Better than grid parity

On a sunny day in late May, workers officially connected a 3.8 MW solar project to the grid on sandy ground in the U.S. state of Utah. The South Milford plant comprises tens of thousands of PV modules, and as such is the largest solar plant to come online in the state to date. While the arid lands of Beaver County, Utah, receive plenty of sun, the state has no mandate that utilities procure electricity from renewable energy, and as such Rocky Mountain Power had not previously purchased power from any large solar projects.
That is, before the South Milford plant and the six other PV projects that SunEdison is building in the region, which together comprise the “Seven Sisters.” Before its purchase by SunEdison, First Wind entered into a power purchase agreement (PPA) with Rocky Mountain Power parent company PacifiCorp for the projects, using a U.S. federal obligation that utilities must buy power from independent producers if the electricity generated costs less than they would otherwise pay to procure power.
This is one of the few times in recent decades that the 1978 Public Utilities Regulatory Policies Act (PURPA) has been used to support a contract for a utility-scale solar project. In order to qualify for PURPA, an independent power producer must offer power lower than a calculation of the utility’s “avoided cost.” In the past this figure was far too low to make the numbers work, even under the best circumstances.
With falling costs for solar PV of all scales, and particularly utility-scale solar, this is changing. Using PURPA, SunEdison and Norway’s Scatec Solar have secured PPAs for hundreds of megawatts of solar projects in Utah alone. Add in projects in Idaho, Oregon, Montana, Wyoming, and North and South Carolina, and a host of developers have secured PURPA contracts for around 1.65 GW of utility-scale solar projects to date.

5.5 GW of cost-competitive solar

Traditionally, utility-scale solar PV in the U.S. has been driven almost exclusively by Renewable Portfolio Standard (RPS) policies, which mandate that utilities must procure an increasing percentage of their electricity from renewable energy sources. As 28 states (and the District of Columbia) have RPS mandates, these policies have driven the utility-scale sector across the nation.
However, in the last two years this has begun to change, and PURPA is not the only alternative mechanism through which developers are selling power. AtGreentech Media’s Solar Summit in April, GTM Research announced that 5.3 GW of contracts have been signed for utility-scale solar projects outside of RPS requirements. Since that time, the company has updated this capacity to 5.5 GW.
In addition to PURPA contracts, this included more than 1.8 GW of solar projects that secured contracts through utility requests for proposals and more than 1.1 GW of projects where utilities entered into contracts with developers outside of formal procurement processes, such as NextEra’s sale of power to the federally owned Tennessee Valley Authority. GTM Research also identified nearly 500 MW of contracts where corporations are bypassing utilities to buy power directly from off-site, utility-scale solar projects, and around 300 MW of utility-owned solar and merchant solar projects.
In all of these projects the sale of electricity is not driven by mandates, and not primarily by environmental concerns. “All of these projects that are being procured are happening because it makes sense from an economic lens,” explains GTM Research Solar Analyst Cory Honeyman.

Better than grid parity

Much of the public and even solar industry conversation around the cost of solar involves the concept of “grid parity,” as the point at which the cost of solar is competitive with retail electricity rates. The assumption is usually that once solar reaches grid parity, dramatic market growth will ensue.
Rooftop solar has already hit this point in several global markets including Hawaii, and utility-scale PV is farther ahead. However, the truth is far more complex and grid parity is really only useful as a metric for behind-the-meter solar. What these 5.5 GW of projects have achieved is a more concrete manifestation of PV’s competitiveness with conventional generation than grid parity. Not only is solar theoretically more cost-effective than other forms of electricity generation, but corporations and utilities are validating that claim with business decisions, and in other cases being forced to buy power from solar because it is so cheap.
“I think what that means, this really becomes a resource that’s not viewed as a renewable resource, but as a conventional generation resource,” notes Honeyman.
The world of electricity pricing is complex, and there are multiple factors behind economic competitiveness. GTM Research says that in many cases, utilities are signing solar contracts as a hedge against volatile natural gas prices. “The price conversation is two things: the hedging factor, and the situations where solar is actually cheaper than the natural gas being procured,” states Honeyman.
Eligibility for PURPA is likewise complicated, and varies across the nation. Utilities have different avoided costs for generation, and state regulatory agencies determine the implementation of the law, including methodologies for calculation of avoided cost, contract lengths, and other essential details.

