Key Drivers for Cutting Utility-Scale Solar Levelized Costs of Energy in US

Industry Insights
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As energy industry news stories tout record lows in utility-scale solar prices in a handful of jurisdictions across the country, a growing number of utilities are considering integrating these projects into their resource portfolios. But, as a report from the Solar Electric Power Association (SEPA) says, not all solar projects are created equal. Utilities looking to procure cost-competitive, high-value solar projects need to evaluate a range of factors, from regional solar resource intensity to local labor and permitting costs to system design issues, such as whether to use a fixed-tilt or single axis tracking system.

 

Key Takeaways:

• Utility-scale projects can now achieve levelized costs of energy (LCOE) of less than $70 per MWh in poor solar resource areas and less than $50 per MWh in good-to-strong resource areas. LCOE will fall as hardware and “soft” costs - such as labor and permitting - also decline

• Design strategies that leverage project orientation and tracking can boost a project’s capacity factor and lower LCOE. For example, a west-facing system can provide additional capacity at peak hours, as can a project with single-axis tracking

• Determining a solar project’s desired value proposition in advance and communicating it to bidders can result in proposals customized to meet specific needs.

Providing templates for bidders to submit key response data can also cut review time and minimize the risk of errors

Key Excerpts from the report:

• Hard and soft costs for solar have declined steadily in recent years and are predicted to decline further through the end of the decade

• Solar levelized cost of energy (LCOE) can achieve less than $70/MWh in poor solar resource locations, and below $50/MWh in good-to-strong solar resource locations

• Project riskiness can dictate financing terms, which impacts LCOE

• Efficient monetization of the Investment Tax Credit can drive LCOE down dramatically

• West-facing systems may provide additional capacity at peak hours, creating an added capacity value for the project

• Design strategies that leverage tracking systems can boost capacity factor and lower LCOE, particularly given the decreasing gap in costs between fixed and tracking systems

• Large scale solar projects can achieve significant economies of scale across soft cost categories compared to small projects, with as much as 40% build cost savings for utility-scale solar

• States with strong solar resources can generate significantly more energy than states with sub-optimal solar resources given the same project design

• Factors such as labor rates can impact solar economics on a sub-regional basis

• Project riskiness can dictate financing terms, which impacts LCOE

• Efficient monetization of the Investment Tax Credit can drive LCOE down dramatically

• West-facing systems may provide additional capacity at peak hours, creating an added capacity value for the project

• Design strategies that leverage tracking systems can boost capacity factor and lower LCOE, particularly given the decreasing gap in costs between fixed and tracking systems

• Large scale solar projects can achieve significant economies of scale across soft cost categories compared to small projects, with as much as 40% build cost savings for utility-scale solar

• States with strong solar resources can generate significantly more energy than states with sub-optimal solar resources given the same project design

• Factors such as labor rates can impact solar economics on a sub-regional basis

• Modeling multiple system sizes, orientations, and designs can allow resource planning tools to better identify “best fit” solar projects

• Routinely testing the market for pricing can allow utilities to stay on top of the continually declining costs of solar projects

• Identifying your value proposition in advance and communicating it to bidders can result in more intelligently designed proposals

• Standardizing templates for key response data translates into less review time and less risk of errors

Fixed Tilt and Single-Axis Tracking

A primary decision facing utilities and developers relates to the base system design under consideration: namely, whether or not to pursue a fixed tilt or single-axis tracking (SAT) system. SAT systems are designed to physically track the sun’s motion across the sky each day rather than being fixed and pointed directly south (or west). Tracking systems create more production in mid-morning and late afternoon hours, but have historically come with added costs from a more complex engineering design and tracking system.

This has resulted in more south-facing fixed tilt projects being the predominant design adopted nationally, with SAT systems developed in specific regions of the country such as the desert southwest. Increasingly, however, the market appears to be moving towards more SATs rather than fixed tilt due to declining cost differentials between the two system designs. SEPA anticipates that leveraging a tracking system rather than fixed tilt will result in a cost differential of 5% or less on average in the next 1-2 years.

Economies of Scale

Economies of scale for solar PV are both obvious and obscure. On the one hand, clearly utility-scale solar projects benefit from economies of scale when compared to rooftop assets. What becomes less clear is just where the natural break points are for utility scale solar. Generally speaking, solar experiences some natural break points with regards to pricing. The first, for utility-scale solar, occurs between 1-5 MW. On average, SEPA anticipates any non-distributed solar project at 5 MW to be priced at or below $2/Watt in 2016. The second common breakpoint occurs between 5-20 MW. At 20 MW, SEPA anticipates 2016 pricing at or below $1.60/Watt on average. Lastly, another common breakpoint occurs from 20-50 MW. SEPA anticipates 2016 pricing for 50 MW projects to be $1.20/Watt or less. Beyond 50 MW, some additional economies of scale may be gained, but at diminishing levels. These breakpoints occur where the relationship between capacity and specific cost components diverge from where marginal costs apply. Under the same assumptions for interconnection, labor, permitting, taxes, and solar availability, the LCOE can still change significantly based solely on economies of scale.

Location

The solar resource calculation of kWh/m2/day is interesting but does not necessarily correlate to the electric utility industry; it can, however, be translated into capacity factor. Capacity factor describes the amount of energy that is produced compared to the system’s theoretical maximum. For comparative purposes, assume three different site assumptions for development of a 20 MW solar project - a strong solar resource location (Phoenix, Arizona); a moderate solar resource location (Jackson, Mississippi); and a lower solar resource location (Pittsburgh, Pennsylvania).

The difference in just a few percentage points of capacity factor can create a wide discrepancy in both the output the system delivers as well as the overall LCOE, even if the projects are similar in all other factors. For a 20 MW south-facing project, 23% and 41% more energy is produced at the Phoenix site compared to the Jackson and Pittsburgh sites, respectively.

Fixed Tilt System Orientation

Traditional logic dictates that fixed tilt solar projects should be faced south to maximize production. That is, after all, where the sun is most often visible on the horizon. Some utilities, however, have pursued west-facing systems, and that has sizable implications to the production. A notable trade-off exists: nearly 17% annual production compared to south-facing systems is foregone by facing systems west. South-facing solar maximizes production around 12-1 pm daily. The typical utility, though, serving a summer peak demand driven by air conditioning load, does not experience its maximum load until around 5 pm. At that point in time, a south-facing system’s production is less than 40% of its average 12 pm output.

SOURCE:

Solar Electric Power Association SEPA, April 2016

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