Getting to Cost-Competitive Solar Energy

SunEdison founder and former Carbon War Room CEO Jigar Shah took to the pages of The Huffington Postand GigaOm recently to downplay the need for aggressive clean energy innovation. “We actually have all of the cost-effective technology [we] need” to mitigate climate change, he says in the former piece, singling out Bill Gates’ and writer Marc Gunther’s claims to the contrary. Shah highlights the domestic solar industry to prove his point, equating rapid industry growth to evidence that solar energy is “cost-effective” compared to conventional energy sources. He extends this sentiment in the GigaOm piece by comparing two new reports: Beyond Boom and Bust, by authors from the Breakthrough Institute, the Brookings Institution, and the World Resources Institute, which calls attention to the impending decline in federal support for clean tech and recommends reforming clean tech subsidies to drive innovation and Solar power: Darkest before dawn, by McKinsey & Company, which highlights ways the solar industry can grow even during an environment of government withdrawal. In Shah’s perspective, the solar industry doesn’t need subsidies anyway and all that’s necessary are financial reforms and incremental innovations to get solar to below $2 per peak watt by 2020. Nevertheless, while financial and incremental innovations are indeed needed, even greater innovations are critical for solar to reach peak watt competitiveness without subsidies worldwide.  Shah would do well not to ignore existing solar technology’s subsidy dependence and the significant innovations needed to take it to the finish line.

As the Boom and Bust report points out,

“Despite significant declines in solar costs in recent years…solar PV projects still have difficulty competing in wholesale power markets with new gas-fired generation without subsidy or policy support, except perhaps in regions with the highest solar resource.”

Certainly, solar power has been able to reach parity with fossil fuels in very niche markets under ideal circumstances, but not in the vast remaining swaths of the world. An April 2012 Congressional Research Service analysis reaches a similar conclusion:

“In some parts of the United States, residential and commercial PV systems produce electricity at prices competitive with conventional grid electricity, once subsidies are taken into account. However, although the per-watt cost of solar PV systems has declined significantly, in most areas of the country solar power is still not competitive with conventional grid electricity. The cost disadvantage could widen if subsidies are unavailable or if retail electricity prices decline due to the lower price of natural gas.”

In fact, solar companies the world over have mostly come to rely on government subsidies like Germany’s feed-in-tariff or various tax incentives to reach cost-competitiveness. But continued government support is unsustainable in the long-term, as evidenced by the German parliament’s March 2012 decision to cut solar subsidies by as much as 29% due to budgetary concerns, following a similar action in Spain.

Even solar cost reductions in the United States can be attributed not only to the significant incremental innovations occurring in the industry, but also to the importing of Chinese panels whose prices have been made artificially cheap through mercantilist government subsidization and currency manipulation – in addition to domestic subsidies. In other words, the solar industry is getting a lot of public support – mercantilist and otherwise – that is ginning up short-term demand.  But the goal is to get solar to cost-competitiveness without subsidies worldwide, not just in niche markets. The McKinsey report, meanwhile, predicts that solar costs will fall in the coming years, even in the absence of subsidies. Shah thus contends that policy emphasis should be placed on rapid deployment as opposed to innovation, misinterpreting Boom and Bust as calling for more domestic subsidization (note: it actually calls for reform in an effort to incentivize and reward innovation and wean the industry off of subsidies).

Shah’s analysis, however, seems to get solar only half way to unsubsidized cost competitiveness. He is right in pointing out that incremental technology and potential financial innovations could bring the cost of solar down, but that alone is clearly not enough.  According to the McKinsey report, companies shouldn’t lose sight that innovation is key: “Companies must turn their attention to the relatively prosaic objective of reducing costs without giving up on the imperative to innovate, which has been critical to success thus far.” In fact, top solar energy experts find that more significant innovations – and not just the incremental innovations ongoing in the industry today – is critical to solar becoming cheap without subsidies, which is estimated to be about $0.50 per peak watt. A MIT report by Tonio Buonassisi and others, for example, agrees with the McKinsey analysis that U.S. manufacturers could cut the cost of solar panels in half within ten years – but that cost shift would require the use of technology that “hasn't been demonstrated at full production scale.” Getting to cost-competitive solar will ultimately take innovations in solar cells, manufacturing, and energy storage and contrary to what Shah might contend, we’re not there yet and deployment without rigorous support for innovation won’t get us there.  We need a comprehensive mix of innovation policies from RD&D to deployment, but also a realization of what kind of clean technologies we need, such that the industry can be self-sustainable and the resulting technologies can be deployed everywhere – not just places that can afford to offer subsidies.