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Francis O’Sullivan and Richard Schmalensee
Rutgers Energy Institute, November 6, 2015
The latest in the MIT “Future of…” studies exploring the
roles of key energy technologies in a carbon-constrained future
Limiting climate risk to acceptable levels will require
drastic reductions in global carbon dioxide emissions
from electricity generation by mid-century.
This will be politically difficult unless the electric power sector can also
meet the needs of a growing global economy at reasonable cost.
Solar is about 1% of global generation; can it be scaled up by around 50x
by 2050 to play a major role in meeting future electricity demand?
If so, what policies would make this most likely? 2
With today’s technology, total U.S. electricity demand could be
met by solar covering 0.43% of the contiguous U.S.
Source: Map adapted from Albuisson, M., M. Lefevre, and L. Wald. Averaged Solar Radiation 1990-2004, Ecole des Mines de Paris. (2006).
Map showing global variations in average annual solar irradiance
3
The scale and distribution of the solar resource make it one of the few low
carbon technologies capable of meeting a substantial fraction of
worldwide electricity demand even with rapid economic growth.
Today we have two practical pathways for generating solar electricity, PV
and CSP – PV dominates contemporary solar electricity generation and it will
continue to do so for the foreseeable future
Solar photovoltaics (PV) - Mature:
~97% of global
solar capacity
- Modular:
efficiency does not
depend on scale
- Output responds
immediately to
changes in
insolation
Concentrated solar power (CSP) - Less mature,
more expensive
- Capital costs
fall with scale
- Needs clear skies
- Dispatchable when
thermal storage is
added
4
5
The past half decade has borne witness to remarkable growth in the scale of
installed solar generation capacity – This year will see 65GW of new PV
capacity come online with 40 GW coming from the US, Japan and China alone
0
50
100
150
200
250
2008 2009 2010 2011 2012 2013 2014 2015E
USA
China
Europe
ROW
Cumulative global installed PV capacity
GW
Global installed solar capacity will approach 250GW
by the end of 2015, a 12X expansion since 2008
Source: MIT Analysis, National Renewable Energy Laboratory, Lawrence Berkeley National Laboratory, Solar Energy Industry Association, European Photovoltaic Industry Association, IHS
65 GW of new PV
capacity in 2015
6
The pathway for solar growth depends on the local market – In the US and
China, utility scale systems are the dominant growth vector, while in markets
like Japan distributed systems lead the way
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
2008 2009 2010 2011 2012 2013 2014 2015E
Utility
Commercial
Residential
Annual US PV capacity additions by system type
MW
0
4000
8000
12000
16000
20000
2014
Other
New Mexico
Texas
New York
Hawaii
Nevada
Massachusetts
North Carolina
New Jersey
Arizona
California
Cumulative PV capacity by state (2014)
MW
In the US, close to 60% of all PV capacity is in the
form of utility-scale units
Source: MIT Analysis, National Renewable Energy Laboratory, Lawrence Berkeley National Laboratory, Solar Energy Industry Association, European Photovoltaic Industry Association, IHS
Deployment support at federal,
state, and local levels has also
driven growth
… but federal subsidies are scheduled to
be drastically cut from 2017, and
state programs have not expanded
recently
… and there has been a backlash
against rooftop solar in some states
7 Source: MIT Analysis, National Renewable Energy Laboratory, Lawrence Berkeley National Laboratory, U.S. Department of Energy, Solar Energy Industry Association, Photon Consulting
LLC
Rapid declines in PV module prices
have been important drivers of
growth
… but these declines may have slowed
… and BOS costs have declined much
less rapidly
Evolution of PV module & system prices
$/Wp
MODULE
Price Drop
~85%
UTILITY
PV system
MODULE
BOS
RESIDENTIAL
PV System
A large reduction in the cost of PV modules has been a key factor in the
recent growth of solar installations – These dynamics also mean that the
focus of solar economics is shifting to the balance-of-system (BOS)
8
Levelized cost of electricity
$/MWh
0
50
100
150
200
250
300
350
Gas Combined Cycle
76
Benchmark LCOE
for Natural Gas
Generation
PV Systems
ITC Subsidy Value
CA MA
Regional variation
Minimum LCOE
CA MA
Utility-Scale
PV
Residential-Scale
PV
105
158
* CSP LCOE numbers based on CA system having 11 hours and MA system having 8 hours of nameplate capacity storage
Source: MIT Analysis, U.S. Energy Information Administration
With these lower costs, utility-scale PV is increasingly competitive in
regions with high quality solar resource like CA, even without subsidy –
But residential PV and CSP systems have notably higher costs
CSP Systems*
192
287
CA MA
141
CSP
331 After Subsidy LCOE
9
However, as PV penetration increases the average price a PV generator
receives will be suppressed significantly – For solar to succeed at very large
scales, its costs must be reduced substantially
Source: MIT Analysis
60
20
55
50
45
40
35
30
25
0 36 6 12 18 24 30
Illustration of how the price a solar generator receives for its output can fall well
below the average market price as solar penetration increases
$/MWh
Solar Penetration
(% Peak Demand)
10
Increasing solar penetration in Germany has already lead to this new pricing
paradigm in their power system – Large-scale solar generation has led to
shaving of peak prices in the Germany wholesale power market
At marginal
penetration the
realized peak
price is high
As penetration rises
the peak price is
suppressed
Source: MIT Future of Solar Study
In light of all this, what needs to be done now to make it more likely that
solar energy can play a major role in limiting climate change?
