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The Dawn of California Residential Grid Parity
October 6, 2011

As published in the Stanford GSB Reporter

Grid Parity Pricing Opportunity

Due to recent price declines in solar components, grid parity pricing is now available in the marketplace. Traditionally, in order to provide sufficient return to solar power system capital providers, these solar power investment projects relied primarily on the receipt of government tax subsidies, namely the Investment Tax Credit (ITC – tax rebate) and Modified Accelerated Cost Recovery System (MACRS – depreciation).

However, now that the installation cost of solar power systems has reached below the value supported by the operational cash flows alone, the government tax subsidies are not required to finance the system investment costs.

What is the limitation of using government tax subsidies to finance solar PV system investment?

The relatively small overall size and high volatility of the tax equity financing markets hinders the adoption of solar PV, because tax equity capital is costly and difficult to obtain. To attract sufficient capital from these investors, solar developers must offer a significantly higher return compared to traditional asset based bank loans. Developers, due to their lack of sufficient existing or expected tax liability, cannot independently monetize the tax subsidies (ITC & MACRS). However, in the past, before the Era of Grid Parity Pricing, solar power system financing required tax equity investors to convert the tax subsidies to cash in order to finance the solar power system capital investment.

Systems can be financed with traditional project finance alone, due to the reduction in system cost. This type of financing is based purely on the expected operational cash flows of the solar project. The government subsidy provides additional profit to the investor or developer, beyond the returns from the sale of solar electricity itself.

Comparison Tax Equity Asset Finance
Size Limit Limit: Aggregate corporate taxable income (Billions) Benefits from strong US corporate earnings Limit: Financial system money supply (Trillions) Benefits from increased market liquidity
Volatility Steep and rapid year-over-year fluctuations in available tax appetite Size of global monetary supply acts as a buffer to keep markets relatively stable

For the first time in history, solar installation may be completed without employing a tax equity financing partner. Cost reduction has lifted the yoke of external tax financing and granted the freedom of the massive asset financing markets to bring solar to every rooftop in California, from San Diego to Sacramento.

Note: A description of solar photovoltaic economics can be found under the”Residential Solar PV System Pricing” section

The initial capital investment of the solar PV system is returned to the capital provider through a stable long-term return provided by the sale of solar electricity to the homeowner, or other power offtaker.

Note: A description of solar photovoltaic economics can be found under the”Residential Solar PV System Pricing” section

Solar Panel Cost Reduction:

The massive reduction in solar panel prices brought about the The Dawn of Grid Parity. $1.00 / W module pricing hit the market 5 years in advance of market analyst expectations. This price reduction was brought about by a massive oversupply of Chinese solar production capacity, which drove margins to zero.

Solar Market Overview

The solar industry contains four glaring country examples of local markets with rich government subsidies, strong sector investment interest, and like all markets only a finite number of locations for solar install. In Spain (2008), the Czech Republic (2009), Italy (2010) and Germany (2011) a nearly identical story unfolded. Solar developers, partnered with capital rich investors, scoured each nation for every viable solar site, submitted interconnection or building permits for each site, and devoured both the government subsidy and the best solar locations as quickly as possible. In a matter of 12-24 months, each of these markets has gone from minimal saturation levels to full PV saturation.

Given the commercial opportunity in the United States, specifically California, there is potential for a similar competitive Gold Rush dynamic to emerge. In 2012, California alone could see up to 5 GW of installation.

California will boom in 2012

Energy Storage Opportunities

The combination of battery storage with would allow the solar PV system to control the rate at which it delivers power to the grid. Currently, owners of solar power systems have no control over the timing of the production of solar electricity. When the energy is produced, it is sold to the grid at a pre-agreed rate. However, because there is no guarantee of electricity production down to the minute-by-minute level, solar power systems cannot reliably sell into the large secondary power markets, the Ancillary Service Markets run by CalISO (California Independent System Operator), the grid balancing authority. In the future, by using battery storage technology, solar PV system owners will be able to effectively time and control the delivery of solar power to the grid, which significantly enhances the value to utility scale electricity customers.

Renewable Energy Integration with the California Electricity Grid

Continued Solar PV installation in California remains unhindered by grid integration issues, which have plagued mature solar markets. Existing”Solar PV-Saturated” markets lack the ability to respond to the grid instability caused by renewable energy.

  1. Voltage Regulation: Existing transformer technology can regulate the voltage variability, at least up to 65% solar PV residential coverage. Next generation solid-state transformer technology will improve this ability further
  2. Power Intermittency: The large wholesale power markets provide sufficient capacity to purchase in real-time electricity to inversely mirror the renewable energy variability, to maintain a smooth production profile
  3. Centralized vs. Distributed Storage: Once the California utilities and balancing authority have exhausted the intermittency balancing ability of the secondary power markets, maintenance of grid stability will require installation of storage resources. However, due to the substantial cost savings from economies of scale in this case, the utilities will adopt large scale storage at the high voltage substation. Initial pilot projects already operate and use sodium sulfur technology. There is limited to no chance of a mandate by the Public Utilities Commission for distributed storage to “firm PV” as a precondition to new solar PV install. Instead, once renewable energy intermittency becomes a large enough problem to warrant dedicated battery storage, the regulators will seek the most efficient, lowest overall cost solution to reduce the overall incremental cost to ratepayers. Even with upcoming cost reductions for distributed storage, centralized storage will always benefit from a cost advantage.The true value of a distributed storage model is the flexibility it provides to expand into different electricity value streams such as the ancillary services markets, currently controlled exclusively by the utilities and energy trading firms.The battery can be used as a defensive measure against a change in the electricity rate scheme by the utility. With a distributed battery product, solar electricity providers could respond to a change in the rate mechanism from consumption based (total usage) to demand based (high peaks, large demand spikes, incur additional payments) and maintain the economic viability of solar power.

Residential Solar PV System Pricing

With the entire tax subsidy included, the investors’ total price can reach $6.00. However, the cost for the system has now fallen to $3.00. This chart depicts how the drop from $4.00 cost to $3.00 cost removes the absolute necessity for tax equity, although it still certainly adds profitability to the project.

System Financial Model:

$3.00 / W Net Present Value at 6% Discount Rate

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