Can Solar Challenge Natural Gas?

A new report from Citigroup argues that solar panel installations will surpass expectations as its cost falls below that of the most expensive gas-fired power plants

Large consumer electronic brands are likely to enter the solar energy market and fuel a worldwide boom in panel installations that will surpass most expectations as the rooftop technology becomes cheaper than gas, a report by Citigroup says.

Although worldwide solar installations grew by an average of 59 percent per year from 2007 to 2012, much of that advance was due to subsidies and legislation mandating solar spending. That’s about to change, according to the report.

Solar has reached residential parity in many regions, and utility-scale parity will follow over the next few years. Some U.S. utilities are already choosing to build solar farms instead of gas plants to deliver peak loads based on pure economics.

“In Germany, Spain, Portugal, Australia and the South-West of the U.S., residential-scale solar has already reached grid-parity with average residential electricity prices,” Citigroup analysts Shar Pourreza, Jason Channell and Timothy Lam wrote in their report. “In other countries grid parity is not far away. We forecast that grid parity will be attained by Japan in 2014-2016, South Korea in 2016-2020 and by the U.K. in 2018-2021.”

On the other hand, China, India, Russia and Saudi Arabia will not attain grid parity until after 2020, despite good solar conditions in some regions, due to their low residential electricity prices, which are subsidized by the state, the report says.

As far as utilities are concerned, giant solar farms must be able to compete against wholesale power prices from combined-cycle gas turbine plants. That’s currently impossible with U.S. shale gas selling at $3 per million British thermal units. But Citigroup says $3 per MMBtu doesn’t reflect the true cost of production of shale gas. In addition, gas costs more in Europe and Asia (in some cases much more: $16 per MMBtu in Japan), so solar can be highly competitive there even at utility scale.

One issue will be that solar growth will lead to lower utilization rates at conventional generation plants, which will nevertheless need to remain online to cover power demand on less sunny days, at night and during the winter.

“Ultimately we believe that the system will move to a capacity payment mechanism to remunerate utilities for low utilization rates on plants that must remain open as backup generation,” the analysts said. “Ultimately, while solar can reduce costs directly, the consumer will end up paying for these capacity payments.”

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Consumer electronic brands likely to move in

“We are likely to see large consumer electronic brands dominate the space, potentially alongside large industrial manufacturers,” Citigroup said. “These companies would bring their existing brand strength, customer relationships, route to market, balance sheets, access to cheap capital and purchasing power to the party. If they were to build 5 [gigawatts] of capacity using the latest equipment, they would achieve economies of scale and lower costs by a technology advantage of two to three years.”

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