WREF2012: CALCULATING A NATION S ECONOMIC SOLAR POTENTIAL A GENERAL METHODOLOGY AND RESULTS FOR THE UNITED STATES

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1 WREF2012: CALCULATING A NATION S ECONOMIC SOLAR POTENTIAL A GENERAL METHODOLOGY AND RESULTS FOR THE UNITED STATES Richard Keiser Keiser Analytics 527 Hudson Street, Suite New York, NY richard.keiser@keiser-analytics.com ABSTRACT As the cost of solar photovoltaic equipment and installations continues to fall, solar PV electricity becomes increasingly competitive with utility-supplied electricity. Just how much electricity could be economically supplied by solar PV is an important question for energy-focused businesses, and for policy makers considering a mix of energy technologies in which to invest, and through which to meet renewable energy and CO2-related targets. This paper presents a general methodology for calculating this amount, and the results for the United States. In particular, the paper presents the steps for calculating solar PV competitiveness, the point(s) at which an electricity consumer can save money by switching from utilitysupplied electricity to distributed solar PV electricity. Solar competitiveness therefore depends on both the cost of solar PV electricity and the prevailing retail price of electricity. Because both of these vary by geography, this calculation must be performed on a market-by-market basis. For the U.S. calculation, the analysis combined local-level irradiation data from the United States National Renewable Energy Laboratory (NREL) with local-level electricity prices from the U.S. Energy Information Administration (EIA) to analyze the entirety of U.S. electricity consumption (approximately 4 trillion kwh). The results show that U.S. solar PV demand will pass through an inflection point as the installed cost of distributed PV drops from $5/watt to $3/watt. At $5/watt installed cost, approximately 8 billion kwh of U.S. electricity could be economically served by solar PV, equivalent to 5 GW of solar PV capacity. At $3/watt installed cost, approximately 440 billion kwh of U.S. electricity could be economically served by solar PV, equivalent to 300GW of solar PV capacity, nearly 80x the present U.S. capacity. 1. SOLAR COMPETITIVENESS The notion of grid parity has been discussed in the solar PV community for many years, often incorrectly and without an economic framework. It is a goal of this paper to present a more rigorous approach, driven by economics, and to apply that approach to the analysis of United States market. Grid parity can be broken down into two important and related concepts. Doing so enables a more accurate and thorough understanding of the potential for solar PV. Those two concepts are solar PV economics and solar PV competitiveness. In this taxonomy, solar PV economics refers to the cost of electricity that is derived from a solar PV array. The variables that determine solar PV economics are well known and are summarized in the Levelized Cost Of Energy (LCOE) equation. The most important of these are: (1) the total installed cost of the array; (2) the financing of the array; (3) the irradiation where the array is located; and (4) available incentives. As is well understood, because irradiation varies with geography, the electricity cost derived from a solar array will also vary by geography. For example, the LCOE of a commercial solar array installed in Alaska (irradiation = 1,260 kwh/m 2, at latitude tilt) with the following characteristics $4/W total installed cost; 40% debt; 8% interest; 15-year repayment; no incentives) is approximately $0.42/kWh. The same array installed in Arizona (irradiation = 2,320 kwh/m 2, at latitude tilt) would have an LCOE of approximately $0.23/kWh. While understanding solar economics is in itself a useful pursuit, it alone cannot answer the more important question, which is: At what price point(s) does it become economically advantageous to switch from utility-supplied electricity to electricity derived from a solar PV array? This 1

2 is the concept of solar PV competitiveness. Solar PV competitiveness requires comparing the cost of solar PV electricity to the prevailing retail price of electricity. Because both the cost of solar PV electricity and the retail price of electricity vary by geography, this analysis requires a market-by-market approach. 2. DATA AND MODELING REQUIREMENTS FOR CALCULATING A NATION'S SOLAR POTENTIAL To determine the amount of electricity consumption that could be economically served by solar PV in a given country, and at what price points, the following are required: (1) the distribution of retail electricity consumption, price by volume; (2) a distribution of irradiation for all geographies within the analysis scope; (3) an understanding of all applicable incentives pertaining to solar PV; and (4) an economic model to compare the costs of purchasing electricity from a utility (the base case ) to the costs and benefits associated with installing a solar PV array. Each of these will be discussed briefly. 