Grid parity and solar PV

In my last blog we explored the question about grid parity for wind power.  As the question seems to have been invented by consultants for solar PV, we deal with it here.
I suppose the amazing thing is that the question can be posed at all.  5 years ago PV was 3 or 4 times as expensive as it is now. A new law has even been invented to describe PV price reduction.  It is called the Swanson effect.   The law states that the cost of PV falls by 20% with each doubling of global manufacturing capacity. The solar panel cost is now $0.74 per watt.  The costs of incorporating a myriad of solar panels into a power station adds perhaps $4 to this.  The trend is going one way.

If we take Round 2 of the current renewable process being run in South Africa we note that the average price paid to PV developers there is R1.65 per kilowatt hour.  We pointed out in my last blog that new coal in South Africa costs R0.99 per kilowatt hour.   This price for coal does not include any charge for the pollution effect.   It is believed that the cheapest solar bid in Round 2 was R1.4.   In the immediate future new solar PV will be competitive with new coal, particularly when the cost of mitigating global warming is taken into account.  This is exemplified with dramatic effect when the cost of the delivered kilowatt hour for PV is compared with the pollution inclusive effect of new coal in Australia.  As reported by Bloomberg the cost of new coal in Australia is A$ 143 per megawatt hour.  This translates to a cost of R1.3 per kilowatt hour.  As we write, on the best solar PV sites in South Africa it can be stated that new coal and new PV deliver a kilowatt hour price that is very close.

Solar PV delivers its power during the day.  Power prices are higher during the day. Solar PV will outcompete any other generation source except wind during the day, when it is taken into account that the energy that drives solar and wind are free.  So here is a fact:  wind and PV will always be dispatched first because the marginal cost of production is zero.

There is what is known as “the merit order effect”.  Because solar always delivers power when electricity is most in demand, during the day, it can replace electricity generation which is more expensive than the average price.  Generation is dispatched according to the marginal cost of production.  Base load delivers the cheapest power, and is dispatched around the clock.  Mid merit plant is brought on next and peaking plant is the last to be brought on because it is the most expensive. Solar almost never replaces base load plant.  When it replaces mid merit and particularly peaking plant, it makes an economic contribution greater than merely replacing the average cost of power.

In most markets solar PV is already at grid parity.  Imagine what it will be capable of in 3 to 5 years time!

We made the point that planning for future electricity generation is a long term issue.  Comparing future power prices with what exists today is a meaningless exercise, because what exists today is a result of decisions taken over the past 80 years.  The real question is “when planning our electricity setup over a planning horizon of the next 40 years, what sources of generation make the most sense from the economic and environmental viewpoints”?   I await a rational argument for the further use of fossil fuels.

This leaves us with the issue which will always be with us and that is the variability of wind and solar.  In our next blog we will investigate this issue.

3 Responses to Grid parity and solar PV

  1. James Carroll March 8, 2013 at 10:39 am #

    Hi Eddie, nice read … Do these economics apply in Europe where solar capture would be less than south Africa and Australia?
    Also nice to see someone mention the pollution charge – when talking about energy I feel we should always mention the true end to end cost otherwise it can be false economics.

    James C

  2. Patrick P March 10, 2013 at 12:39 pm #

    To mirror the point:

    And a paper (available online) which impresses the ‘externalities’ associated with various energy generation methods:
    Title: Cooling the Planet, Clearing the Air: Climate Policy, Carbon Pricing, and Co-Benefits
    Authors: James K. Boyce and Manuel Pastor

  3. Karl McGoldrick April 4, 2013 at 11:56 am #

    Dera Eddie,

    So the solar industry, although still in it’s infancy, has already become a cost driven business. Do you see new solar applications, such as in Building Integrated (BIPV), where attributes such as lightweight, flexible, aesthetics, will be more performance driven than cost driven? Thereby allowing room for new thin film/flexible solar technologies to flourish?

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