Economic Analysis of Solar Power:

Achieving Grid Parity

Annie Hazlehurst
Joint MBA / MS Environment & Resources Candidate
Stanford Graduate School of Business

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 Questions to be Answered
• What are the markets
for solar?

• How do we think about

the cost of solar relative
to other power sources?

• What do cost profiles

need to be in order to
achieve grid parity?

• Where is the industry

today and where is it
headed?

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 3 Primary Types of Solar Power

Photovoltaics (PV) Concentrating PV Solar Thermal

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 3 Primary PV Markets Today
Residential Rooftop Commercial Rooftop

Ground-
mounted
(Usually
utility
scale)
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 2 Emerging PV Markets
Building-Integrated PV (BIPV) Rural Electrification
• Enabled by flexible form-factor • Requires cheaper batteries and panels
for wide-spread adoption

Also niche applications: calculators, satellites,

remote power, etc. 5
Electricity Supply Chain

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Cost of Electricity Varies By Geography: Ranging
From 6-20 cents/KwH in the US

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 Incentives Driving Adoption
Renewables Portfolio Standards
WA: 15% by 2020* VT: (1) RE meets any increase ME: 30% by 2000
New RE: 10% by 2017
MN: 25% by 2025 in retail sales by 2012;
MT: 15% by 2015
(Xcel: 30% by 2020) (2) 20% RE & CHP by 2017 ☼ NH: 23.8% by 2025
ND: 10% by 2015 MI: 10% + 1,100 MW ☼ MA: 15% by 2020
☼ OR: 25% by 2025 (large utilities)* by 2015* + 1% annual increase
5% - 10% by 2025 (smaller utilities) (Class I Renewables)
SD: 10% by 2015 WI: Varies by utility; ☼ NY: 24% by 2013
10% by 2015 goal RI: 16% by 2020
☼ NV: 25% by 2025* CT: 23% by 2020
IA: 105 MW ☼ OH: 25% by 2025†
☼ CO: 20% by 2020 (IOUs)
☼ PA: 18% by 2020†
10% by 2020 (co-ops & large munis)* WV: 25% by 2025*†
☼ IL: 25% by 2025
☼ NJ: 22.5% by 2021
CA: 33% by 2020 UT: 20% by 2025* KS: 20% by 2020 VA: 15% by 2025*
☼ MD: 20% by 2022
☼ MO: 15% by 2021
☼ AZ: 15% by 2025 ☼ DE: 20% by 2019*
☼ NC: 12.5% by 2021 (IOUs)
10% by 2018 (co-ops & munis) ☼ DC: 20% by 2020
☼ NM: 20% by 2020 (IOUs)
10% by 2020 (co-ops)

TX: 5,880 MW by 2015

HI: 40% by 2030 29 states & DC

have an RPS
6 states have goals
State renewable portfolio standard
☼ Minimum solar or customer-sited requirement
State renewable portfolio goal Extra credit for solar or customer-sited renewables
Solar water heating eligible *† Includes non-renewable alternative resources

Source: www.dsireusa.org 8
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Solar’s Competitiveness Depends on Sunlight

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 Measuring Efficiency: Capacity Factor
• Capacity Factor = average power .
max power capability

• The higher the capacity factor, the more efficient the plant

• Solar cells have a capacity factor of roughly 18%

– Compare that to coal plants that can achieve >80%

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 How Do You Calculate Cost/KwH?
Wp: “Watt-Peak”. Amount of power generated with “one sun” of radiation,
1,000 W/m2
– $/Wp: Includes module, BOS, and installation

$/KwH (or Levelized Cost Of Electricity) requires more information:

n=25

Σ NPV(Cap + Fin + O&M)

n=1
LCOE =
Σ kWh

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 Sample Calculation Of $/KWh
Sample Assumptions C-Si
Capital Cost per kW (includes installation) $5,500
Nameplate Plant Size (KW) 1,000
Total Capital Cost $5,500,000
Life of Asset (years) 25
Construction time (months) 6
Tax Rate 38%
Inflation annual 1.50%
Inverter capex per watt $0.15
Inverter capex cost $150,000
O&M cost per MWh $8.00
Years between Replacing Inverter 10
Utilization Factor 0.00%
Annual Degradation 0.50%
Carbon Tax (Credit) per MWh $0.00
ITC 30%
WACC 0.0%

FINANCING ASSUMPTIONS
Risk free rate 5.00%
% debt 60%
Spread over RFR 3.00%
Cost of Debt 8.00%
% equity 40%
Equity Beta 1.5
Expected return of market 10.00%
Cost of equity 12.50%
WACC 8.0%

