Could solar power fall victim to its own success? That appears to be the underlying suggestion from two solar analysts who examined the industry’s long-term prospects.
The problem relates to “value deflation,” a theoretical concept from economics — but one with real-world implications.
Writing in a recent edition of Nature Energy, analysts Varun Sivaram and Shayle Kann describe a paradox: in order for solar to successfully compete in the market without subsidies, the installation cost of solar would have to drop to some target point. But as solar approaches that target, the target itself would drop.
How is this possible? Consider that solar plants pump out the most power during the hottest parts of the day, which also happens to be when wholesale power typically costs more due to high demand. Because solar plants also have zero marginal costs (that is, once developed, a solar installation provides power for free) they end up getting tapped by grid operators over more expensive alternatives during these high energy-cost days. The addition of this low marginal-cost power during high-demand days tends to suppress wholesale power prices generally. And this, in turn, tends to push down the target installation price that solar developers must meet to remain competitive.
Viola. Value deflation. A paradox.
“Cost-competitiveness for solar is a moving target,” write Sivaram and Kann. “As solar’s share of the electricity mix increases, the cost of each new solar project must fall to compete. This ‘value deflation’ effect of solar at higher penetrations is a well-known theoretical concept, but it is rarely discussed as a matter of practice in the solar industry.”
The current installed price of solar is about $3 per watt. But taking into account future market conditions and value deflation, the industry should target a $0.25-per-watt price by 2050, according to the analysts. As Vox writer Brad Plumer puts it: that’s a mind-bogglingly low number. “Current approaches to cutting costs won’t necessarily get us there. We may need experimental new technologies. Or novel ways of integrating solar into our walls and windows. Or robot installers.”
Sounds daunting. In an interview, however, Sivaram and Kann acknowledge that it will be many years before value deflation presents serious challenges for solar development.
Is a policy analyst consultant for TCAP, a coalition of political subdivisions in Texas that purchase electricity in the deregulated market for their own governmental use. Because energy costs are typically a significant budget item to our members, TCAP is consistently looking for ways to save our members money, through cost-saving contracts, energy efficiency or demand response programs.