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Threat to Solar Market: Government Budget Woes

Grid parity represents something of a Holy Grail for solar companies — a point where they can compete on cost with conventional fossil fuel sources of energy. The race for grid parity shifted into overdrive earlier this year as a heap of new funding and the extension of tax credits were approved as part of the stimulus package. According to a new report released today from Lux Research, certain types of solar installations are now on the verge of grid parity — especially in California — but accelerating progress toward that Holy Grail has in some ways never been more at risk.


In short, Lux raises concerns that intensifying budget problems will lead politicians to pull the rug out from under the solar industry. Lead author Ted Sullivan warns against hailing the arrival of grid parity prematurely and ending or reducing solar subsidies as a result. Sullivan told us in an interview today that proclamations like that could deliver nothing short of a total solar collapse. “Near-term viability in select applications will drive the thin edge of the wedge that leads to cost reduction and future universal grid parity,” Lux writes. But cutting subsidies at this point would eliminate the “primary demand driver for solar installations,” compromising the industry’s ability to quickly increase production volumes, innovate and cut costs.

According to Sullivan, commercial rooftop installations in California are where solar comes closest to grid parity. During the summer, largely thanks to higher time-of-use rates that can drive grid electricity rates up to about 45 cents per kilowatt-hour in that setting, he said these installations represent “the thinnest edge” of that wedge leading to universal grid parity.

But that’s a far cry from universal grid parity, Sullivan said. He noted that what was seen as “insatiable demand” from Spain collapsed (contributing to oversupply in the market) when the government there said, “Look, you’re at grid parity, what do you need subsidies for?”

Many “debt-ridden governments” are now dealing with the tension Lux sees between solar subsidies and growing fiscal pressures. In California, Sullivan noted that a key incentive — the Performance Based Incentive program — could be at risk as the state faces a $26.3 billion deficit that’s growing by the day (the state has begun issuing IOUs and just had its credit rating cut to BBB, it’s lowest since 2004). That’s because the payments — which help sweeten the deal for solar installations of at least 100 KW with five years of payments for every kilowatt-hour produced — come out of the state budget, by way of the California Public Utility Commission.

So far, however, the CPUC says the state’s 2-year-old solar initiative is doing what it’s supposed to: helping to bring 3,000 MW of new solar power online by 2016 and lower costs of the technology. Last week the California Public Utilities Commission issued its first self-assessment of its portion of the program (it has a $2.2 billion budget and a goal of 1,940 MW by 2016) , finding that it represents a “bright spot that shows how government support for renewable energy is working,” according to the San Jose Mercury News. And the state’s $3.3-billion solar subsidy program, as the Los Angeles Times reports, “has become so popular that the state utilities are approaching the legal limit for how much power they can buy from customers.”

Still, Lux says that in most markets, utility-scale solar generation (projects of 1 MW or more), grid parity remains at least a decade away, and Sullivan says it will take a lot more than a government push to make grid parity a reality. At this point, the race to drive down the cost per kilowatt-hour for a solar system’s total lifecycle — and the struggle to survive the shakeout brought on by oversupply and the global economic downturn — is on.

Photo credit SunPower installation at Nellis Air Force Base

12 Responses to “Threat to Solar Market: Government Budget Woes”

  1. Solar is pretty expensive for residential homes. This is stopping from many from purchasing. Especially since the economy is in rough shape and the payback time is several years down the road. A good solution to get things going may be for solar panel manufacturers / dealers to start leasing them out so there isn’t a huge upfront cost.

    Lets keep our fingers crossed.

  2. Josie Garthwaite

    @adam and @Ed Gunther – I’ve asked Ted Sullivan at Lux to explain some more about why he sees that incentive program being at risk as a result of the CA budget crisis. Hopefully I’ll have an update soon. Thanks.

  3. CSI is ratepayer funded meaning the electricity customers of the three IOUs, Invester Owned Utilities, pay for it in their electricity bills. I had the same misconception until set straight by Adam Browning of Vote Solar. Perhaps the first commenter? I thought it was backed by a bond since CA has so many of those.

    From the “Annual Assessment Report to the Legislature”:
    “In January 2007, the State of California launched an unprecedented $3.3 billion ratepayer-funded effort that aims to install 3,000 megawatts (MW) of new solar over the next decade and to transform the market for solar energy by reducing the cost of solar.”

  4. actually, no. incentive funds are all ratepayer dollars, not general fund monies. so, budget deficits do not put the incentive funds directly at risk.