Will grid parity change everything for solar industry?

EL SEGUNDO, USA: Many in the solar power industry and the investment community believe the arrival of grid parity—the point when cost of electricity generated by a rooftop photovoltaic (PV) cell system is equivalent to that purchased from an electrical utility—will mark a major inflection point for the market that will deliver a huge increase in growth.

However, even when true grid parity arrives, it’s unlikely to generate an abrupt rise in solar system installations due to the high upfront costs and the long-term return of investing in a rooftop photovoltaic system, according to iSuppli Corp. In fact, growth is set to moderate during the years when grid parity arrives for various regions of the world as the industry enters a more mature phase.

Following a dip in growth in 2009, photovoltaic installations measured in terms of megawatts are expected to rise at a Compound Annual Growth Rate (CAGR) of 72.4 percent from 2010 to 2013. During the period from 2010 to 2020, when grid parity is expected to arrive in many nations that are leading in solar-energy installations, the CAGR will slow to 20 percent.

Parity apparent
While there are many definitions of grid parity, iSuppli characterizes it as the point when an investment in a rooftop solar system delivers a 100 percent return on investment in five years. Furthermore, debts incurred, i.e. negative cash balance in the investment in the system—must never exceed 25 percent of the total cost of the installation.

“iSuppli doesn’t expect the arrival of grid parity to result in an abrupt increase in user demand for photovoltaic systems,” said Dr. Henning Wicht, senior director and principal analyst for iSuppli.

“The market is likely to make a smooth transition, with demand progressing through the arrival of grid parity in an evolutionary way. This is because users must still make an investment in advance and the wait for the return over a long period of time. A lot of this has to do with psychology. It takes a high level of commitment to invest in a solar system that is expected to operate during a period of 30 years.”

Because of this, global PV installations are expected to rise in smooth fashion, even when grid parity arrives in certain nations of the world. The major factor determining the growth of PV installations will be the supply/demand balance, which will dictate pricing.

Solar market to recover from Spanish flu
Global PV installations are expected to decline by 32.3 percent in 2009 to reach 3,546 megawatts, down from 5,235 in 2008. However, the 2009 decline is due to a single event: a sharp decline in expected PV installations in Spain.

Spain accounted for 50 percent of worldwide PV installations in 2008. An artificial demand surge had been created in Spain as the time approached when the country’s feed-in-tariff rate was set to drop and a new cap of 500 Megawatts loomed for projects qualifying for the above-market tariff. This set a well-defined deadline for growth in the Spanish market in 2009.

However, megawatt installations will rebound in 2010 with growth of 42.5 percent, followed by a 73.6 percent rise in 2012 and a 68.6 percent increase in 2013.

The figure presents iSuppli’s forecast of worldwide photovoltaic system installations in terms of megawatts.Source: iSuppli, June 2009

Waiting for parity
Different countries are expected to attain grid parity at different times, due to varying factors including sun exposure and the cost of utility-provided electricity.

“The country that is probably closest to reaching this standard is Italy,” Wicht said. “Italy has high electricity rates, and low system prices. It also has a high exposure to solar radiation.

However, even in this nation, the elapsed time to the cash break-even point is now about 14 years. Furthermore, debt for a system installed now will reach 35 percent of the net system price.”

iSuppli doesn’t expect the nation’s solar industry to achieve grid parity until 2012.

The next closest nation to reaching grid parity is Germany due to the high cost of electricity and the availability of low-cost solar systems in the nation. However, Germany is not set to achieve grid parity until 2018, according to iSuppli’s definition.

California may already have achieved grid parity if consumers are paying the premium of 35 cents per kilowatt hour. However, this kind of grid parity addresses only a small fraction of the state’s consumers. Grid parity addressing the majority of private household and reaching electricity prices of 22 cents per kilowatt hour are likely to be achieved in four to five years.

However, these events are not likely to spur a major rise in solar installations.

“The definition of Grid parity is imprecise, making it easy to call it the holy grail for solar,” Wicht added. “As solar system prices will continue drop and public incentives will allow to obtain Return on investment of 5 to 10 percent over 20 years, Solar Penetration will rise like any other market, with early adopters and late adopters. The market is at an early stage in terms of penetration. Penetration of solar systems will progress like any other market.”