Source: Credit Suisse First Boston 12

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 Sample Calculation Of $/KWh (C’ont)
BASE CASE ASSUMPTIONS - 1 2 3 4 5 6 7 8 9 10 11 12 … 25
Annual inflation 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% … 1.5%
Fuel cost per MWh - - - - - - - - - - - - - … -
O&M cost per MWh $ 8.00 $ 8.12 $ 8.24 $ 8.37 $ 8.49 $ 8.62 $ 8.75 $ 8.88 $ 9.01 $ 9.15 $ 9.28 $ 9.42 $ 9.56 … $ 11.61
Carbon cost (revenue) per MWh - - - - - - - - - - - - - … -
Incentives, other - - - - - - - - - - - - - … -
-
BASE CASE CASH FLOWS - 1 2 3 4 5 6 7 8 9 10 11 12 … 25
-
AT Fuel costs - - - - - - - - - - - - - … -
AT O&M costs - (4,043) (8,165) (8,247) (8,328) (8,411) (8,495) (8,579) (8,664) (8,750) (8,837) (8,925) (9,013) … (10,248)
Carbon Tax - - - - - - - - - - - - - … -
Tax benefits: … -
Depreciation Effect 418,000 668,800 401,280 240,768 240,768 120,300 - - - - - - - … -
PTC/ITC 1,650,000 - - - - - - - - - - - - … -
Other incentives - - - - - - - - - - - - - … -
Construction Costs (5,500,000) - - - - - - - - - (174,081) - - … -
Terminal Value - - - - - - - - - - - - - … -
Cash Flow to Enterprise (3,432,000) 664,757 393,115 232,521 232,440 111,889 (8,495) (8,579) (8,664) (8,750) (182,918) (8,925) (9,013) … (10,248)
-
Discount Factor 1.00 0.93 0.86 0.79 0.74 0.68 0.63 0.58 0.54 0.50 0.46 0.43 0.40 … 0.15
Present Value of Cash Flow (3,432,000) 615,653 337,182 184,706 171,002 76,235 (5,360) (5,013) (4,689) (4,386) (84,915) (3,837) (3,589) … (1,505)
Net Present Value of Cash Flow (2,232,688) -
-
-
BASE CASE PLANT PRODUCTION - 1 2 3 4 5 6 7 8 9 10 11 12 … 25
Capacity (KW) - 500 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 … 1,000
Utilization / capacity factor (%) 0.0% 18.3% 18.2% 18.2% 18.1% 18.0% 17.9% 17.8% 17.7% 17.6% 17.5% 17.4% 17.3% … 16.3%
Annual degradation 0.0% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% … 0.5%
Production (KW) - 92 182 182 181 180 179 178 177 176 175 174 173 … 163
Annual production (MWh) - 803 1,598 1,590 1,582 1,574 1,566 1,558 1,551 1,543 1,535 1,527 1,520 … 1,424
-
Discount Factor 1.00 0.93 0.86 0.79 0.74 0.68 0.63 0.58 0.54 0.50 0.46 0.43 0.40 … 0.15
Present Value of Energy Produced - 744 1,371 1,263 1,164 1,073 988 911 839 773 713 657 605 … 209
Net Present Value of Energy (MWh) 15,750

Levelized Cost of Energy ($/kwh) $0.14

Source: Credit Suisse First Boston 13

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 Levelized cost comparisons
Capital
cost per Capacity Fuel Cost O&M per Life
kW Factor per MWh MWh (years)
Solar PV (Crystalline) 5,500 18% $0 $8 25
Solar PV (Thin Film) 4,500 18% $0 $10 25
Fuel Cell DG 3,250 90% $45 $32 20
Solar Thermal 4,000 25% $0 $8 20
Nat Gas (CCGT) 1,000 85% $43 $6 40
Coal 2,750 85% $30 $10 45
Nuclear 6,000 92% $7 $17 40
Wind 2,500 35% $0 $10 25
Geothermal 3,500 95% $0 $25 20

• Capital cost: raw material cost (steel, silicon, etc.)