11
Three main messages:
1. A long-term approach should be taken to technology
development
2. Preparation should be made for much greater
penetration of PV generation
3. Subsidies for solar deployment should be reformed
to improve their efficiency
Message 1:
A long-term approach should be taken to technology
development
What that means in practice:
Federal R&D spending should focus on emerging technologies with
the potential to deliver transformative cost reductions; the private
sector has the incentives and ability to improve those technologies
that are currently commercially marketed.
12
Wafer-based PV technologies and in particular crystalline silicon (c-Si)
dominate today’s solar market – In may respects this is a very attractive
technology but it has limitations
13
Current c-Si PV technology
c-Si PV technology is efficient and mature, but its intrinsic properties
may limit the potential for much further system cost reductions
ADVANTAGES
Efficient
Reliable
Robust and
Durable
Abundant
Non-toxic
DISADVANTAGES
Thick wafers
Rigid and heavy
Complex
manufacturing
14
With today’s c-Si PV technology balance of system (BOS) costs dominate
total system costs – Industry has the ability and incentive to reduce BOS
costs
14 Source: MIT Analysis
0.65 0.40
0.40 0.05
0.30
1.80
0.00
1.00
2.00
Module Inverter & OtherHardware
Engineering andConstruction
Sales Tax Margin and G&A System Cost
2014 System cost build-up $/W
Balance of System
Utility-Scale
PV
BOS now accounts
for 65% of utility-scale
system cost
0.65
0.90
0.35
0.56
0.05
0.74
3.25
0.00
1.00
2.00
3.00
Module Inverter, OtherHardware &
Logistics
InstallationLabor
CustomerAcquisition &
PII
Sales Tax Margin andG&A
System Cost
2014 System cost build-up $/W
Balance of System
Residential-Scale
PV
BOS now accounts for
80% of residential-scale
system cost
15
Emerging thin-film technologies have the potential to lower both
module and BOS costs
Light & Flexible High-throughput Abundant
Much more R&D needs to be done, and this is where federal
solar R&D should focus
15
Kaltenbrunner, et al. 2012
(Current) Challenges
Low efficiency
Low stability
Unproven at scale
16
DOE solar R&D funding has increasingly focused on
areas other than core solar technology development
0
50
100
150
200
250
300
350
400
2010 2011 2012 2013 2014 2015 2016*
Breakdown of DOE’s Solar Energy Technology Office budget
$110M
or
31%
$241M
or
69%
Funding for work on
Current Technologies
addressing:
• grid integration
• enhanced manufacturing
competitiveness
• reduction of c-Si
BOS “soft costs”
Funding for work
directly focused on
Advanced Solar
Technologies
* 2016 SETO budget values are proposed not actual
Source: Department of Energy Annual Budget Justification statements
PV
CSP
Other
$Millions
17
To reduce CSP costs substantially, new high-temperature system
designs & materials must be developed and tested at pilot scale
Reminder:
Storage is integral for CSP
in the form of stored heat
that can be used on demand
to produce electricity
More efficient solar
collectors can convert
more of the incident
solar energy into thermal
energy Higher-temperature
power cycles can
convert more of the
absorbed thermal
energy into electricity
Source: MIT Analysis
CSP energy losses and opportunities
Key Recommendations:
Technology Development
18
• Federal PV R&D should focus on transformative
technologies rather than on near-term reductions
in the cost of crystalline silicon systems.
