The paradox of cheapening solar power

We need renewable energy, such as solar power. Because of that, companies are working hard on making it cheaper. They can do this either by developing new, cheaper to manufacture technologies, cheaper ways of installing or by simply getting economies of scale as demand and production increase. They haven’t managed to follow Moore’s law, though some new-technology developers predict they someday will.

However, there is a disturbing paradox in these activities. Unlike computers, it does not make financial sense to buy solar (or any other low or zero operating cost energy technology) if you have reasonable confidence the price is going to improve at even modest rates.

Imagine you have an energy technology with effectively zero operating cost, like PV panels. Let’s say that it’s reached the point that it can match the price of grid power over a 20 year lifetime. That means that, if it costs $10,000, it costs $72 per month or $872 per year at a 6% cost of funds. (Since $872 buys 9688 kwh at the national average grid price of 9 cents, that means you need a 4800 watt PV system to match the grid which is hard to do for $10,000 but someday it won’t be.)

But here’s the problem? Let’s say that it’s very reasonable to predict that the cost of solar will drop by more than 9% over the coming year. That’s a modest decrease, entirely doable just with increased production, and much less than people hope from new technology. That means that your $10,000 system will cost you $9,100 to buy a year down the road. Since we are talking about a grid-equivalent price system, the cost of grid power in this example is $872. So you can buy the power from the grid, wait a year, and save money. The more you expect the price of solar to drop, the more it makes financial sense to delay. (Note that at this lower price the system is now beating the grid. What matters really is whether the dollar cost reduction of the solar system exceeds the dollar cost of the grid electricity purchased.)

Indeed, if you predict the cost-drops will continue for many years, it sadly does not make sense to buy for a long time. Effectively until your predictions show that the cost decrease of the system no longer exceeds the cost of the power generated by it. That has to eventually come some time, since as it gets very cheap it can’t really drop in price by more than the cost of grid power, especially while there are physical install costs to include in the mix. But it can certainly drop by 6% per year for a decade, which would take it down to half its original cost. Possibly longer.)

Now, you will note I speak of the financial cost. This ignores any motivations based on trying to be greener. This is the analysis that would be done by somebody who is simply looking for the best price on power. This is frankly how most people think. This can be altered by both government incentives to buy solar and by externality taxes on polluting grid power.

This also applies not simply to solar, but any technology where you invest a lot of money up front, and have close to zero operating cost. Thus wind, geothermal and certain other technologies face the same math. Even nuclear to some extent.

All of this also depends in your confidence in your predictions. The more uncertain your predictions of price drops, the more you might be pushed in other directions to obtain certainty.

The paradox is this. We may be in a situation where solar is competing with grid power, and many are poised to buy it. If many do buy it, economies of scale will drive the price down. Thus, nobody should buy it, as they should wait for that price decrease! But if nobody buys it, it won’t decrease in price as much, creating a chaotic system. Some will buy it (to be green, for example) so it’s not a total loss, but it becomes harder to understand.

We’re used to dealing with computers, which reduce in price not just 6% a year but 40 to 50%. We’ve all felt the dilemma over whether to buy a computer or other electronic device that will lose its value so quickly, or whether to wait. However in that case, if we wait, we don’t get our nice new computer or camera, and thus lose out. You can wait forever which makes no sense. This is not the same logic with power. With power, we’re talking about a commodity that you can buy elsewhere, and get all the benefit — for less than the depreciation on what you considered buying.

What can keep the market for solar going if it looks like it will drop in price? Well, first of all, many people want to buy solar other than to save money. (Indeed, only a few people today with high local electricity prices and fat government rebates can save money with it.) Secondly, it seems that few people, even if their goal is to save money, think this way. And if they do, they are uncertain of their predictions, and would rather get the solar now than risk grid power going up or solar going down. But curiously, it remains the case that if people make predictions of cheap solar in the near term, and they are believed, it should kill most sales of solar in the present term.

The price just being up and down

As i can see here.the price is being up and down.It is getting cheap in these 2 monthes.

I'm in this same thought loop too,

With a little financial rearranging, we could go solar now. 1-2K of PV and a water heating system, can be had for $6-10K (not counting rebates and credits) now...

But our roof is due to replacement (as in down to rafters) in 5 years so. That will cost $10-20K, which is not doable right now.

In 5 years, I expect 2-4K of PV, plus water heating, to be under $5K total and can be incorported into the roof replacement.

I want to be green. But cannot justifiy the cost, espsially when it would have to come down in 5 years anyway.

You need good rebates.

a 2kw PV system generates about 4,000 kwh per year in a good sun place, like California. That’s worth $520 at 13 cents/kwh, but is worth more at PG&E high-tier rates. Because of the tiers, the best thing to do is to get enough solar to get you out of the upper tier, but don’t go below your baseline (tier 1) as it is no longer economical.