2.1 Distribution Of Retail Electricity Consumption The distribution of electricity consumption shows how much electricity is being consumed by which consumers and at what price points. In some countries, electricity prices are highly regulated and all rate payers pay very similar rates. In other countries like the United States, there is a wide distribution of retail electricity prices (between $0.01 and $1.00), which varies by customer type (e.g., industrial, commercial or residential) and by market (state, city, county, utility). These data can be visualized as a matrix, with the regions or markets on the vertical axis, electricity prices on the horizontal axis ($0.01-$1.00/kWh), and electricity consumption volume populating the interior. 2.2 Distribution Of Solar Irradiation As is well understood, the distribution of irradiation shows how much input solar energy is available in each geography. These data must be consistent with the granularity of the overall analysis: i.e., if the analysis is being done on a regional or county level, the irradiation data should also be available at that same level. 2.3 Solar PV Incentives Incentives presently play a critical role in determining solar PV economics, and therefore solar PV competitiveness. To be useful to the analysis, incentives must be structured in a way so they can be efficiently entered into an economic model. As is well understood, the primary incentive structure in Europe is the Feed In Tariff (FIT), which is typically set at the national level. In contrast, the primary incentive mechanism in the United States is through the federal tax credit (e.g., the Business Energy Investment Tax Credit; ITC). In addition, there is wide diversity in both the type and value of incentives at the state- and utility-level. High variability in incentives can complicate economic modeling significantly. It is therefore important for the analyst to decide what level of granularity can be efficiently analyzed while still yielding an accurate result. Finally, as recent events have shown, it is important to recognize that incentives for solar PV are a varying and likely temporary mechanism, and it is therefore also valuable to complete the entire analysis without any incentives, to reveal the true solar PV cost and resulting natural demand. 2.4 Economic Model An economic model is needed to compare the costs of purchasing electricity from a utility (the base case ) to the costs and benefits associated with installing a solar PV array. The best way of making this comparison is on a Net Present Value (NPV) basis. To calculate the base case, one makes assumptions about both the rate of change in electricity consumption and in electricity prices over the analysis period (typically 25 years). Because the current consumption and price are known (see Section 2.1), one can quickly calculate the present value of future payments to the utility (i.e., Electricity_Cost base_case ). This value must be compared to the present value of all costs and savings associated with installing a solar PV array. These benefits may vary depending on the structure of the incentives. For a typical net-metered residential array they include: (1) savings derived from direct consumption of the electricity produced by the PV array; (2) income derived from the sale of electricity in excess of direct consumption (i.e., electricity sold back to the utility); (3) savings derived from any federal, state, or local-level incentives; and (4) the costs to build and operate the array. 2.5 Additional Data And Assumptions In addition to assumptions about the rate of change of electricity consumption and retail electricity price mentioned in Section 2.4, depending on the incentive and model type, other data will be required to complete the analysis. In the case of analyzing a net-metered residential array in the United States, two additional data points that are important are (1) the percentage of PV generation that will be consumed directly, i.e., at the point of generation (the balance will be sold back to the utility); and (2) the netmetered rate, i.e., the price paid by the utility to the consumer for excess electricity fed into the grid. 2

3 3. GENERAL ANALYSIS METHODOLOGY The analysis approach is as follows: (1) systematically enter each point in the consumption matrix consumption volume (kwh), by price, per region into the economic model; and (2) using assumptions about the rate of change of electricity consumption and electricity price, calculate the NPV of all future payments to the utility. This represents the base case against which the economics of installing the PV array will be compared. Next, (3) for each consumption value, look up and enter the irradiation value that corresponds to region being analyzed; (3) calculate the amount of PV capacity necessary to supply this same amount of consumption; and (4) enter a starting value for the total installed cost for the solar PV array. The total installed cost is the control variable, and a reasonable approach is to start with a high value, e.g., $6/watt. Next, (5) calculate the NPV of all costs and benefits associated with installing the solar PV array as described in Section 2.4; (6) compare the NPV of purchasing electricity from the utility step (2) to the NPV of all costs and benefits associated with installing the solar PV array step (5). Next, (7) if the NPV of purchasing electricity from the utility is less than the NPV of installing the solar PV array in this convention, both values represent costs and therefore both are negative save the consumption value, the value of equivalent PV capacity, and the installed cost. This amount of electricity could be economically served by solar PV at the respective installed cost. If the NPV of purchasing electricity from the utility is greater than the NPV of installing the solar PV array, solar PV electricity is too expensive to address this market at this installed cost; (8) reduce the value of the array s installed cost step (4) by some increment, e.g., $0.50/watt, and complete steps (5) through (7) again. Finally, (8) add up all consumption and capacity values for which the NPV of purchasing a solar array is less than the NPV of purchasing electricity from the utility. These total represent the amount of electricity that could be economically served by solar at each installed cost, and the equivalent PV capacity. 