• Federal PV R&D efforts should focus on new and
emerging thin-film PV technologies that use
environmentally benign, Earth-abundant materials
and that are compatible with low-cost manufacturing
and lower BOS costs.
• Federal CSP R&D efforts should focus on new
materials and system designs, and should establish
a program to test new designs in pilot-scale facilities,
akin to those common in the chemical industry.
Message 2:
Preparation should be made for much greater
penetration of PV generation
What that means in practice:
Given that c-Si PV will likely be the dominant solar technology for
many decades to come and very large-scale reliance on PV will pose
much more serious challenges than have been encountered to date, it
is necessary to focus on developing both the technical and
market/policy solutions needed to mitigate these challenges
19
Higher levels of PV penetration yield a number of challenges for the grid
operation including capacity and ramping requirements – These issues
can be mitigated to various degrees by storage
Simulated net demand for non-PV generation at different levels of PV penetration
ERCOT (Texas) typical summer day
20
24 hour day
INCREASED RAMPING
RATE REQUIRED
ELECTRICITY
DEMAND
PEAK NON-PV
GENERATION
Diurnal and seasonal changes in PV output are predictable, but PV
output varies with the weather, which is imperfectly predictable
21
• At high levels of reliance on PV, large-scale storage with various capacities
(e.g., minutes, hours, days, …) and response speeds will likely be necessary.
• Apart from pumped (hydro) storage, which is economical but difficult to site,
large cost reductions in storage are necessary for widespread deployment.
Source: NREL
Hourly solar radiation at Golden, Colorado during 2012
22
Distributed PV can help lower line losses, but as penetration grows those
savings are generally outweighed by investments needed to maintain
power quality
Average total costs with increased distributed PV penetration under
different assumptions about design standards & generation mix
Source: MIT Analysis
23
Net metering subsidizes residential PV more than utility-scale PV at the
expense of other customers – This has already produced conflict
Wholesale
energy price
Retail price
including
network
costs
Utility Customers
A B C
Network cost paid by customer per kWh
Energy cost paid by customer per kWh
System before A installs solar
…N
Wholesale
energy price
Higher retail price
with cost shifted
Utility Customers
A B C
Network cost paid to customer A per kWh
Energy cost paid to net-metered customer per kWh
System after A becomes a net solar seller
…N
Net-metered rate
paid to Customer A
Additional network cost paid by customers without solar
Utility Rate
$/kWh
Utility Rate
$/kWh
- When A sells power, she gets the retail price, while utility-
scale sellers get the wholesale price, often much lower
- When A stops covering any network costs, the retail rate
must go up so the other customers cover those costs –
plus the network cost paid to A!
Key Recommendations:
Grid integration
24
• R&D aimed at developing low-cost, scalable energy
storage technologies is a crucial part of a strategy to
achieve economic PV deployment at large scale.
• Utilities, regulators, and stakeholders should develop
and deploy fair pricing systems that allocate distribution
network costs to all users of the network—including
distributed solar generators.
Message 3:
Subsidies for solar deployment should be reformed to
improve their efficiency
What that means in practice:
There is a good case for continuing to subsidize the deployment of
solar generation, but today taxpayers and utility ratepayers are paying
considerably more per kilowatt-hour of solar generation than they
could be. Appropriate reforming of today’s subsidy mechanisms will
ensure greater solar deployment per dollar of subsidy investment
25
Federal, state, & local governments
subsidize the deployment of solar technologies through an array
of tax credits, regulatory requirements, and direct subsidies
26
• These subsidies help lay the foundation for a major solar scale-up
by building experience with manufacturing & deployment and
overcoming institutional barriers
• Particularly in the absence of a nation-wide price on carbon
emissions, the US should continue to subsidize solar deployment
• The main federal solar subsidies are accelerated depreciation and
a 30% investment tax credit (ITC) for businesses and individuals
who own a solar system.
