Solar Value Down by 37% in California Due to Value Deflection: Report

The value of solar has fallen by about 37% compared to other power generation sources in California, said The Breakthrough Institute in its latest report. The report said California’s 20% power comes from solar, substantially higher than any other state of the United States.

According to the report, the 37% decline in the value of solar in California is due to value deflation. Solar generation is concentrated in a relatively short period of the day. As the solar installation increases, the average wholesale price of power decreases during the mid-day hours, which reduces the value of both new and existing solar compared to other power generation sources. In California, the decline in mid-day electricity prices has reduced solar energy’s value, especially in the months of spring and fall.

According to the report, solar generation reaches the top in April-June due to high insolation and lower power demand in California. In July-August, solar penetration goes down as total load increases due to higher cooling demand. Especially, mid-day solar penetration increased from 18% in 2015 to 36% in 2019. Mid-day solar penetration also witnessed seasonal variations as it was 30% during winter months, 41% during spring, 37% in summer, and 36% in fall.

The report said the overall marginal prices of all electricity on the grid would decline as the percentage of power on the grid coming from solar projects increases. The marginal price of power declines from around $60/MWh to $0 as the percentage of power from solar increases from 0% to 55% on the grid.

As per the report, the marginal prices of power decline by around 50% at 30% solar penetration, and it falls to zero when over 50% of California’s power is generated by solar energy. The largest decline in solar value, or value deflation between 40% and 60%, is witnessed during the spring months (March-May) as total power demand is low, but solar generation is relatively high. While the smallest decline in solar value, or value deflation between 10% and 20%, is witnessed during July-September, as power demand and solar generation both are on the higher side.

In California, utility-scale solar generation expanded rapidly over the last five years from 5% in 2014 to 13% until now. Utility-scale solar’s value in California in 2020 was around $27/MWh, similar to the price paid to solar generators of $26/MW in power purchase agreements (PPAs). However, the actual levelized cost of energy (LCOE) generation from solar projects was about $45, around 40% more than PPA costs because of the combination of a 30% federal investment tax credit, various state-level incentives, and indirect investor subsidies.

The report observed that the value deflection of solar is expected to continue in line with the percentage of power generation by solar continues to grow. The value deflection would increase from 45% to 75% in spring months, and 35% to 45% in fall months, as solar penetration increases from 13% to 20%. In the spring months, value deflection could approach 90% when solar penetration reaches 30% because of low power demand and high solar production.

In California, average annual value deflection will be about 48% at 20% utility-scale solar penetration, 65% deflection at 30% solar penetration, 74% value deflection at 40% solar penetration, 80% value deflection at 50% solar penetration, and 85% at 60% solar penetration.

The report stated that value defection was countered by the rapid decline of solar module prices. It added that subsidized solar PPAs cost went down by over 50% between 2014 and 2020. During the same period, the unsubsidized LCOE of solar projects fell by about 65%.

In California, solar is subsidized by around $900 million annually, based on a difference between PPAs and LCOA costs. The availability of solar subsidies makes a big difference to the existing cost-effectiveness of solar and its ability to keep up with existing value deflection. However, technology-specific subsidies may be phased out as solar installation grows.

To raise the relative value of solar, other technology-neutral deployment policies like carbon pricing or clean energy standards should increase natural gas’ costs in the future. As if the solar value declines faster than its cost, solar deployment could be hindered in the state, increasing overall energy costs.

To reduce the value deflection of solar, the report suggested to deploy technologies like grid-scale storage, long-distance high voltage direct current transmission lines, and load shifting through efficiency and demand response.

According to the U.S. Solar Market Insight Q2 2021 report, released by the Solar Energy Industries Association and Wood Mackenzie, the U.S. solar market had surpassed 100 GW of installed power generating capacity, doubling the industry’s size over the last 3.5 years.

In 2020, the U.S. solar industry grew 43% and installed a record 19.2 GW of capacity despite the Covid-19.