.
Thermal power plants that burn coal, oil or gas to produce electricity are characterized by their Heat Rate — a measure of the efficiency at which the plant transforms the fuel into electrical energy. A quick look at the typical heat rates by plant technologies on the US Energy Information Administrationtells us that a typical gas combined cycle has a Heat Rate of about 0.0075 MMBtu per kWh. In the US, the price of gas has significantly fallen since the explosion of shale drilling and has been moving around $2 to $5/MMBtu for the last 5 years.
This translates to a very efficient gas power plant costing between 1.5 cts/kWh and 3.75 cts/kWh. Unlike oil, there is no global price for natural gas, instead the price varies wildly from region to region (this is mainly due to the difficulties associated to transporting gas, but let’s not digress). Here is a graph taken from BP’s latest world statistical energy review:
As you can see the natural gas prices have diverged since 2008 and the rest of the world, not benefiting a shale gas boom, is paying a lot more than the US. Europe is importing most of its gas from Russia through long term contracts that are indexed mainly to oil prices, and pays about $12/MMBtu. Japan is willing to pay a premium for natural gas, especially after Fukushima, and buys Liquified Natural Gas (LNG) at around $18/MMBtu. These gas prices result in fuel costs of 9 cts/kWhin Europe and 13.5 cts/kWh in Japan. Remember, the all inclusive, unsubsidized cost for solar in the US is now 8 cts/kWh. And just for the record, the diesel generators used in many emerging markets have a fuel cost over 30 cts/kWh.
If you were the Japanese owner of a gas fired power plant using LNG imported at $18/MMBTu, you would be significantly better off building a solar farm near your plant for the sole purpose of offsetting your fuel expenses. This is how cheap solar has gotten.
Igor Leroux is currently a Sloan Fellow at the Stanford Graduate School of Business. He previously worked with the ENEL Group, one the world’s leading integrated utilities, on wholesale markets for gas and power in Russia. He holds a Msc in Economics and Law of Energy from the University of Montpellier, France. Igor is an enthusiast supporter of Solar Energy, and plans to work on the financing side of solar project development after graduation. A native of Saint-Pierre & Miquelon, France, he speaks French, Italian, English and Russian fluently.
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