• Capacity factor: efficiency, utilization rate (cells cannot compare to plants)
• Fuel cost: commodity pricing (oil, natural gas, water – ZERO for solar!)
• O&M: labor, maintenance (location, durability)
• Lifetime: Depreciation (tax benefits)
Source: Credit Suisse First Boston 14
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 Cost of solar vs. other energy sources…
$0.15 $0.14
$0.12
$0.12
$/Kwh

$0.09
$0.09 $0.08
$0.06 $0.05
$0.06 $0.04 $0.04 $0.04
$0.03 $0.02

$0.00

Wind

Efficiency
Thermal

Coal
(Thin Film)

Geothermal
Fuel Cell DG

Nuclear

Nat Gas
(Crystalline)

(CCGT)
Solar PV

Solar
Solar PV

• Remember that:
• This is just the generation cost and does not include transmission, overhead or
emissions capture
• Utilities use a blend of different options depending on conditions
• Solar costs include PTC/ITC incentives
• Crystalline costs are ~$0.24/kwh without incentives

Source: Credit Suisse First Boston 15

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 Solar is Advantaged @ Peak Times

• Provides power during peak (most expensive) times of day

Source: Credit Suisse First Boston 16

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 Utility Dispatch Curve - NorthEast

• Dispatch curve – utilities turn on cheapest variable cost power first

• Cost of the highest needed to meet demand sets the “market price”
Source: Credit Suisse First Boston 17
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 Solar can be Competitive Today at Peak

Average cost over 25 yrs of PV cell electricity $0.24/kWh

including 8% interest payments:

Peak (afternoon) Wholesale Rates: $0.25/kWh

***Average over last year

• Wholesale electricity prices have dropped >50% since last summer – it’s
hard to compete with cheap coal and natural gas
• Pricing above does not include incentives

Source: Credit Suisse First Boston, Good Energies 18

 The Ultimate Goal: Grid Parity

Source: NREL, HSBC 19

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 The Path to a Solar World
• “With a 10% efficient PV system, we could supply all the US energy needs with a square of land
some 400km on a side (Cover Texas and Oklahoma pand handles, part of Kanas and a slice of
Colorado).” – Engineering & Science Publication 2007

$6.00/W • Compete with power @ peak times, ~10% of total usage

$3.00/W • Compete with most natural gas powered generation, ~25% of total usage

$1.00/W • Compete with coal, >75% of total usage

$0.50/W • Cheapest source of energy, solar powers the world

**Costs ($/W) are full BOS cost

Source: Various 20
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 $/Wp Ranges From $4-9 Depending On
Type Of Installation
Representative Costs, 2008

Residential Commercial Utility

System size 3.8KW 210KW 10MW

$/Wp, in US $8.98 $6.68 $4.93

¢/kWh - Phoenix, AZ 31.78 22.91 26.09

¢/kWh - Boston, MA 41.89 30.44 36.49

• Costs for 2009 will be even lower, some installations are being done as low
as $3 / watt

Source: SAM model, built by DOE and Sandia National Labs. Costs are representative of realistic figures, not average 21
costs from sample installations. Does not include incentives.
 Cost Components of a System
$/Wp Prices to Installer, 210 KW Commercial Rooftop System, SAM 2008
$8
$7 $0.79
$6.67

$0.19
$6 $0.68 $0.19
$4.83
$5
$4
$3
$2
$1
$0
Modules Inverter Installation labor BOS Miscellaneous Total

Source: SAM model, built by DOE and Sandia National Labs. Costs are representative of realistic figures, not average 22
costs from sample installations. Does not include incentives.
 Cost Components: Si vs Thin Film

Source: HSBC Global Research

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 Lay of the Land
Technology Efficiency(1) BOS Cost Module Cost Space Materials Distributed / Primary End Markets 2008 Market
($/w) ($/w) Requirements Constraints Centralized Size
Rooftop - Residential
Crystalline PV 12-20% 5-8 3-4 Low to Medium Si - abundant Distributed $25 billion
and Commercial
Rooftop/Ground -
Thin Film PV 6-12% 4-7 1-3 Medium to High Te, In - rare Both Resid/Comm/Sm. $7 billion
Utility
Ground - Comm.,
Multi-Junction / Concentrator 20 - 25% 8 - 10 3-4 Medium Ge - rare Both $0.4 billion
Small Utility

steel, etc. -
Solar Thermal 20-30% 3-4 NA High(3) Centralized Ground - Utility $1 billion
abundant

Organic(2) 2-3% NA NA NA C - abundant Distributed BIPV, others negligible

1) Represents module efficiency - typically 2-4% efficiency is lost going from cells to modules for c-PV and thin film; multi-junction losses are 10-20% in the concentrators
2) This technology is in very early stages of develoment, numbers shown reflect what early companies such as Konarka and Plextronics have been able to achieve
3) Requires a lot of land because can only achieve cost competitiveness at large scale, but has the highest energy per area density of any solar technology

Source: Lux Research, Cleantech Network, various 24

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 What We Need to Do…
• Drive down costs
• Increase efficiency
• Reduce materials usage / use cheaper, abundant materials
• Scale and standardization
• Smarter design and automation
• Vertical and horizontal integration
• Increase adoption
• Access to financing
• Creative business models
• Policies, ie price on carbon, RPS, etc.

