US utilities face growing rivalry from unsubsidised roof-top solar power

Roof-top solar power is increasingly cost-competitive with retail power prices, with far-reaching implications for solar manufacturers, utilities and rival generation technologies.

Data gathered from installations in the United States by the department of energy suggest it is cheaper to generate electricity from roof-top solar panels than to buy power from electric utilities, if applied to European retail power prices.

The economics of unsubsidised solar depends on the balance of self-generated solar power which is used at home, displacing more expensive purchased electricity, compared with the surplus which has to be exported back to the grid at much lower wholesale prices.

Retail power prices are higher than wholesale because of a mark-up by utilities, plus state levies and charges to cover the cost of grid transmission and renewable energy.

A report titled "The unsubsidised solar revolution" by UBS analysts last month estimated that households in southern Germany installing unsubsidised solar power could already make a net saving over the 20-year lifetime of the panels.

The analysts estimated a positive rate of return on investment of 2 per cent already, rising to more than 6 per cent by 2020. The economics of solar will continue to improve as the installed cost continues to fall, retail power prices rise and residential battery storage becomes increasingly competitive, allowing households to displace more purchased electricity.

Prices of solar panels, or modules, have more than halved in the past three years, because of a global glut after manufacturing increased in China.

The remaining installation costs, chiefly labour, are often referred to as "balance of system" and vary according to the maturity of the supply chain.

The US department of energy's national renewable energy laboratory (NREL) has developed an open project database detailing the combined full installation cost, excluding incentives, of projects based in the United States.

Utilities, installers and the public volunteer the data, which NREL monitors to ensure quality.

As expected, full installed costs have fallen less precipitously than modules, given the labour component.

Median calculations are more meaningful than averages given the non-symmetrical data which includes a minority of utility-scale projects.

The NREL data shows median, full installed costs fell 17 per cent between 2010 and last year, and are now around US$4 (Dh14.69) per watt.

That is higher than some analyst estimates. Assuming the full cost of a new roof-top installation is $4 per watt, it is straightforward to calculate a levelised cost of electricity (LCOE) using various assumptions.

An LCOE measure estimates cost per unit of power output, in dollars per kilowatt hour, and can be compared with rival energy technologies and actual retail and wholesale power prices.

In the LCOE calculation, lifetime cost includes the initial investment plus financing and operating costs, after accounting for a certain discount rate and tax savings on depreciation and interest.

Lifetime power output is calculated according to the initial output of the installation, depending on local annual sunlight, discounted according to the cost of capital and an estimated annual degradation of the solar modules.

Many European countries face severe capital constraints and austerity in the near term, which will limit household outlays.

The economics of unsubsidised solar are still only at break-even, but evidence suggests that utilities would do well to prepare for a new wave of unsubsidised projects.

They have suffered enormously in Germany from the impact of subsidised installations, which have driven down wholesale power prices and fossil fuel power plant load factors.

* Reuters