Solar
Power Through 2015:
Re-evaluating
Its Potential
By
Nancy Stauffer, MIT Laboratory
for Energy and the Environment
Based
on more than 200 interviews and detailed financial analyses of 150 solar
power companies, an MIT analyst has concluded that the tendency of energy
experts and decision makers to dismiss solar power as “too expensive
to be important” may be a big mistake.
Indeed,
based on his findings, MIT graduate student Michael G. Rogol predicts
that in 2015 solar power will make up a significant fraction of the
new electricity-generating capacity added worldwide. And most of the
additions will not be stand-alone systems in remote areas but rather
grid-connected systems on people’s roofs.
Throughout
the 1990s, Mr. Rogol worked as a management consultant and market analyst
focusing on oil, natural gas, and electric power. Like others in the
energy field, he knew well that solar power was not economically competitive
in the electricity marketplace. So why did he see more and more people
in Japan and Germany putting solar panels on their houses?
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To
find out, in 2003 Mr. Rogol began a two-year study of the solar power
industry, through the Laboratory for Energy and the Environment. He
interviewed solar power executives, technologists, investors, and policy
makers and performed a comprehensive financial analysis of the global
solar power industry. His analysis confirmed that—despite the
high cost—solar power is indeed spreading. “I found that
the amount of new solar power installed each year [in megawatts] is
23 times greater now than it was in 1994,” he said. “And
almost everyone I’ve interviewed expects annual solar installation
to grow an additional 20 to 25 times in the coming decade.”
Three
observations explain the apparent inconsistency between the high cost
of solar on one hand and the fast growth in solar power installations
on the other. First, when considering the economic viability of solar
power, many energy analysts focus on the cost of generating electricity
at large central power plants using traditional fuels such as coal,
natural gas, and nuclear. That cost ranges from 2¢ to 8¢/kilowatt-hour
(kWh)—far lower than the cost using solar photovoltaic (PV) systems,
which ranges from 25¢ to 50¢/kWh.
“But
when residential customers think about installing a rooftop PV system,
they compare the cost with the price they pay on their electricity bills,”
Mr. Rogol said. “And that price is much higher than the cost of
generating the electricity at the central power plant.” In some
countries, residential prices are already high enough that solar power
is almost cost competitive. A notable example is Japan, where residential
customers now pay more than 25¢/kWh.
A second
factor helping solar power overcome unattractive economics is the continuing
drop in the cost of manufacturing PV panels and other PV system components.
In the solar business, every time the manufacturing capacity for panels
doubles, cost drops by 20%. Demand has grown by 35% a year for the past
decade, so every two and a half years capacity has doubled. The result:
annual cost reductions of 6–8%, which have largely been passed
on to customers in the form of price reductions. As an example, the
figure above shows the steady decline in residential prices for PV panels
in Japan from 1992 to 2003.
Finally,
most analysts do not recognize the magnitude of government support for
solar power in many OECD countries. In Germany, for example, if you
put solar panels on your house, a government program requires your utility
to pay you 70¢/kWh for your PV-generated power—well above
the estimated 40–50¢/kWh cost of producing it. Indeed, if
you take out a low-interest loan to install the panels, the check you
receive each month is larger than the payment due on your loan. Other
markets with strong policies supporting solar power include Japan, South
Korea, Italy, Spain, China, and California and New Jersey.
Falling
costs and strong government support have combined to make solar power
economically competitive for many residential customers. As a result,
demand has been growing quickly—so quickly that it has outstripped
current supply. “Worldwide, the solar market is sold out through
the end of this year, and most capacity for 2006 has already been committed,”
said Mr. Rogol. “Ask your electrician to install panels, and you
can expect to be on a long waiting list.” To meet this strong
demand, manufacturers are rapidly investing in production capacity,
resulting in a projected sector-wide increase of at least 30% in 2005.
With
so much demand from end customers, so much support from governments,
and so much new manufacturing capacity coming online, Mr. Rogol feels
confident that rapid growth in solar power use will continue. According
to his estimates, in 2004 there was more than 1 GW of new solar capacity
installed worldwide—equivalent to adding one large power plant.