• At the end of 2016 the business ITC is scheduled to be cut to 10%,
and the individual ITC is scheduled to expire
• Such a drastic cut in federal support would be unwise
• Federal, state, and local support of solar deployment should be
reformed to enhance the efficiency of these programs
Solar developers are generally not capable of monetizing the ITC without use
of the tax equity market – Having to partner with tax equity investors is costly and
reduces the effectiveness of the entire subsidy mechanism
27
68
101
37
57
0
50
100
150
200
250
300
350
CA MA
120
180
72
107
CA MA
Utility-Scale PV Residential-Scale PV
ITC subsidy cost per
kWh
After ITC electricity
LCOE
Levelized cost of electricity $/MWh
- The current solar ITC subsidy regime
means that more expensive systems
receive higher subsidies
- Generation from residential systems
can receive 2X or more subsidy per
kWh than from utility-scale systems
- Not only that, firms that build and
own residential solar systems can
calculate ITC and depreciation based
on the present value of systems’
income, which in markets with little
competition may be well above the
actual investment cost.
Source: MIT Analysis
The 24 state-level RPSs that require utilities to buy solar electricity
from distributed generators are a major driver of solar deployment
28
All RPS programs are different; almost all restrict generator location; many states
have multiple solar support policies; some localities do also
Source: dsireusa.org
Key Recommendations:
Deployment policy
29
• Particularly in the absence of a nationwide price on
carbon emissions, drastic cuts in federal support for
solar technology deployment would be unwise.
• Policies to support solar deployment should reward
generation, not investment; should not provide greater
subsidies to residential generators than to utility-scale
generators; and should avoid the use of tax credits.
• State RPS programs should be replaced by a uniform
national program. If this is not possible, states should
remove restrictions on out-of-state siting of eligible
solar generation.
Working Draft
Last Modified 4/28/2010 8:16:26 AM GMT Standard Time
Printed 4/28/2010 8:08:33 AM GMT Standard Time
Thank You
31
Study Chair
RICHARD SCHMALENSEE
Howard W. Johnson Professor of Economics and Management
John C. Head III Dean (Emeritus)
Sloan School of Management, MIT
Study Co-Chair
VLADMIR BULOVIĆ
Fariborz Maseeh (1990) Professor of Emerging Technology
Associate Dean for Innovation
Electrical Engineering and Computer Science, MIT
Study Group
ROBERT ARMSTRONG
Chevron Professor, Department of Chemical Engineering, MIT
Director, MIT Energy Initiative
CARLOS BATTLE
Visiting Scholar, MIT Energy Initiative
Associate Professor, Institute for Research in Technology
Comillas Pontifical University
PATRICK BROWN
PhD Candidate, Department of Physics, MIT
JOHN DEUTCH
Institute Professor, Department of Chemistry, MIT
HENRY JACOBY
Professor (Emeritus), Sloan School of Management, MIT
JOEL JEAN
PhD Candidate, Department of Electrical Engineering
and Computer Science, MIT
RAANAN MILLER
Associate Director, MIT Energy Initiative
Executive Director, Solar Energy Study
FRANCIS O’SULLIVAN
Senior Lecturer, Sloan School of Management, MIT
Director, Research and Analysis, MIT Energy Initiative
JOHN PARSONS
Senior Lecturer, Sloan School of Management, MIT
JOSE IGNACIO PĖREZ-ARRIAGA
Professor, Institute for Research in Technology
Comillas Pontifical University
Visiting Professor, Engineering Systems Division, MIT
NAVID SEIFKAR
Research Engineer, MIT Energy Initiative
ROBERT STONER
Deputy Director for Science and Technology, MIT
Energy Initiative
Director, Tata Center for Technology and Design, MIT
CLAUDIO VERGARA
Postdoctoral Associate, MIT Energy Initiative
ROBERT JAFFE
Morningstar Professor of Science, Department of
Physics, MIT
Study Participants
more than 35
years of current
production
required by 2050 6 years
1400
years
COMMERCIAL THIN FILM PV Source: MIT Analysis 32 32
Te, In, Ga, and Se
are now produced only as
by-products from the
production of other metals.
Substantial increases in
production volumes of these
materials would likely require
primary production with
unknown technologies.
