Solar Update: Cheap as Fossil Fuels by 2020 in Most Markets

The results of a new study by Lux Research show that falling costs have begun to make solar power competitive against traditional fuels but that "grid parity" remains at least a decade away – and it's not a sure thing yet.

"Total grid parity across global markets will emerge only with significant cost reductions over the next decade or more," the study, the Slow Dawn of Grid Parity, said.

Here's the vital point: These steep cost reductions must be driven by uninterrupted government subsidies starting now. This at a time when competing industries are aggressively clamoring for their own financial help from governments.

"Grid parity" is the point at which unsubsidized solar becomes as cheap, or even cheaper, than conventional energy. It's the catchall phrase where solar photovoltaics (PV) is concerned, the holy grail of cost-effective clean energy.

The good news is it already exists in some places, namely in California. There, the costs of commercial PV rooftop systems are fast approaching $0.45/kWh, Lux said. That achievement is largely thanks to "time of use" policies that set the price of peak power during the day or in summer months at elevated rates, when PV technologies are at their best.

The policy is opening the door for solar to be competitive with retail rates today. Within a few years, PV should hit grid parity in other markets for select applications, such as residential PV systems in Italy.

But parity for utility generation, at around $0.08/kWh, remains 10 years or more away in most of the world. That "sobering outlook" stands "in contrast to the hype from some quarters," the authors warn. Here's the rub:

Premature views of grid parity could be counterproductive. Mounting fiscal pressure on debt-ridden governments could turn the political tide against solar subsidies, particularly if politicians take the simplistic stance that grid parity is a current reality.

In other words, it is no time for governments to pull the subsidy plug on solar.

Why would they anyway? According to the report, in high-subsidy nations like Greece, investors are beginning to rake in the profits, measured by the internal rate of return (IRR). In fact, in subsidized markets, IRRs can reach well in excess of 10 percent, said Ted Sullivan, senior analyst at Lux Research, and lead author of the report. And that is "actively fueling [new solar] demand," he added.

Even in markets where grid parity is far off, ongoing subsidies are allowing businesses and homeowners to earn positive returns, an important step on the path to parity.

"These IRRs will boost demand, fueling further increases in scale and enabling the industry to continue cutting costs and innovating. This should drop future solar [levelized cost of electricity] LCOE and further accelerate grid parity," the report said.

On the flipside, nations that lacks solar subsidies are watching their nascent industries fizzle to nothing.

New York-based Lux provides strategic advice on emerging technologies to leaders in business, finance and government. The intelligence behind its latest study came from conversations with 20 utilities, project developers, financiers and tax experts.

One of the key findings: The maturation of solar has led to a "significant re-evaluation of the way in which solar projects are evaluated."

"The solar industry is coming of age, and the metrics for judging solar technologies are shifting," Sullivan said.

According to the old wisdom, grid parity for solar would be achieved as soon as module prices got to the $1-per-watt mark. But the buck-a-watt metric has been slammed by analysts for being a one-size-fits-all oversimplification at best, and at times just plain wrong. That's because it measures the upfront capital costs of installing solar only.

The report affirms the industry's shift to a more accurate metric — the cost of generating actual electricity from the solar installation, presented as the price per kilowatt-hour (kWh).