By 2010 he estimates that the capacity added each year will be up to
5 GW and by 2015, close to 20 GW.
To
put those numbers into context, the world’s total electricity-generating
capacity in 2004 was 3600 GW. Thus, the new solar capacity did not add
significantly to total global capacity. But the story changes when we
focus on annual additions to capacity. In 2004, new solar capacity accounted
for only about 1% of total additions worldwide. “But given the
rapid growth in new solar capacity, solar will likely make up some 5%
of total annual capacity additions worldwide by 2010 and has realistic
potential to be close to 20% by 2015,” he said. “While solar
will still be a small fraction of total global installed capacity, its
importance in incremental capacity expansions will become much more
significant.”
The
money involved is also significant. Revenue in the solar sector (including
the prices paid for modules, inverters, other components, installation,
and other fees) was about $7 billion in 2004 and should reach $10 billion
in 2005—estimates based on Mr. Rogol’s interviews with the
largest solar companies (for details, see reference 11 in the Publications
and References section). Looking farther out, he predicts that by 2010
it is likely to rise to $30–40 billion, and by 2015 it might be
as much as $80 billion. Why the dramatic growth? Not only are current
companies expanding production but also new companies are joining the
solar market, among them GE and others that have traditionally sold
equipment for large fossil-fuel-fired plants.
How
confident is Mr. Rogol in his estimates? “I think through 2010
these are very safe numbers. I can see out to 2010 with my interviews
and analyses because companies have already made commitments of capital
and resources, and policies are already in place,” he said. “Beyond
that, corporate commitments and government policies become less certain.”
He emphasized that he is not alone in predicting rapid growth in solar
capacity. Executives in companies such as Sharp, BP, Kyocera, Dow Corning,
and Shell are now making major investment plans to expand their solar-related
activities—strategic decisions consistent with expectations of
continued growth.
All
the good news for the coming decade is tempered by long-term challenges
that may disrupt solar power’s growth after 2015. As more and
more people install solar capacity, government subsidies are likely
to become prohibitively expensive and be trimmed back or eliminated
sometime after 2010. And by about 2015, silicon crystalline technology
will likely have reached maturity. While promising new manufacturing
methods are delivering cost reductions, by 2015 all the potential benefits
of efficiency gains, economies of scale, and so on will have been reaped.
Further cost decreases will come only if new, more-efficient solar power
technologies have been developed.
Therefore,
timing is critical. If the present government subsidies for solar power
continue until R&D advances bring the cost of solar-generated electricity
in line with residential electricity prices, then the role of solar
PVs as a power-generation technology could become large. Noting that
possibility, Mr. Rogol stressed the urgent need for “more work
to be done to lay out a detailed, comprehensive analysis of the major
challenges for solar power beyond 2015—challenges that we should
begin to address now.”
Michael
G. Rogol is a Ph.D. candidate in the Engineering Systems Division and
a member of the Martin Family Society of Fellows for Sustainability.
This research was supported by the Martin Family Foundation, CLSA Asia-Pacific
Securities, GE Capital, Cambridge Energy Research Associates, and Photon
International. Further information can be found in references 9–12
below.
References
Rogol,
M. Investing in Solar Power: Hot Spots and Shadows.Presented
to the US Department of Energy’s National Renewable Energy Laboratory’s
Solar Energy Technology Review. October 2004. Contact Michael Rogol
at michaelr@MIT.EDU. (Ref. 9)
Rogol,
M. Solar Power through 2020: Potential and Challenges.Presented
at the MIT
Laboratory for Energy and the Environment’s Environment and Sustainability
Seminar Series, October 6, 2004. Contact Michael Rogol at michaelr@MIT.EDU.
(Ref. 10)
Rogol,
M. Sun Screen: Investment Opportunities in Solar Power.CLSA
Asia-Pacific Markets. July 2004. Available at http://photon-magazine.com/.
(Ref. 11)
Rogol,
M. Tipping Point: Will Japan Become the First Mass Market for Solar
Power? Cambridge Energy Research Associates. February 2004. Contact
Michael Rogol at michaelr@MIT.EDU.
(Ref. 12)
(Note:
This article was originally published in the March 2005 issue of energy
& environment, the newsletter of the MIT
Laboratory for Energy and the Environment.)
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