Solar Energy at Grid Parity: Projected Effects and Implications for PolicyThe point at which the cost of electricity from solar photovoltaic (PV) cells will equal the cost of producing electricity by traditional means (i.e. mainly fossil fuels) is called “grid parity”. Up to now, solar electricity costs more than electricity from the (electric) grid; and it is the aim of all the solar energy research efforts to lower the cost of solar energy to make it competitive to other electricity sources. At the same time, the steadily rising price of fossil fuels and the efforts to combat global warming is helping to close the cost gap between fossil fuels and solar energy. We can now - more or less – expect that grid parity will be achieved within 5 to 7 years or so, perhaps it is a good idea to take a look at what this would bring about. This paper explores what would happen during the period immediately after grid parity for PV is achieved. When, exactly?
Grid parity seems like a simple concept. It is the point at which the generation of electricity from solar PV cells would equal the cost of generating electricity from fossil fuel sources. However, it is not that simple. Due to the reasons stated above, we can say that grid-parity is not really a fixed, exact point, and thus would not arrive suddenly on a given day for all the world. It would arrive gradually, with the line crossed earlier in some places than others, and in one application earlier than in others. To make a very rough estimate as to when grid-parity will be achieved; we should note that predictions have been made to the effect that if crude oil remains at $100/barrel, technological advances in PV would mean that grid-parity will be achieved between 2012 and 2015. Of course, this contains too many variables. Crude oil is rising beyond $100/barrel (however, on the other hand, the value of the dollar is also declining), and then we are also not sure how fast PV technology will advance (i.e. in terms of lowering the cost per kilowatt-hour. We should also consider the predictions that the world crude oil production will peak in 2010, resulting in a steep rise in the price of oil. The high price of oil will be a significant factor that would hasten the achievement of grid parity for solar energy. It will remain significant during the whole period of transition from the fossil fuel based world economy, to one which is based mainly on renewable energy. Grid Parity: EffectsThis paper aims to address the question of what happens when grid-parity occurs. Contrary to what many people expect, the impending arrival of grid-parity does not mean that technological development will “rescue” high-energy-consumption societies from the need to make difficult political and economic changes in their energy and consumption patterns. While it is true that the arrival of solar energy grid-parity will eventually result in a more environmentally-friendly energy production-use balance; it also demands big changes in living and working conditions all over the world. And more importantly, the transition from the present fossil-fuel-intensive economy to a solar/renewable energy economy will be a drawn-out and painful process, which would possibly be marked by wrenching economic changes as well as political conflict. Countries and companies cannot afford to take a laid-back attitude toward this transition period (which will last some 10 to 15 years). Those who neglect to take appropriate and timely steps to deal with this “crisis of transition” would do so at their own peril. Let us now point out some things that are likely to happen in this transition. Grid parity will not be that obvious in the beginning.
When grid parity is attained, things will indeed change in terms of how PV electricity production develops. The changes will not occur at the same time.
Grid parity will not be arriving in one big bang. In fact, it will probably seem like a non-event in the beginning. The first ones to notice will be policymakers and researchers who are on the look-out for ways to promote renewable energy. This would be both at the governmental and corporate spheres. This would naturally include those who are already involved in solar energy production under programs prompted by anti-global warming commitments. Another reason why grid parity will not be noticed right away, is that it will arrive during a period of big economic problems caused by high fossil-fuel prices. Countries will be reeling from the effects of crude oil prices reaching perhaps $300 or $400 per barrel, and this will result in the collapse of industries, recession, even political problems and wars. The ultra high prices of fossil fuel prices will not be fully attributed to the decline of crude oil reserves, and speculators and temporary political troubles will be seen as the cause of much of this price rise. With the idea that the price peak may be temporary, many countries may merely implement temporary measures to deal with it. They may not immediately come to the conclusion that the fossil-fuel economy is in its final decline, and that a change to renewable energy is not only also cost-effective but imperative. Grid-parity for solar energy will not arrive alone.