Thin-film PV technologies promise lower BOS costs due to their
format that can eliminate heavy glass substrates, … but, unlike
c-Si, materials availability and high-temperature processing will
limit the scale-up of today’s commercial thin-film PV
Source: MIT Analysis 33 33
at most 3 years
of current
production
required by 2050
EMERGING Thin-Film PV
Material Sets
COMMERCIAL THIN FILM PV
EMERGING THIN FILM PV
There is a promising set of emerging thin-film PV
technologies that are not materials-constrained and
that can be developed at near room-temperature
34
The PV system cost reductions that have been achieved have not necessarily
been passes along to US consumers – In the utility sector, pricing tends to be
competitive, while “value pricing” is a prominent feature of the residential market
Utility-scale PV – ~1MW and above Residential-scale PV – up to 10kW
- Utilities driving market by need to meet RPS
targets
- Strong competition among developers to
secure PPAs
- Pricing strongly linked to underlying cost
base
PV Pricing Mechanisms
- Emerging awareness and demand among
homeowners
- Installers developing innovative business
models reducing upfront costs to owners
- “Value Pricing” linking solar prices to local
utility rates
Today, utility sector PPAs are being signed in the $40-50/MWh range, this
is at or below what today’s capex costs can allow – This is evidence of
operators being confident they can take out further cost
35
2008 2009 2010 2011 2012 2013 2014 2015
300MW
100MW
0
50
100
150
200ERCOT Southwest California Northwest MISO SPP Southeast
Average PPA prices
$/MWh
Sources: Bloomberg NEF, “U.S. PPA Market Outlook.” 07/08/15. GTM/SEIA, “US SMI Q1 2015.”
Price formation in the residential sector differs from market-to-market and is
often linked to regulated utility rates – Consumer willingness to pay can lead to
a decoupling of solar price from underlying cost
36
UnsubsidizedCosts - Gross
Price toConsumer
Federal Subsidy Net Price toConsumer
Net ConsumerWillingness to
Pay
Federal Subsidy Gross Price toConsumer
$3.25/W
$4.50/W
$2.27/W ITC: $0.98/W
Reported
price in
competitive
market
Reported price in
immature market
ITC: $1.35/W
Competitive Market Immature or Uncompetitive Market
WTP: $3.15/W
Source: MIT Team Analysis
37
One of the most important factors in the growth of solar in the residential
market has been the rise of the “third party owned” business model – High
capital cost and tax appetite, two key barriers to US residential solar penetration
have been eliminated
Source: California Solar Initiative and other state reporting systems
Average system price by ownership type
$/Wp
$4.15
$5.25
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
8.00
Q4'10
Q1'11
Q2'11
Q3'11
Q4'11
Q1'12
Q2'12
Q3'12
Q4'12
Q1'13
Q2'13
Q3'13
Q4'13
Q1'14
Q2'14
Q3'14
Q4'14
Q1'15
Q2'15
AZ CA, Host-owned
CA, 3rd-party MA, Host-owned
MA, 3rd-party MD
NY, Host-owned NY, 3rd-party
The success of the third-party owned model is rooted in the ability to “value
price” solar power relative to incumbent utility supplied power
38
Range of future utility
prices: PU, t
Power Price
¢/kWh
Years 0 1 2 3… …N
Predefined future PV lease
or PPA price: PPV, t
PU, 0
PPV, 0
- Third party solar ownership, either via leases or PPA structures is allowed allowed in at least 22
states today
- The third party model makes residential solar very affordable and in most major markets it entirely
dominates installations – In CA more than 75% of new installations are third party
- Third party solar developers are explicit in viewing themselves as competing directly with utilities Source: MIT Team Analysis
Cost-basis calculation for ITC purposes is an area where the third-party model
causes issues
39
- The cost method is the most straightforward and is based on the assumption that an informed
purchaser will pay no more for a system than the cost of replacing it.
- The market method relies on data from recent sales of comparable systems.
- The income method estimates FMV based on the cash flows generated by the system.
Allowable methods for establishing the solar ITC cost basis:
How the ITC cost basis is established based on the “income method”
Source: MIT Team Analysis
In many contemporary U.S. residential solar markets, allowing the ITC cost
basis be established via the “income method” amplifies the subsidy by 50%
or more – In highly competitive markets this amplification would be eliminated
40
UnsubsidizedCost
Lease PV Subsidy PV Total IncomePV
Lease PV Subsidy PV Total IncomePV
Subsidies:
ITC:
$0.98/W
MACRS: $0.26/W $4.24/W
Cost Method Income Method
$3.00/W
Subsidies:
ITC:
$1.45/W
MACRS: $0.39/W
$3.00/W
$4.84/W
$3.25/W
Source: MIT Team Analysis