4. APPLICATION OF THE GENERAL ANALYSIS METHODOLOGY TO THE UNITED STATES Because of the scope of the analysis and the volume of electricity consumption in the United States (4 trillion kwh), an abbreviated description of the implementation of the methodology will be presented here. Those interested in a more thorough explanation are encouraged to access the complete publication cited in the References Section, or to contact the author directly. 4.1 Input Data: Distribution Of Electricity Consumption, Irradiation, Incentives Following the data requirements and approach outlined in Sections 2 and 3, the starting point of the analysis is an understanding of the distribution of electricity consumption, by price, by volume. In this analysis, these data were compiled at the state level, i.e., subtotals and distribution by U.S. State, and are summarized at the national level in Fig 1. From the data, we see U.S. electricity consumption is a bellshaped curve with its apex at $0.10/kWh, and the bulk of electricity is consumed between $0.05-$0.17/kWh. Also from this curve we see the total volume of U.S. electricity consumption is approximately 4 trillion kwh, second to China worldwide, and greater than all of Europe combined. Fig. 1: Distribution of U.S. electricity consumption. The second data requirement is the solar irradiation. In the United States these data are monitored by NREL and are publicly available. From these data, we know that average irradiation by U.S. state varies between 1,260 kwh/m2 (Alaska) and 2,320 kwh/m2 (Arizona; at latitude tilt). The third input requirement is the financial incentives. In the United States, incentives for solar PV vary widely by state and by region. For simplicity, only the federal tax credit (Investment Tax Credit; ITC) has been modeled in this analysis (excluding accelerated depreciation). The ITC provides a tax credit equivalent to 30% of the solar PV array installed cost in the following year. This simplifying assumption has the effect of overstating solar PV costs, and therefore understating potential demand. 3

4 4.2 Approach and Sample Calculation Solar PV competitiveness varies by geography and market segment. As a result, the general approach is to analyze each point in the consumption matrix individually, calculate the installed cost at which solar PV can economically meet that consumption and the equivalent in solar PV capacity, and then add these values for each evaluated installed cost. As an example, let us consider commercial businesses in the state of Florida. Based on the EIA data, we can estimate that in 2012, these businesses will consume approximately 19 billion kilowatt hours of electricity at an average price of $0.13/kWh, for an annual cost of $2.5 billion. Assuming electricity prices increase at an annual rate of 3% and demand remains constant over the next 25 years, the NPV of these payments to utilities (at a 10% discount rate) will total approximately $32B. This is the base case in which these businesses operate. Now we will consider the case in which these same businesses install solar PV arrays on-site to meet their electricity demand. Average irradiation in Florida is approximately 1,730kWh/m2, and assuming DC-to-AC conversion losses of 18%, 13GW of capacity would be necessary to provide 19 billion kilowatt hours of demand. We will assume that 70% of all electricity generated by the array is consumed on-site, and that the remaining 30% is sold back to the utility. Accordingly, of the approximately 19 billion kilowatt hours generated by the solar array, approximately 13 billion kilowatts will be consumed by the businesses, generating annual savings of approximately $1.5 billon. In addition, revenue of approximately $0.5 billion will be generated each year by selling the remaining 6 billion kilowatt hours back to the utility (at a rate equal to half of the retail price). The NPV of these savings and revenue streams over 25 years are approximately $17 billion and $6 billion, respectively. Next, let us model the cost of the solar array, varying its cost to determine at which point the net NPV of installing the solar array is less than that of buying all electricity from the utility. Using a starting value of $6/watt total installed cost, the NPV of the solar array costs is $69 billion without incentives, and $49 billion with the ITC. Accordingly, at $6 per watt, the NPV (i.e., cost) of all payments and savings is $78 billion without incentives, and $58 billion with the ITC. 1 Both of these values are less than, i.e., more negative than, the NPV of payments to the utility ($32 billion), therefore at $6 per watt without any state or local 1 It is easiest to assume that the utility connection remains, and