When PV attains grid parity, it will also signify the start of an overall transition to a more renewable-energy based economy. Other renewable-energy sources e.g. wind, hydro, biomass and geothermal are already economically feasible at current prices and level of technology but only at certain conditions. Solar energy, on the other hand, has so far needed government subsidies to become feasible. Unlike the other forms of renewable energy, solar energy can be tapped almost everywhere, and it is also scaleable (its applications range from pocket-size PV cells for calculators and appliances, to hectares of panels). These properties of solar energy makes it the key link in the renewable energy package. This means that with PV at grid parity, the whole renewable energy package would attain the breadth and depth to force a shift in favor of renewables. It would then become possible at last for renewables to provide more than 50% of the world’s energy needs. Fossil-fuels use will continue to increase, and prices will continue to rise.
One, perhaps astonishing, result of arriving at grid-parity is that the amount of electricity produced from fossil fuels will not decrease, but that it will continue to rise. Going further, we can even say that the additional demand for fossil-fuels will be a direct result of achieving grid-parity for solar energy. It would not be the only or even the main reason for the fossil-fuel price to rise, but it will contribute to this rise. At present (i.e. early 2008), PV cells need to produce electricity for about two years before it recovers the amount of energy needed to produce it in the first place (this is referred to as the “energy payback time”). Now, the global total installed capacity of PV doubles every two years. This is quite a fast pace, even if we take into consideration that the total installed PV capacity is now only about 0.05% (or 1/20000) of the total global electricity production. At the present rate, PV cells are just paying for themselves, in terms of electricity use – the electricity needed to produce PV generating capacity is equal to the electricity that PVs actually generate. Now, if grid-parity is achieved, the rate of growth of PV generating capacity will certainly grow faster than double every two years. We could expect rates of 100% yearly growth or even higher. If the energy payback time for PV does not improve significantly, the electricity needed to produce PV capacity will grow faster than what PV produces. The result of this is that fossil-fuel electricity generation will have to increase in order to fill the gap. We need to also factor in the fact that hydroelectric, wind and geothermal plants could provide a portion of the additional energy needed. In so much as this would be the case, we also need to factor in the energy payback time for these other sources of renewable energy. After doing this, the overall energy payback time would most likely remain to be around two years. Since the achievement of grid-parity will not lessen the overall demand for electricity from fossil-fuels, and may even increase this demand; the result of this will be that the overall demand for fossil- fuels for electricity production will increase. Add to this the fact that fossil-fuel supply may even be decreasing during this period, the result is that the price of fossil-fuels would keep increasing. This will cause a strange chain reaction: the faster the setting up of PV capacity, the higher the demand on fossil-fuel resources, resulting in a higher price for fossil-fuels, further increasing the demand for new PV capacity, and so on… Large scale solar electricity generation first, decentralized generation later.
Grid-parity will be achieved first for large-scale projects, before that for building-based PV applications. This seems a bit contra-intuitive: after all, building-based applications would depend on PV technology being competitive to retail electricity prices, while large-scale projects needs to be competitive to wholesale electricity prices (which are lower than retail prices). Thus, one would expect “retail” grid parity to be achieved before large-scale grid parity. However, large-scale projects have some advantages over smaller-scale applications. First of all, large-scale projects will be the first ones to install the latest and most efficient PV products. When California-based Nanosolar came out with what a new product line early in 2008, they also announced that their production for at least a year had already been committed to various large-scale projects in Europe. It makes sense for companies with new products to ensure their market for the immediate future, since this gives them a stable environment for further developing their new product. Also, it costs a lot less for them to supply large-scale customers, than trying to sell this through a retail distribution system. For their part, those setting up large-scale projects actively seek out the best and cheapest technologies, make their plans much earlier, and have more resources than those with building-scale projects. This means that small-scale projects will only benefit from the new, more efficient, products a couple of years after the big projects had already been using them. Then, there are economies-of-scale benefits for larger projects. While the PV cells and panels themselves are scaleable, the other equipment needed are less so. For example, each building-based PV system would have to have their own inverters, switching and metering systems, and maybe batteries. Big projects would need a single (though very big) inverter and a control system. Big projects could also afford to do things like “solar tracking”, in which the solar panels are constantly kept at right angles to the rays of sunlight (maximizing the amount of sunlight received), but smaller PV systems would be mostly fixed structures. Large-scale utilities’ PV projects also have the possibility of producing electricity in sparsely-populated (but sunny) areas, and transporting this to where it will be used. Already, there are proposals for building a long cable to transport electricity generated from solar plants in Algeria, to consumers in Germany. Another possibility is that utilities would make arrangements to “exchange” electricity production. For example, PV electricity produced in sunny Italy could be sent during the day to Switzerland, and in the evening, the Swiss would send Italy hydroelectric power. These kinds of arrangements would lower the cost of electricity for the energy utilities on both sides. There will be added burden to the electricity grid, as fossil-fuel applications shift to electricity.
