TODAY’S STUDY: MORE EVIDENCE THAT SUN’S PRICE IS COMPETITIVE

Levelized Cost of Solar Photovoltaics in North Carolina
Miriam Makhyoun, Rich Crowley and Paul Quinlan, February 2012 (North Carolina Sustainable Energy Association)

Executive Summary

As of September 30, 2011, North Carolina ranked 8th in the U.S. for cumulative installed solar photovoltaic (PV) capacity.1 As of October 31, 2011, there were 1,142 solar PV systems totaling over 128 megawatts of capacity registered with the North Carolina Utilities Commission to be installed in North Carolina from 2006 to 2011. These systems range in capacity from small residential systems to one of the largest solar projects on the East Coast, located in Davidson County.

Considering the robust growth of solar PV installations in North Carolina, the purpose of this report is to evaluate the cost of solar PV systems in relation to the retail price of electricity provided from electric utilities in North Carolina. In particular, the report considers when the declining cost of solar PV systems reaches grid parity or becomes equal to electricity prices in North Carolina. The report also considers the impact of PV system capacity and the presence or absence of federal and state tax credits on the cost of solar PV systems.

A key component of the research evaluated the levelized cost of energy (LCOE) of North Carolina solar PV systems. The LCOE of solar PV systems reflects the price at which energy must be sold to break even over the assumed economic life of the system. The LCOE equation takes into account system costs, as well as factors including financing, insurance, operations and maintenance, depreciation schedules and any applicable incentives. The analysis used the System Advisor Model (SAM) developed by the National Renewable Energy Laboratory2 to calculate the LCOE under a series of ownership and systems capacity scenarios from 2006 to 2020. In addition, retail electricity prices were calculated for 2006 to 2020. Finally, the evaluation compared the LCOE of solar PV systems and the retail electricity prices in nine scenarios to identify if and when the declining LCOE of solar PV intersects with increasing retail electricity prices.

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Key findings from this report include:

• For many electric utilities, solar PV systems greater than 10 kW with federal and state tax credits were at grid parity or cost competitive with commercial retail electricity prices in North Carolina in 2011.

• Solar PV systems greater than 500 kW with federal and state tax credits achieve grid parity or become cost competitive with commercial retail electricity prices for all North Carolina electric utilities in 2015.

• Solar PV systems greater than 10 kW through 500 kW with federal and state tax credits achieve grid parity or become cost competitive with commercial retail electricity prices for all North Carolina electric utilities in 2018.

• Solar PV systems 10 kW or less taking federal and state tax credits achieve grid parity or become cost competitive with residential retail electricity prices for the majority of North Carolina electric utilities in 2020.

• For many electric utilities, solar PV without federal and state tax credits will be at grid parity or cost competitive with retail electricity prices in North Carolina in 2020.

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Summary of Methodology

Considering the robust growth of solar PV installations in North Carolina, the purpose of this report is to evaluate the cost of solar PV systems in relation to the retail electricity price charged by electric utilities in North Carolina. In particular, the report evaluates when the declining cost of solar PV systems will reach “grid parity” – the point at which the amortized cost of a solar PV system becomes equal to retail electricity prices in North Carolina. The report also evaluates the impact of PV system capacity and the presence or absence of federal and state tax credits on the cost of solar PV systems. This analysis was conducted in three phases as outlined below.

It is important to note that the numbers presented in this report are projections based on historical trends in North Carolina. As with any projection, there is a degree of uncertainty within the modeled parameters that increases the further they are modeled into the future. This report is intended to be useful to evaluate the near-term trends for solar PV system grid parity with electric retail prices; however, changes in parameters can significantly alter the results of this analysis.

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(1) Calculating the Levelized Cost of Energy (LCOE) of Solar PV Systems

This research estimated and evaluated the levelized cost of energy (LCOE) of solar PV systems. The LCOE of solar PV systems reflects the price at which energy must be sold to break even over the assumed economic life of the system.11 Stated another way, it is the cost incurred to install and maintain an energy-producing system divided by the energy the system will produce over its lifetime of operation:

This equation yields a net present value in the familiar cents per kilowatt-hour (kWh) of electricity generated. This is an assessment of the economic lifetime energy cost and energy production and can be applied to essentially any energy technology. It is frequently used to evaluate a technology or energy system against electricity purchased from the grid.12 The LCOE equation takes into account system costs, as well as factors including financing, insurance, operations and maintenance (O&M), depreciation and any applicable incentives. Installed costs are a primary driver for solar PV systems as they lack fuel costs and require minimal O&M.