Enter the ITC drop-down

This entire 5.5 GW of projects, spread across the nation, is intended to come online by the end of 2016, when the federal investment tax credit (ITC) declines to 10%. This 30% tax credit has a major impact on project economics, and as such it is unlikely that without it many of these projects would either qualify for PURPA or be a cost-competitive choice for utilities.
Utilities and developers are rushing to meet RPS requirements and commission large pipelines of solar projects to take advantage of this credit. Once January 1, 2017 arrives, GTM Research predicts a precipitous fall in construction of utility-scale solar, including these non-RPS projects.
Of course, construction will not stop entirely, and there will be projects that do not meet the deadline. Notably, there is a question of whether or not the contractors who will build these plants will be able to complete the entire 5.5 GW by the end of 2016, especially as there is another 8.9 GW of utility-scale solar being built under RPS requirements.

The long view

GTM’s Honeyman says that while these projects will be much less tenable in 2017, the long-term outlook is good. “There are a lot of reasons to remain optimistic in terms of finding some opportunities for cost reduction as you move further down the road, later in this decade,” he notes.
Like all market analysts, the staff at GTM Research tempers its optimism with caution. The company’s most recent
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projections show the U.S. solar market returning to a 2015 level of 8 GW in 2019, but with the utility-scale portion making up a smaller percentage than distributed solar – a reversal of current market shares.
There are others who are more optimistic about the future of the U.S. solar market. Tony Seba is an author, entrepreneur and Stanford lecturer whose 2014 book rose to the #2 position among best-selling titles in the Oil and Energy section of Amazon.com. Clean Disruption predicts that solar PV will become not only the main electricity source, but the main source of energy globally within the next 15 years.
“The cost curve [of utility-scale solar] is on a disruptive path,” Seba told pv magazine . “If you look at the cost data over the last few years, you’ll see clearly that utility-scale is going down, down, down.” Seba stresses the trend of corporations beginning to buy power directly from solar projects, describing Apple’s 110 MW power contract with First Solar as “not surprising.” He echoes GTM’s Honeyman in emphasizing that price stability is a factor here. “The key thing to remember is that corporations value not just low-cost inputs, they also value predictability,” explains Seba.
Consistent with his writings that the falling cost of solar PV will cause it to rapidly disrupt traditional energy industries, Seba told pv magazine to “expect more” sale of solar outside mandates, as costs continue their downward cost curve. Seba is also less concerned about the end of the federal ITC. He says that while he thinks the ITC was useful in the recent past, it has become “more of a hindrance” to solar, noting that it keeps the solar industry dependent upon tax equity investment.
“What we have seen is that there are only a few dozen investors with the capability and the appetite for tax equity investment,” comments Seba. “That means that tax equity is expensive.” Seba also notes that the end of the ITC will broaden the range of investors who are able to participate in solar projects.
While casting the end of the ITC as a benefit to the solar industry remains a minority viewpoint within the industry, Seba is not alone in seeing the ITC as problematic. SunEdison Founder Jigar Shah has also publicly called for the industry to let the credit expire, as have the CEOs of a number of third-party solar companies. And while Seba acknowledges that the end of the ITC will be a “speed bump,” he expects continued rapid growth in the U.S. solar market without it.

Exceeding expectations

Tony Seba is more optimistic about the future of solar than any of the main organizations projecting the future of renewable energy – including not only Greentech Media, but the International Energy Agency (IEA), the U.S. Department of Energy (DOE), and even Greenpeace. However, it is also important to note that organizations like IEA, DOE and Greenpeace produce long-term forecasts that consistently underestimate the growth of solar markets, although Greenpeace’s estimates have been the closest.
Seba says that this is typical for a technology disruption, noting that business and technology experts consistently failed to predict that the cell phone, internet, or automotive industries would grow as quickly as they did. One factor cited by Seba is that Solar PV is a semiconductor-based technology, and is following similar trends in cost declines to microprocessors.
Utility-scale solar is not at the heart of Seba’s predictions, which primarily focus on rooftop solar and storage. Ultimately, he argues that once costs for rooftop solar with storage decline below the cost of transmission, other forms of electricity generation will become obsolete.
Such predictions raise more than a few eyebrows. Yet if the current cost trends continue, solar PV will become the lowest-cost source of electricity in every market segment within at most a few decades. While the exact date that this happens will vary according to scale, market and geography, the sale of electricity from utility-scale solar outside of RPS requirements is a strong indicator that this moment is arriving. It may be sooner than we think.