When oil prices rise, it will cause the price of gasoline and diesel to rise faster than that of electricity. This is mainly due to the fact that electricity is usually produced by a mix of various kinds of generators – from the coal and gas-fired plants, to hydroelectric, wind, geothermal, and solar – in addition to some fuel oil generators. Fuel oil prices will rise in pace with gasoline and diesel, coal and natural gas will rise probably a bit slower, and the renewable sources of electricity will not rise at all. This would make the resulting price of electricity to rise slower than that of gasoline and diesel. As a result of the divergence in the prices of fossil-fuel and electricity, people will increasingly strive to shift to using electricity. Transportation is one of the main cases where electricity will substitute for oil products. This would mean more (electric) train use – displacing both automobile use, and some air travel. Electric trams and buses, as well as metro systems will be used more in the cities. There would also be a massive shift to electric and plug-in hybrid cars. Fossil-fuel used for heating and cooking will also be replaced by renewable energy or electricity. LPG or heating oil systems will be replaced by electric heating, solar heating, or heat-exchangers which utilize industrial heat for household heating use. Electric stoves will replace LPG-based cooking systems. Industry will also gradually shift from coal or diesel-engines for its operations. Metal smelting using electricity will replace smelters using coal or natural gas. This shift to electricity for will greatly increase electricity demand, straining the resources of the electricity utilities. If additional generating capacity is not produced (or sufficient energy-saving measures taken), the resulting energy shortage may result in rolling electricity blackouts. PV and renewable energy research will accelerate.
The achievement of grid-parity will not cause PV research projects to stagnate. On the contrary, research funding and research efforts would boom as a result of grid-parity. Since grid-parity will arrive unevenly, with certain applications and regions attaining it before others, the crossing of the parity border in one area will provide a stimulus for research aimed to push the parity border in other areas also. If parity is achieved for sunny countries e.g. Spain, research will redouble for achieving parity also for temperate zone countries e.g. Germany. After parity is achieved for large-scale solar plants, this would push the effort for also attaining this for small-scale household use, and then to solar applications for vehicles (starting with ships perhaps).
The large increase in the demand for PV products will force innovations in terms of the kinds of materials used for PV cells, as well as in ways to produce these materials more cheaply. And then there will also be the need to produce more cost-efficient auxiliary equipment e.g. inverters, meters, charge-controllers, and batteries. At a certain point there will be a need to be able to store large amounts of solar energy for periods when there is no sun. And this means that it would then be impractical to depend on just scaling up the use of batteries. Thus, there would need to be breakthroughs in technologies e.g. hydrogen fuel, long-distance transport, huge capacitors etc. Implications for PolicymakersThe period of transition that will start with the crossing of the grid-parity border for PV will last some 10 to 15 years. During this time, PV’s share of world electricity production from 0.05% to something like 25%, and perhaps the total share of renewables (including hydroelectric) would be near 50%. It would be a period of great opportunity, but also of great challenges. To meet these challenges, policies that will need to be taken would include: The faster PV capacity is built, the better.