Historical installed costs were derived from 1,037 PV systems registered with the NCUC that contain cost data and evaluated in three categories based on system capacity (see Table 2). Systems were categorized and analyzed by their expected installation date, not the registration date with the NCUC. Significant outliers were removed before data analysis. Within each category of system capacity, the mean installed cost was calculated for 2006 to 2011, where data was available. Projected costs for solar PV systems for 2012 through 2020 were modeled from historical data, bounded by an assumption that the installed cost of solar PV systems do not drop below $1 per Watt.

Once installed figures were calculated, the analysis used the System Advisor Model (SAM) developed by the National Renewable Energy Laboratory13 to calculate the LCOE of a solar PV system installed in Raleigh, North Carolina each year from 2006 to 2020, where data was available. Systems that were 10 kW or less in capacity were assumed to be residential installations with residential ownership for tax purposes. The two larger system categories were assumed to be commercial installations with commercial ownership for tax purposes. In addition, a key variable considered within each capacity category was the presence or absence of the 30% federal tax credit and 35% state tax credit. While the federal and state tax credits are set to expire at the end of 2016 and 2015 respectively, this analysis assumes their existence through 2020. The final outcome was six LCOE trend lines for solar PV systems in North Carolina (see Table 3). A full set of assumptions used within the LCOE modeling can be found in Appendix A.

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(2) Calculating Retail Electricity Prices for Residential and Commercial Customers

Historical electricity prices were derived from data collected from the Energy Information Administration. Historical retail electricity prices for 2001 through 2010 were categorized by (1) residential or customer class and (2) type of electric utility (cooperative, investor-owned, or municipal utility). This report considered electricity prices for 31 cooperative, 71 municipal and 3 investor-owned electric utilities. Electricity prices were modeled for 2011 to 2020 using historical data for each electric utility. The highest retail price, median retail price, and lowest retail price for cooperative and municipal utilities were used to generate an electricity price band for residential and commercial customers for each of these utility types. It should be noted that this analysis examines retail electricity prices and not retail electricity rates, because the available data does not compile the variety of rates offered to residential and commercial electric customers. In addition, the number of utility customers used in this report reflects figures from 2010. These figures remain constant in the analysis and are not projected for future years. Additional details concerning electricity price calculations can be found in Appendix A.

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(3) Evaluating Grid Parity - Comparing LCOE of Solar PV Systems and Retail Electricity Prices

The final stage of analysis was generating nine scenarios that compare the LCOE of solar PV systems and the retail electricity prices of various electric utilities (see Table 4). The final stage was designed to identify if and when the declining LCOE of solar PV intersects with the increasing retail electricity prices. The term frequently used to describe this intersection is “grid parity”.

This analysis evaluates the LCOE of solar PV systems reaching grid parity with retail electricity prices in two ways. First, the analysis calculates the percentage of utilities where solar PV systems meet grid parity with retail electricity prices. Second, the analysis calculates the number of residential or commercial electric customers served by a utility where solar PV systems meet grid parity with retail electricity prices. The percent of utilities and number of customers calculated for each year are considered within each of the nine evaluated scenarios.

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Conclusions

For many electric utilities, solar PV systems greater than 10 kW with federal and state tax credits were at grid parity or cost competitive with commercial retail electricity prices in North Carolina in 2011.

The LCOE of solar PV systems greater than 500 kW taking federal and state tax credits was $0.09/kWh in 2011. This figure was at or below the retail commercial electricity prices for 74 of the 104 electric utilities, or 71% of utilities in North Carolina. These cooperative and municipal electric utilities at grid parity serve over 107,000 commercial customers in North Carolina. However, grid parity was not present with commercial electricity prices provided by investor-owned utilities, which serve 71% of the commercial customers in North Carolina.

The LCOE of solar PV for systems greater than 10 kW through 500 kW was also found to be at grid parity in certain instances. The LCOE of these systems with federal and state tax credits was $0.12/kWh in 2011, which was at or below the retail commercial electricity prices for 28 of the 104 electric utilities, or 27% of the electric utilities in North Carolina. These cooperative and municipal electric utilities serve over 28,000 commercial customers in North Carolina.

