The Transformer – January 22, 2007

Vol.4, No.1

Shedding some light on solar costs


As a renewable energy source, solar panels — or photovoltaics (PVs) — are still not widely utilized or generally seen as cost effective in this region. Two factors are combining to change that conclusion, however.  First, skyrocketing demand has dramatically driven down PV costs.  Second, utilities — especially urban, summer-peaking, transmission-constrained utilities – are starting to appreciate the benefits of solar.

Worldwide PV demand has been increasing exponentially.  We’ve come a long way since “solar pioneers” wishing to demonstrate their environmental friendliness began installing pricy systems on their homes and businesses.  These days, PVs are more and more in demand from Third World countries lacking expensive power grids.  In 2004, about 1 billion watts (1,000 megawatts) of solar PVs were built worldwide.  Given that the typical installation – most commonly to run a small water pump and charge a battery to power a light, TV, ceiling fan or refrigerator — requires only a couple hundred watts or less, that’s a lot of panels.

PVs have become big business, with about $7 billion in worldwide sales in 2004.  Manufacturing costs plummeted about 30 percent from 1999 to 2003, although demand is so great that local dealers have seen rising sales prices over the past year for the hard-to-come-by panels.

However, solar remains a very expensive option for First World countries with grids that distribute power from large central station generating plants.  John McIntosh, general manager of Bend, Ore-based Cascade Sun Works, provided some real-life numbers:  A typical 3,000 kilowatt home PV installation in central Oregon will produce about 3,700 kilowatt-hours of electricity a year and cost about $20,000.

Over its 25-year guaranteed life, that works out to about 40 cents per kilowatt-hour, compared to the typical utility rate of 6-8 cents per kilowatt-hour.  (Credits and grants from Oregon’s Department of Energy and the Energy Trust cover about half that amount, cutting the owner’s cost to about 20 cents per kilowatt-hour … still not competitive with the utility.)

The numbers say PV is far from competitive in our market.  But a new study by the chief economist for Americans for Solar Power suggests this comparison does not tell the whole story.

The rest of the story

In 2005, as part of a California Public Utility Commission rulemaking process involving the benefits and costs of distributed generation, Dr. Lori Smith Schell presented an assessment ( of photovoltaics’ value in reducing — or “avoiding” — costs to California utilities.

The California utilities face some particular problems:  strongly peaking summer afternoon loads, loaded-to-capacity transmission and distribution systems, and airshed problems from acid rain and respiratory illness-causing nitrogen and sulfur oxide emissions.  Interestingly, similar problems face Boise, Idaho, and Salt Lake City — two cities whose rapidly growing loads (driven by air-conditioning needs) have led their two utilities, Idaho Power and PacifiCorp, to propose spending hundreds of millions of dollars on new coal plants, transmission lines, and demand-reduction programs to cycle-off air conditioners and irrigation pumps.  Schell’s analysis also could apply to other fast-growing, summer-peaking areas such as Bend, Ore., and the Tri-Cities and Spokane, Wash.

Schell found that solar PVs provide power at exactly the right time:  on hot, sunny afternoons when air-conditioners are going all out, and thus when utilities’ costs and stress on the wires and infrastructure are highest.

Serving these summer peaks is costly for several reasons.  First, the utility must have “peaking” resources available that are used for just a few hours each summer afternoon.  That’s expensive.  Second, the utility must build its transmission and distribution system large enough to handle its peak load, or the lights will go out.  Third, electrical line losses — heat generated by power transmission — are much higher when the system is maxed out.  Finally, reserve requirements — the amount of extra generating capacity a utility must have available in case of an emergency — are calculated based on peak use.

Waste not, pay not

A system in which a quarter of the sunk capital costs of generation, transmission and distribution are caused by a few hours a year of peak use is inherently wasteful.  Shaving that peak can save the utility a bundle.

So when a customer installs a PV array on a house or business, the utility avoids having to purchase power, equipment or transmission rights during peak times.  The value of energy at peak is much higher than the utility’s average cost per kilowatt-hour, and utility rates reflect average costs.

The Schell study looks at those peak periods and calculates the value to the system of not using fossil fuel plants to provide peak needs.  The following graph adds up the major benefits.  As can be seen, much of that value comes from avoiding  (not having to pay for) fossil fuel plants and the wires that transmit and distribute the power. The rest comes from avoiding the emissions those plants would produce.

As the chart shows, the value to the utility system of solar power is between 7.8 cents and 22.4 cents per kilowatt-hour.  That makes solar close to cost-effective right now when used to meet a fast-growing utility’s summer peaking need.


Northwest utilities, regulators and policy-makers would be wise to assess the full, comparative value of solar PV and other forms of distributed generation before investing ratepayer and shareholder dollars quite-likely unnecessary and often financially risky new transmission and central generation resources.  Given the historical improvement in technology, it is quite likely that solar PVs will soon be the least-cost choice for utilities serving many sun-drenched cities.  In addition, requiring PV installation at the time of construction for these fast–growing, summer-peaking areas allows a broader array of PV technologies to be applied.

Additional resources

ASPv Economists Unveil Landmark Study of Solar Electricity Benefits

Americans for Solar Power

American Solar Energy Society

Solar Oregon

Solar Washington

The Northwest Solar Center