Since states offer tax

Since states offer tax incentives for solar adoption, should it be announced that those will be phased out as prices drop? In that way they become a true incentive for early adopters.

False assumptions

Hi, I just to say that you should examine the assumptions that you made could be wrong, even if your reasoning is correct. Your basic assumption where I see the flaw is, that prices for non-solar power will be stable on the average grid price you mentioned. If that was true, it would make sense to wait for development, but in fact everyone knows that energy prices have risen over the last decades on a massive scale, and it will get worse. Having that in mind, people would not calculate the next 10 years based on current average prices, but on extrapolated/predicted prices for the next 10 years. So indeed, the decision is mainly based on, whether you're an optimist or pessimist for the future world. But not only for the cost of green energy, but also thousands of other aspects that play into energy. Reminds me of stock markets... ;)

Also consumers are driven not only by ideology and financial aspects, but there are many other reasons.

Grid power increase

No, grid power increase is only a very minor factor in this equation. That’s because with capital up-front generation (such as solar) the decrease applies to the whole cost of the system over its whole life. Grid power is bought by the kw-h and so its increase is only for the time you are buying it.

To give you an example, say grid power is 15 cents/kwh and is going to go up 33% in a single year. Of course this is far more than anybody expects. So it will be 20 cents/kwh by the end of the year, and let’s presum an average of 17.5 cents over the course of a year.

Let’s say we predict the solar is going to go down just 10% in price, a much more reasonable prediction. Say you use 10,000 kwh/year. Grid bill will be $1,750. 5kw solar system will cost $25,000 to install this year, but next year thanks to 10% reduction it costs $22,500 (10% less).

So the right move financially is to pay $1,750 for the grid power and put in the solar panels a year later for $2,500 less. You save $750.

And as you can see, the raise in the price of grid power doesn’t really affect it much. Even if grid power were to double to 30 cents over the course of the single year, your grid bill would be $2,250 and you still save $250 delaying your solar by a year.

So it’s all about your prediction for the decline in the price of solar, and almost nothing about your predictions for grid power.

sounds like an equilibrium

So if prices are expected to go down in the next year because of increased manufacturing volume, while the expected decrease in prices reduces sales volume, we have a negative-feedback system. If there's enough hysteresis or time lag, then yeah, you could get oscillation, but you could also just get stability --- where prices go down, but just enough that some people are willing to buy anyway.

Reducing sales volume

I don’t think there is an equilibrium. In part because people aren’t thinking about this. And the decreases in price are coming from not just increased production, but also from new technology, as they do with computers.

People are buying for other than purely financial reasons. In fact, at today’s solar prices you have to be buying for non-financial reasons, but we are now reaching the level where this is no longer true.

In addition, power companies may find they are forced to add capacity and thus will buy plant that will cost them less next year, so much less as to wipe out all revenue on the plant built early. Because the alternative would be shortages in a regulated market.

Your greener life might be more satisfying

Sensitive people postponing cheaping green power might want to consider the personal satisfaction increase of their life going green regardless of money for once.

There's no "paradox", Brad

So you're saying that solar power will never work because ,every year, technological advancements are making solar cheaper? That's silly, Brad. Nobody has ever cried because things got cheaper. Ex: When you go to the store to buy a DRINK, you buy the CHEAPEST DRINK. You do not look at the MILK and tell yourself, "Oh no! In the future, the dairy farmers will come out with some new-fangled way of making milk cheaper, and I would be a 'tard for paying full price now!" You do not buy the $2.50 ORANGE JUICE over the $2.00 MILK just because next year the MILK will be $1.50. As a consumer, I would be happy to buy the cheapest energy. So, when solar's price drops below coal and gas, I will buy it and someone else will be there to sell it. Solar doesn't have to be as cheap as it will ever be for me to purchase it. It only has to be cheaper than the alternative coal and gas.

Secondly, if I were a businessman, I would not twiddle my thumbs each year because the cost of manufacturing and installation will be cheaper the next year. That's how all businesses work, not just solar! Do you think Intel will stop producing computer chips now because in 5 years chips will be easier and cheaper to produce. If people want to buy solar because it's cheaper than coal, than, by God, I'm going to start selling it now and get some profit flowing and hope that next year cost of operations goes down and I will expand and make even more profit in the future.

In conclusion, things become cheaper. It's a natural progression for technology to make things cheaper and better. People do not wait around until the peak of technological achievement and solar is as cheap as it will ever be. Solar energy will be a product just like any other product, and people will buy it when it is a good deal, and people will sell it as soon as they can make a buck. And the sooner Brad takes or retakes a Macroeconomics class, the better.

Nope

I certainly don’t say it will never work. Obviously once it gets to a certain price it is competitive! It’s just that there is a paradox. As long as you are confident it will be cheaper next year, you should wait — on a purely financial, rather than green basis. Some people buy it today when it isn’t economical at all, because they like that it’s green, though they don’t realize there are greener things they can buy for their money, much greener.

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