Several scenarios produced results where the LCOE of solar PV system was not at grid parity with electricity prices in North Carolina in 2011. The removal of federal and state tax credits from the commercial solar PV systems noted above resulted in installations that were not at grid parity with any commercial electricity prices in North Carolina. Further, solar PV systems 10 kW or less taking federal and state tax credits demonstrated a significantly higher LCOE of $0.19/kWh in 2011. This higher LCOE figure reflects economies of scale achieved in larger installations and tax depreciation benefits from commercial ownership. As a result, solar PV systems 10 kW or less were not at grid parity with residential electricity prices for any electric utility in North Carolina in 2011.

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Solar PV systems greater than 500 kW with federal and state tax credits achieve grid parity or become cost competitive with commercial retail electricity prices for all North Carolina electric utilities in 2015.

The LCOE of solar PV systems greater than 500 kW with federal and state tax credits is $0.06/kWh in 2015. This LCOE figure is at or below the projected retail commercial electricity price for all 104 electric utilities in North Carolina. Solar PV achieves full grid parity with retail commercial electricity prices within all cooperative utilities in 2012, all investor-owned utilities in 2014, and all municipal utilities in 2015.

In the absence of the federal and state tax credit in 2015, the LCOE of solar PV systems greater than 500 kW increases to $0.14/kWh. The result is an LCOE figure at or below the projected retail commercial electricity price for only 20 electric utilities in North Carolina in 2015.

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Solar PV systems greater than 10 kW through 500 kW with federal and state tax credits achieve grid parity or become cost competitive with commercial retail electricity prices for all North Carolina electric utilities in 2018.

The LCOE of solar PV systems greater than 10 kW through 500 kW with federal and state tax credits is $0.07/kWh in 2018. This LCOE figure is at or below the projected retail commercial electricity price for all 104 electric utilities in North Carolina. Solar PV achieves full grid parity with retail commercial electricity prices within all cooperative utilities in 2015, all investor-owned utilities in 2017, and all municipal utilities in 2018.

In the absence of the federal and state tax credit in 2018, the LCOE of solar PV systems greater than 10 kW through 500 kW climbs to $0.15/kWh. The result is an LCOE figure at or below the projected retail commercial electricity price for 22 electric utilities in North Carolina in 2018.

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Solar PV systems 10 kW or less taking federal and state tax credits achieve grid parity or become cost competitive with residential retail electricity prices for the majority of North Carolina electric utilities in 2020.

The LCOE of solar PV systems 10 kW or less with federal and state tax credits is $0.11/kWh in 2020. This LCOE figure is at or below the projected retail residential electricity price for 97 of 105 electric utilities,14 or 92% of the electric utilities in North Carolina. Solar PV achieves grid parity with retail residential electricity prices within all cooperative utilities in 2018, and the majority of investor-owned and municipal utilities in 2020. These electric utilities at grid parity serve nearly 2.5 million residential customers, or 62% of residential customers in North Carolina. Solar PV does not achieve grid parity with residential electricity prices offered by Duke Energy, which serves 1.1 million residential customers in North Carolina.

In the absence of the federal and state tax credit, the LCOE of solar PV systems increases to $0.17/kWh in 2020. The result is an LCOE figure at or below the projected retail residential electricity price for 33 electric utilities in North Carolina in 2015. The number of residential customers served by electric utilities at grid parity drops dramatically to 96,000 customers.

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For many electric utilities, solar PV without federal and state tax credits will be at grid parity or cost competitive with retail electricity prices in North Carolina in 2020.

In 2020, the LCOE of solar PV systems greater than 500 kW without federal and state tax credits is $0.10/kWh. These systems will be at grid parity with commercial electricity prices for 88 electric utilities in North Carolina, including all cooperative utilities and the majority of municipal and investor-owned utilities. These electric utilities currently serve 350,000 commercial customers, or 54% of all commercial customers in North Carolina.

The LCOE of solar PV systems greater than 10 kW through 500 kW without federal and state tax credits is $0.13/kWh in 2020. These systems will be at grid parity with commercial electricity prices for 52 cooperative and municipal electric utilities in North Carolina. These electric utilities serve over 75,000 commercial customers today. These systems will not be at grid parity with commercial electricity prices of investor-owned utilities.

Finally, the LCOE of solar PV systems 10 kW or less without federal and state tax credits is $0.17/kWh in 2020. These systems will be at grid parity with residential electricity prices for 33 cooperative and municipal electric utilities in North Carolina. As noted earlier, these electric utilities serve 96,000 residential customers.