Give or take a couple of years, solar energy is expected to achieve ‘grid parity’, the holy grail of solar energy, around 2011. This is when solar will become as expensive as energy production from conventional sources, and solar energy will become mainstream. There are a couple of forces at work to get us there.

First, there are the year-on-year efficiency improvements in the cell production (producing more with less), and the cells themselves (increasing the amount of sunlight that is converted into energy).

These are the results of learning economies (the more one produces, the more one learns how to do that in a more efficient way, gaining experience) and gradual technological advancement. This is the low but steadily grinding force

The second force is that of technological innovation. We’re talking here not about the grinding force of technological improvements which we just discussed, but on new concepts and technologies that bring substantial one-off improvements, for instance, using new materials like nano structures. We are busy making several report on the most promising ones.

The third force, however is a rather simple one, but a bit of a double-edged sword. Today, the crucial raw material for the most common type of solar cell production is polysilicon, and this happens to be in short supply, sending prices skywards (spot prices have recently crossed $500 but came down from that high) and making cell producers frantically looking to secure longer-term supplies.

But this situation is not supposed to last. In China especially, an enormous amount of polysilicon production is coming on-line. The exact timing is unsure, some people talk about late 2008, some about the second half of 2009, but this is likely to happen. We will have a follow-up article on the timing.

Since polysilicon constitutes a large part of the cost of solar cell production, drastically reducing those costs will lead to the possibility of rapidly decreasing prices for solar cells.

This has the potential to make solar cells much cheaper. In fact, those new supplies will bring prices crashing down. According to Bradford, from the Prometeus Institutute and author of a book (“Solar Revolution”) on the topic argues that

“Prices for solar panels could drop by as much as 50 percent from 2006 to 2010. In areas that get a lot of sun, that will translate to solar electricity costs of about 10 cents per kilowatt hour, matching the average price of electricity in the United States. That will make solar affordable and, eventually, will vastly increase the market, Bradford says. “You can’t even begin to imagine the transformation that that’s going to create.”

So, increasing supply of polysilicon will drastically reduce its cost and has the potential to enable much cheaper solar cells. This will bring solar energy close to of that holy grail of the solar industry: grid parity (which means that solar energy could compete with traditional sources of electricity production).

According to Emanuel Sachs, a professor of mechanical engineering at MIT (and one of the founders of 1366 Technologies, another start-up with an innovative approach):

“Today, solar cells cost about $2.10 per watt generated. When manufactured at a commercial scale, the first cells incorporating his new technology will cost $1.65 per watt. Planned improvements will bring down this cost to about $1.30 a watt, he says. To compete with coal, the cost will need to come down to about $1 a watt, something that Sachs predicts can be achieved by 2012 with further improvements in antireflection coatings and other anticipated advances.”

When that happens, whole new market opportunities will open up. Solar companies can start functioning as (or delivering to) utilities. And it’s not that there isn’t ample room to grow here:

All of the solar cell manufacturers are supply constrained. The entire world produced a total of 3.8 Giga Watts [GW] of solar cells in 2007. Worldwide electric production (2005) was 18,560,000 GW hours total. By my rough calculations, one year of solar cell production produces about 0.05% of total world electric production. Total world-wide solar cell installed capacity was 12.4 GW. 12.4 GW solar capacity x 365 days x 7 hrs per day = 31,682 KW hrs of solar production. That is 0.17% of total world production.

This can take place in more than one way. One could build endless rows of solar cells in, say, a desert, but perhaps the most efficient one is in a distributed form.

Distributed energy
We already see the beginning of this, it’s placing solar cells on rooftops. There are already big plans underway. For instance:

PPL Renewable Energy on Monday (May 12) announced plans to design, construct and operate a 1.7-megawatt solar system for Schering-Plough Corporation in Summit, N.J. When completed, the green energy project will be the largest rooftop solar installation in the United States.

Rooftop or ground-mounted solar panels can significantly reduce energy bills by generating electricity during the daytime or “peak” hours when power prices are highest and the facility consumes the most energy.

It’s especially good for offices, in the summer, they need cooling during the day, and in the winter heating. Solar roofs can really help to reduce peak-hour usage, and prevent brownouts.

“BECAUSE small solar installations require less transmission infrastructure than centralized power plants, they might turn out to be the key to preventing brownouts (and maybe blackouts) predicted by 2011 in many parts of the U.S”

And they are not the only ones who are doing this, Duke has a similar big project in North Carolina, and Duke is a utility.

There are further advantages to this distributed approach. The main one is that no new power plants need to be built, and also no new grid construction.

In fact, some argue that this implies that distributed solar energy is competitive right now. We are already at grid parity, according to Jigar Shah, Chief Strategy Officer, SunEdison.

Shah insists power producers not compare solar energy cost to the cost of power generated by existing Old Energy production but to the cost of building new production from traditional sources. Considered that way, distributed solar generation – especially when the cost of building new transmission for the traditional sources is considered – is competitive right now.

Shah added that distributed solar generation is now storable, predictable if intermittent, and there are plenty of places to build it, from the rooftops of homes and businesses to the brownfields of inner cities. What is still needed, he concluded, are good incentives, innovative price schedules, net metering and a smart grid.

We don’t know whether it’s true though. If it is, we could see a mushrooming of small-scale installations. But there are some hurdles on the way. Incentives are clearly important, as the Duke example shows

Here again a state Renewable Electricity Standard (RES) is driving the move to New Energy. North Carolina passed an RES in 2007 and Duke is responding. Think what the nation’s response would be if Congress passed a national RES and the other half of the states got into the flow

In fact, it has been argued that incentives for the utilities are actually quite perverse.

Because rate cases are often structured so that more energy consumption equals more profits, utilities don’t have an incentive to encourage energy efficiency or distributed renewables.

Incentives are probably coming back on a Federal level though, so we think there are exciting times coming up for solar energy. The American market might take off in a serious way, but we also expect a lot of China.

No less a company then DuPont is going to build solar R&D and production facilities in China, as it expects demand there to grow 30% a year.

Price war?

However, some caution remains warranted. Although the end of polysilicon scarcity will bring forward the day of grid parity, but it also removes the most important barrier to entry in the industry. What the resultant effect of these two opposing forces will be is difficult to tell in advance.

New players might very well price aggressively to establish themselves in the market, in which case the basis of competition will shift to product and process efficiencies. The established players are likely to have one (or a couple) leg up over the newcomers, but there is a whole lot of innovation going on at the moment.

It’s not at all impossible that some new player will leapfrog technological boundaries in order to establish themselves with more efficient product and/or process efficiencies. We can already see a few candidates, which we will cover in upcoming articles here. Stay tuned.