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The Disruptive Potential of Solar Power

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While a McKinsey article highlights the potential for solar to improve dramatically over the next few years, CFR experience suggests that for large scale solar the economics are compelling today.
In a recent McKinsey Quarterly article, the authors discuss how the rapidly improving economics of solar power have already changed the renewable electricity landscape. While the overall installed cost of rooftop residential solar PV (photovoltaic) systems have declined from $7 per peak watt in 2008 to less than $4 in 2013, the authors expect them to continue to drop through 2020, clearly making the solar option cost competitive with traditional power-generation technologies such as coal, natural gas and nuclear energy and continuing to drive the more than 4x increase in US and European adoption rates since 2009. The authors also describe how businesses with large physical footprints are installing commercial-scale rooftop solar systems, often at less than the current price of electricity purchases from their utility suppliers, and with the financial sector becoming more comfortable with financing such projects, the authors expect PV solar to potentially disrupt the traditional relationships between consumers and suppliers of electricity.

 

The article is clearly on target and is consistent with what CFR has experienced in the field. However, we believe the potential for solar PV is even greater than what the authors see and that, for many, now is a great time to act. While the installed costs in the residential market are likely to further decline as the authors expect, it has already dropped to such low levels for larger-scale projects and we believe that the potential for solar PV in the commercial, industrial and institutional markets – which make up over 60% of the total end-user market – is much greater than the authors expect. We have found that end-users with large physical footprints have an advantage in installing solar PV on-site, however, in most cases such installations only account for five to ten percent of their electricity use. But thanks to deregulated transmission networks, businesses as well as large institutions such as universities and hospitals that do not have spare land or rooftops onsite can access direct or indirect delivery solar PV solutions offsite with attractive economies of scale and the ability to meet up to 100% of their electricity needs. Since such sites can often be located relatively close to load centers, the economics of transmission for such sites are even more favorable than those for similar scale coal or natural gas fueled power plants. And, coupled with attractive federal and state tax incentives set to expire over the next two years, the near-term economics of large-scale offsite solutions can be very compelling. So we see solar PV as likely to be even more attractive to a broader category of large consumers of electricity and therefore more disruptive to incumbents than the article suggests.


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