Over the last few years, solar PV has gotten cheap. Cheap enough to start impacting some commodity energy markets today. Cheap enough that with continued progress, but no breakthroughs, it might alter the global outlook for energy supply within a decade.

I have long been skeptical of solar hype. In 2008 we did an expert judgment exercise suggesting only even odds of getting to module prices of $0.30 per watt in 2030. In 2011 we did some analysis showing how the power-law learning curve for modules appeared to be flattening. That analysis was done at the end of a decade that saw big increases in installed capacity, with little corresponding change in module prices.

I worried that deployment incentives (the global total amounting to many hundreds of billions of dollars over the past decade) would simply lock in the current technologies and do little to drive the breakthroughs that were needed to get solar cheap enough to compete for commodity power.

I was wrong.

Current costs

Facts have changed. Just a few years ago, the cost for industrial systems was twice what it is today. A host of little innovations have driven costs down. Module prices are now around $0.50 per watt. The unsubsidized electricity cost from industrial-scale solar PV in the most favorable locations is now well below $40 per megawatt-hour and could very easily be below $20 per megawatt-hour by 2020. Compared to other new sources of supply, this would be the cheapest electricity on the planet. Let’s look at how that cost is calculated.

The current state of play is captured in three facts:

The capital cost of industrial (>50 megawatt) solar PV installations with north-south axis trackers is now about $1,500 per kilowatt, and contracts for some industrial systems without trackers are getting down to $1,000 per kilowatt.

Capacity factors of industrial systems with trackers are reaching just over 30 percent at the best sites in the U.S.

Real-world efficiency for commercial PV systems now exceeds 20 percent.

Let’s now proceed on the assumption that these facts are correct. What does this mean for electricity supply cost?

Assume that an average capital change factor (CCF) is 6 percent, a low but not unfeasible value, as the risk premium for these facilities has decreased dramatically. (CCF is the ratio of the total annualized cost of capital, spread across debt and equity, divided by capital cost.) At $1,500 per kilowatt, a 6 percent per year CCF, and 30 percent capacity factor, electricity cost is $34 per megawatt-hour.

1500 × 0.06/(8760 × 0.3) = 34

Note that this low cost of capital would only make sense for a project that was selling into a low-risk market.

Now suppose costs for big systems (>100 megawatts) get to $1,000 per kilowatt by 2020, and you install them in the world’s best locations using a north-south oriented single-axis tracker to a capacity factor of 34 percent. These trackers used to add a lot of capex, but disciplined manufacturing and scale has driven cost down to about $100 per kilowatt. (Here is info on the Sunpower C1 tracker.)

Under these assumptions, power cost is $20 per megawatt-hour -- or $0.02 per kilowatt-hour.

1000 × 0.06/(8760 × 0.34) = $20 per megawatt-hour (or same cost at $750 per kilowatt and 26 percent CF).

That’s $5.5 per gigajoule for electricity. ($20 per megawatt-hour and 3.6 gigajoules per megawatt-hour = $5.5 per gigajoule.)

Even $40 per megawatt-hour is very cheap power. The 2013 median price of sales to industrial customers in the U.S. was about $60.

That’s the good news. But cheap solar does not deal with the problem of solar power’s intermittency. It does not mean rooftop solar in New England makes sense. It does not magically decarbonize the world. In the long run, we need low-carbon dispatchable power in the world’s demand centers. This will require some combination of gas for peaking, storage, and long-distance transmission. Lots of the world’s demand is in places where insolation is at least 40 percent less than in the best locations, which are parts of Mexico, Southern California, the Mid-East and Australia.

But it does mean that one can now build systems in the world’s sunny locations and get very cheap power.

Implications

What does this mean?

Implication #1: In sunny places, solar will reshape commodity power markets.

Examples:

Power prices will have a midday low. This is already happening in California, where it’s called the “duck curve.” It will soon be the norm in other high-sun demand centers, and the changing power price structure will shake utilities and industrial customers.

Wind suddenly looks less interesting. The capacity factors, global build rate, and costs for wind power have been nearly flat for five years.

Nuclear and CCS will have a harder time competing. For example, there are nuclear builds in the Middle East (e.g., UAE building Korean reactors), but with cheap solar it will be hard to compete against solar with gas backup.

Gas for load following and low-capex peaking looks ever more important.

Implication #2: There will be opportunities to bring electrical demand to areas where power is cheap.

One option is look for products that have very high energy costs and are easily transportable, and build solar farms and production together in high-insolation sites.

Four options are aluminum, ammonia, desalination, and transportation fuels. The first two are each about 1 percent of global primary energy demand. Niches, yes, but not small. Desalination is growing fast and it’s much cheaper to store water than electricity.

If (a) most of the energy demand is from processes that can handle a diurnal cycle, and if (b) the amortized capex is low compared to the energy cost, then one can deal with variability by simply cycling the production facility on and off.

For transportation fuels, if cheap solar means hydrogen prices under $10 per gigajoule in sunny places, then carbon-neutral synthetic fuels look promising. It takes about 2 t-CO2 and 40 gigajoules of H2 to make 1,000 liters of gasoline using a process like Exxon Methanol-to-Gasoline. If we can get CO2 from the air at $125 t-CO2 then the idea of making fuels at prices around $1 per liter looks plausible over the next few decades.

The upshot

Cheap solar is limited by intermittency and by the fact that many of the locations with the highest energy consumption don’t have good solar resources (e.g, northeastern U.S., northern Europe, coastal China).

In the near term, a surprising amount of intermittency can be managed cost-effectively with gas turbine backup, and this works even as electricity sector carbon emission are pushed down to a third of today’s values. Looking further ahead, long-distance electric transmission can move solar power from good sites to demand centers and can reduce the impact of intermittency by averaging supply and demand across larger areas.

Looking even further ahead, if we want a stable climate, humanity must bring net carbon emissions to zero. And, if we hope for a prosperous world with ample energy that can raise standards of living for the poor, then energy demand will more than double, growing to beyond 30 terawatts.

Climate is not the only problem: energy systems have other social and environmental costs, and the land footprint of energy is a good proxy for environmental impacts on water, landscapes, and the natural world. My view is that only two forms of energy -- solar and nuclear power -- can plausibly supply tens of terawatts without a huge environmental impact. But that’s a topic for future posts. For now, let’s celebrate the last decade’s progress toward cheap solar.

***

David Keith is a Gordon McKay professor of applied physics and professor of public policy at Harvard. This piece was originally published at his Harvard blog and was reprinted with permission.

To learn and debate about these kinds of energy system topics, sign up for Harvard's free edX course launching on June 8th, Energy Within Environmental Constraints. You can also follow the course on Twitter and Facebook, where we'll announce more blog posts like this one in the weeks leading up to the course.