First movers into PV stand to gain the most from grid parity. Those who move first would have a head start not only in using solar energy for their countries’ electrical needs, it would also give them an advantage in the mad rush for resources that would surely come. In the first years after grid-parity, there will likely be supply shortages of everything from raw materials (note the recent short supply of poly-silicon) to related machinery (e.g. inverters) to skilled personnel. Various countries and companies would do their best to safeguard their supply stream, either thru long-term contracts, or even by producing these factors themselves. And this in turn will give the first-movers an advantage not only in terms of continuous supply, but also give cost advantages due to scale. The energy shortages that come in the course of the transition to PV will hit the late-comers hardest. Those countries that made the transition to a renewable energy economy first will be shielded from the high cost of fossil fuels, and could proceed to rearranging their economies to fully utilize the benefits of the new renewable energy supply. The energy shortages and other economic problems will also hinder late comers from making a speedy transition to the renewable energy economy. If there is a significant time lag between the first movers and late comers, it is quite possible for energy intensive industries to shift to the first mover countries. The best scenario, in terms of minimum economic pain, would be for PV production to make a huge increase in the first two years after grid parity. If PV installed capacity increases 2000% in the first two years, and thereafter only 100% every two years; the economic dislocations will be a lot less than if installed capacity increased 200% every two years. Undertake radical energy-saving measures.
Since PV grid parity will be accompanied by increased energy demand for more than a decade, it is imperative to implement energy-saving measures, especially for this period. Some policymakers may believe that they could simply wait for technological developments to solve the energy crisis. Following from this, they would not take serious steps to reduce energy consumption. Such an attitude will be potentially disastrous. Without energy conservation, countries’ economies would not be able to cope with the highly increased prices for energy, and electricity utilities would suffer from under-capacity and shortages. The knee-jerk reaction to rising energy prices would be to try to lower the effective price increase felt by the consumers. This is often done by cutting taxes on oil products or even direct subsidies to households. Doing this would be counterproductive: it will result in people continuing with their energy-wasteful ways, and it will probably also be a big drain on the government budget.
Immediate conservation measures would include limiting public lighting at night (e.g. that public light ads be turned off at 1 a.m., and street lighting to be lessened late at night); setting auto speed limits; requiring school bus use, etc. Medium term changes would include measures such as promoting public transportation, building codes changes to help reduce building energy consumption, promoting more hybrid auto use, etc. Increase electricity generation from other renewable sources.
Depending on the location, some renewable energy sources are already cost-effective e.g. geothermal, wind and hydroelectric. This should be developed before PV grid parity is achieved, in order to help cover the increased demand for electricity, as well as to serve as a balance for solar energy, especially in terms of night-time electricity production.
It is best to do this well before energy prices peak, and shortages become acute. Government subsidies for PV will still be needed.
Before grid-parity, subsidies were needed to encourage people and utilities to install PV. After the achievement of grid-parity, subsidies will still be needed, but for other purposes.
Then, there is a need to ensure that the installed capacity of smaller-scale PV projects is able to grow in the midst of the mad rush by large-scale projects for limited PV resources. Distributed solar electricity production would distribute the beneficial effects of PV to households and building owners; and would also help to unburden the electricity grid. The spread of technological innovations needs to be facilitated.
With the PV boom, will come the question of how we can facilitate the rapid spread of PV technology, while still respecting intellectual property rights. This is a potentially acute question in terms of the need of technology transfer among nations; particularly between developed countries, and the poorer countries. Perhaps it would become necessary to establish an international license agreement or body to regulate using patents across borders, or even compulsory licensing clauses, for “climate change related innovations”. With such clauses, countries could utilize patented innovations that are either not available, or available only at prohibitive prices, without direct transactions with the patent-holder. Prepare for the renewable-energy economy that will come after the transition.
After the transition period is largely completed, energy production and use patterns will be different from that before the transition. It cannot be an opportunity to go back to the wasteful ways of using energy. Some of the needed changes could be initiated in the period of transition. One example will be a solar-powered train system that will replace most automobile or air travel.
2 April 2008 |
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