Source: Various 25
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 How Fast Does It Need to Grow?

Growth of an Industry
2003 2010 2015 2020 2025 2030
World electricity consumption (MM kwh) 14,787,000 19,045,000 21,699,000 24,371,000 27,133,000 30,116,000

Solar intalled capacity (GW) 2 31 165 614 1,528 2,461

Solar MM kwh 2,160 36,906 198,487 736,969 1,833,816 2,953,379
% Growth NA 50% 40% 30% 20% 10%
% Solar Generation 0% 1% 3% 7% 10%

Growth Rate Sensitivity

Compound Annual Growth Rate (2010-2030) 10% 20.0% 30.0% 40.0% 50.0%
% Global Energy Powered by Solar <1% 1% 9% 63% 400%

Source: EIA, Jeffries, http://blogs.zdnet.com/BTL/?p=8033, Morgan Stanley Research, Goldman Sachs Research 26
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 How Fast Can It Grow?
• Google grew revenues at a 80% CAGR from 2003 – 2007 (50% from 06-08)
• 10% CAGR predicted by analysts going forward
• Global mobile users grew at 25% CAGR over the last decade

• 3x installed capacity next year:

• Would require 15% of the world’s proven tellerium reserves / 7% of estimated reserves
• Or 20% of the world’s estimated indium reserves

Source: Credit Suisse First Boston, Jeffries 27

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 How Fast Will It Grow?
• The solar industry already grew at a 30-40% CAGR over the last decade
• Solar production grew 80% in 2008, expected to fall 33% in 2009

Source: Credit Suisse First Boston, Jeffries 28

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 Current State of Solar Industry

Source: Jeffries Clean Tech Primer 2009 29

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 Pricing Declines Will Continue

• Module costs have fallen roughly 80% over the last 25 years – Expect 25% yoy ‘09
• Chinese producers expected to get c-Si module costs to ~$1.30 / watt on new lines
• Many companies will sell below cost in the next few years due to supply glut
• Political backlash is a threat of falling prices, ie Spain

Source: Solar Economics Forum 2009, Prime Star Solar 30

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 Who’s Making, Who’s Buying

• 33% of supply came from China

• Expect >30% decline in sales this year
• Spain expected to account for only 5% by 2010 and the U.S. 20%

Source: Navigant Consulting, SolarBuzz 31

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 Increase in Utility Scale Systems
• PPAs, RPS, stimulus financing,
economies of scale all pushing solar
markets to larger systems
• Spain and other countries currently cap
system size

• Long run costs must

decline further for utilities
to adopt solar
independently of policy
mandates

Source: Emerging Energy Research 32

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 VC Solar Investments

3Q09

• Solar was 40% of VC investments in clean tech for 2008 - Compared to 30%
in 2009 YTD
• Smaller rounds, fewer companies funded
• Is solar “saturated”?
• still represents only 0.7% of total energy generation and offers an abundant source of fuel

Source: Cleantech Network Annual Report 2008 33

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 What’s Hot, What’s Not?

• Thin film received the most funding (48%) in 2008, Solar Thermal the second most at 19%
• 80% went to CIGS
• Shift to utility scale projects like solar thermal as well as balance of system and service
model plays
Source: Cleantech Network Annual Report 2008, Navigant Consulting 2009 34
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 What and Who to Watch
• The big players
• First Solar, Sunpower, Suntech, etc.
• Low cost or high quality that will enable them to capture margins
• Emerging technologies
• Thin film, solar thermal
• Chinese manufacturing
• Access to low cost financing will drive capacity building
• Industry consolidation
• First Solar acquired OptiSolar
• MEMC acquiring SunEdison
• Materials access
• Tellerium and Indium could be constrained
• Creative business models and financing
• SolarCity
• Smart grid integrated plays
• Global policies and incentives
• Many European countries are capping subsidies by industry size
• Impact of stimulus funding in the U.S.

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“ The way we use energy strengthens our adversaries and
threatens our planet”
– President Obama 1/20/09

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