simply calculate the value of all savings and costs of the PV array. In this case, without the ITC = (32MM) + 17MM + 6MM + (69MM) = (78MM); with the ITC = (32MM) + 17MM + 6MM + (69MM) + 20MM = (58MM). incentives it is not economical to replace conventional electricity with a solar PV array priced at $6/watt. However, as the installed cost of the solar array decreases, this result changes and the cross-over points can be calculated. At $3/watt installed cost, the NPV of all payments and savings with the ITC is $34 billion, just slightly less than the NPV of payments to the utility. By systematically reducing the installed cost, one can calculate the point(s) at which the NPV of both options are equal. For this example, the cross-over points are $2.50/watt with the ITC, and $1.50/watt without any incentives. Graphically, this dynamic is depicted in Fig. 2. Fig. 2: Cross-over points are calculated for each value in the consumption matrix. Therefore, this one point in the consumption matrix the commercial electricity consumption in the state of Florida at $0.13/kWh 19 billion kwh could be economically served by solar PV at $2.50/watt with the ITC incentive, and at $1.75/watt without any incentives. Based on Florida s irradiation, 13GW of solar PV capacity is needed to meet this amount of consumption. This example illustrates the methodology used to analyze all available U.S. electricity demand. The analysis was executed both with and without the ITC incentive to show its impact, and the potential demand based on the true cost of solar PV. State-level irradiation data were then used to calculate the amount of equivalent capacity that would need to come on-line to meet this demand. 5. SUMMARY OF ANALYSIS RESULTS The most important result from the analysis is a summary of electricity volume that could be economically served by solar PV at different installed costs, and the equivalent in solar PV capacity. In particular, the results show that U.S. 4

5 solar PV demand will pass through an inflection point as installed cost of distributed PV passes from $5/watt to $3/watt. At $5/watt installed cost, approximately 8 billion kwh of U.S. electricity consumption could be economically served by solar PV, equivalent to 5 GW of solar PV capacity (Fig 3 and Fig 4). At $3/watt installed cost, approximately 440 billion kwh of electricity could be economically served by solar PV, equivalent to 300GW of solar PV capacity, nearly 80x the present U.S. capacity. Given the current (Q2:2012) range of distributed PV installed costs from $6/watt residential to $2.75/watt commercial the United States will pass through that inflection point between bottlenecks that may arise in the broader electric grid. These factors would have a contracting effect on the results. As a result, this analysis likely sets the upper bound on total solar PV demand at the present time. In addition, all state- and local-level incentives, which are currently considerable, were excluded from the analysis. Modeling all available incentives would have the effect of expanding the market potential at higher installed costs, i.e., more electricity consumption could be economically served by solar PV at higher installed costs. With respect to solar PV adoption, in practice this will not happen precisely at the economic cross-over point (i.e., where NPV=0), but when a return is generated on the solar PV investment. The value of return on investment (ROI) needed to drive adoption varies and is generally between 8-15%. In this analysis, cross-over points were modeled with the ITC, and it was assumed that state- and local incentives provide the requisite ROI. Finally, because electricity prices in general are increasing, the upper bounds of the analysis will increase over time. For example, in 2014, the distribution of electricity prices (Fig. 1), will likely be further skewed to the right. Therefore, the competitiveness of solar PV will likely increase, and executing this same analysis at that time would yield greater capacity maximums. Fig. 3: At $3/watt, over 440 billion kwh of U.S. demand could be economically met with distributed solar PV. Fig. 4: U.S. Solar PV demand will cross through an inflection point between $5 and $3/watt. 6. EMISSIONS AND CONSTRAINTS IMPACTING ANALYSIS RESULTS It is important to note that a number of factors were excluded from the analysis for practical reasons. These include space, shading and structural constraints, as well as 7. ACKNOWLEDGEMENTS I would like to acknowledge the following people and organizations that were instrumental in building my skills as an analyst and contributing to my understanding of energy in general, and of solar PV technologies and economics in particular: Vadim Zlotnikov, Dr. Alexander Kandybin, James Gingrich, Abhiram Rajendran, Scott Shiao, Dr. Daniel Turner-Evans, Dr. Harry Atwater, Dr. Vaclav Smil, the Massachusetts Institute of Technology (MIT), the California Institute of Technology (Caltech), the European Photovoltaic Industry Association (EPIA), the National Renewable Energies Laboratory (NREL), the United States Energy Information Association (IEA), and the Solar Energy Industries Association (SEIA). 8. REFERENCES (1) 300 GW Of Demand At $3 Per Watt? Quantifying The U.S. Solar PV Potential Using Retail Electricity Prices (And A Primer On Solar Economics), Richard Keiser, 2011: (2) Energy Association (3) NREL 5