SunPower is building the largest solar power plant in the world, but could it compete with new industry prices? Image source: SunPower.
How expensive is solar energy? How does it compare to what you pay for electricity?
The answers to those questions might surprise you, as utilities around the world are learning. Late last year, Dubai's state utility asked project developers to put their best foot forward in a bid to build 100 megawatts of photovoltaic projects just south of Dubai. The results were shocking.
A record low solar bid The lowest offer came from Saudi Arabia's Acwa Power, which bid $0.0598 per kilowatt hour for a 25-year fixed contract without any government subsidies. That's less than electricity costs in every state in the U.S. and well below the price of electricity in the Middle East, where oil still provides a large percentage of the grid's energy.
The chart below lists the Dubai project bid compared to electricity rates in October 2014 in the U.S. overall, California, and Hawaii. The domestic numbers are end-user costs that also include distribution and transmission, but they give some context as to how solar costs compare today.
Dubai Solar Bid
Source: U.S. Energy Information Administration.
What's shocking is how cheap Acwa Power must be building this system for. Depending on whether the Dubai system has tracking that increases electricity production per day, the capacity factor of the project will be 20% to 25%. Capacity factor is the percentage of time a system will produce its rated capacity, so a 100 MW system with a 25% percent capacity factor would produce 219 million kW-hrs per year (100,000 kW * 365 days * 24 hours * .25).
This will lead to total possible revenue, not including system degradation, of between $261.9 million and $327.4 million over the 25-year contract..
Even if we assume a 25% capacity factor, no degradation, and zero maintenance cost, which there won't be, the plant would have to be built for less than $167.4 million to return 6% on the investment. That's $1.67 per watt, well below the $1.88 per watt GTM Research said it would cost to build a single-axis tracking system, which is the most common and least expensive tracking design. These are incredibly low costs and low rates of return for solar assets.
First Solar's projects are installed for low costs but also come with lower efficiency modules. Image source: First Solar.
The bar has been set That low cost and low return on capital might work in today's low interest rate environment, but they also set a high bar for cost reductions in future plants.
As SunPower (NASDAQ: SPWR ) , First Solar (NASDAQ: FSLR ) , and SunEdison(NYSE: SUNE ) decide on expansion plans, these are the kind of projects they will have to compete against. SunPower in particular has expressed interest in entering the Middle East market, but I'm not sure it can build projects that cheaply today.
SunEdison has its sights on India and more competitive bids, which could come in near the same price as the Dubai project. If it keeps projects like this on the balance sheet the returns could be low, something for investors to keep in mind.
First Solar's challenge will be to compete with this price given its efficiency deficit versus its peers. Fleet efficiency was just 14.2% last quarter, while First Solar's commodity panels are 14%-16% efficient and SunPower's best panel is 21.5% efficient. So, others can pack more power into the same amount of space.
Falling costs for solar projects are a good thing for the growth of solar because it makes the industry more competitive with fossil fuels, but the next thing to worry about will be returns on those projects. If solar projects continue to be built for $0.06 per kW-hr it doesn't leave much profit for investors, whether they own a company that makes panels, builds systems, or owns the assets.
The number of profitable companies in the solar industry is small and with solar power purchase agreements now falling to $0.06 per kW-hr the pricing pressure in all parts of the business will continue. Solar panel makers will need to differentiate themselves on more than cost, building in electronics and increasing efficiency to make installation easier. Project builders will have to improve efficiency by automating installations and cutting maintenance costs. And financing costs must continue to fall.
One reason I think SunPower is at an advantage is its higher efficiency and innovations with products like C7 and C12 that magnify the sun's light on a solar cell, lowering the number of cells needed to produce the same amount of electricity. The company is also starting to build electronics into solar panels, which lowers installation costs.
What's certain is that the race to cut costs hasn't slowed down and whether you're looking at SunPower, First Solar, or SunEdison. Every penny matters today in solar.