The cost of rooftop solar-powered electricity will be on par with prices for common coal or oil-powered generation in just two years -- and the technology to produce it will only get cheaper.
The prediction, made by Deutsche Bank's leading solar industry analyst, Vishal Shah, is part of a report on Vivint Solar, the nation's second-biggest solar panel installer. Shah believes Vivint Solar is doing so well that it will double its sales each year for the next two years.
The sharp decline in solar energy costs is the result of increased economies of scale leading to cheaper photovoltaic panels, new leasing models and declining installation costs.
Today, only 10 states boast solar energy costs that are on par with those of conventional electricity generation methods, such as coal-fired power plants. Those states include Arizona, California, Connecticut, Hawaii, Nevada, New Hampshire, New Jersey, New York, New Mexico and Vermont.
Last year, those states using solar power accounted about 90% of U.S. installations. But, by 2016, Deutsche expects solar energy to reach price parity in all 50 states.
For example, the cost of solar-generated electricity in the top 10 states for capacity ranges from 11-15 cents per kilowatt hour (c/kWh), compared to the retail electricity price of 11-37 c/kWh. In those states, there is currently about 6 gigawatts (GW or billion watts) of solar electricity installed. However, with the price of solar panels dropping, new solar leasing programs and the availability of low-cost financing, Deutsche expects an installed capacity growth of about 400% to 500% over the next three to four years.
Currently, the U.S. has 16GW of installed solar capacity, with nearly 5GW of solar capacity was added last year alone, according to Deutsche.
One of the factors spurring growth is the expiration of the federal government's solar investment tax credit (ITC). That measure, passed in 2008, offered a 30% tax credit for residential and business installations. When it expires in 2016, the tax credit will drop to a more permanent 10%.
"Consequently, we expect to see a big rush of new installations ahead of the 2016 ITC expiration," Shah stated in his research document.
At the same time, Deutsche Bank believes the cost to finance solar installations will also drop from 7.9% today to about 5.4% next year. Financing for installations is expected to stabilize at around 6.5% by 2019.
Amit Ronen, director of George Washington University's Solar Institute, authored the ITC legislation in 2008. Along with the ITC law, one of the driving forces behind adoption of solar power and the ensuing reduction of costs, he said, has been the U.S. Department of Energy (DOE) SunShot Initiative, which helps fund research, manufacturing and market creation. SunShot has a goal for solar energy to reach price parity with conventional power sources by 2020.
"They say they're about 60% of the way there because [of solar] panel prices.... They've come down 80% over the past five years," Ronen said.
The cost of solar panels, or solar hardware, used to represent two-thirds of the overall price to install solar power. Over the past five years, however, that has flipped to where "soft costs," which include labor, permitting and advertising, now represent the majority of the cost.
The U.S. has lagged behind some other countries in progressive solar energy policies that have been successful in lowering soft costs of solar installations.
Germany, for example, has a generous fee and tariff policy, that guaranteed if a residence or business installed solar, costs would remain fixed for 20 years. The uptick in installations lead to massive price drops in solar energy costs.
"Germany made this massive investment in solar even though they have relatively poor solar resources," Ronen said, referring to both a lack of solar hardware resources and sunny days. "For example, in the U.S. the worst place in the country for solar is Seattle. Germany's worse than Seattle."
After the Fukushima nuclear disaster in 2011, Germany also decided to shutter its oldest nuclear plants, and set its sites on phasing out all plants by 2022 in favor of renewable energy.
"So Germany is on the leading edge of high solar penetration rates," Ronen said. "Overall, the experience shows that it is possible even in a place like Germany with relatively poor [solar] resources."
Deutsche said solar system prices in the U.S. are expected to decline from just under $3 per watts today, to under $2.50 per watt over the next 18 months, leading to a further decline in the price per kilowatt-hour of solar to 9-14 cents, "driving further acceleration in solar shipments."
The U.S. solar installer market is still highly fragmented, Shah noted in his analysis. But he expect that to shift dramatically over the next three to five years as large solar manufacturers and installers, such as First Solar and SolarCity, grow to facilitate economies of scale in a post-ITC environment.
"We believe the availability of residential leasing options...also acts as a significant growth catalyst for the sector, considering the fact that solar leasing companies are highly profitable and have strong incentive to maximize the number of leasing customers ahead of ITC expiration in 2016," Shah said.
One area of concern is net metering, Shah noted. Net metering is the ability for residential and commercial solar installations to sell unused power back to utilities, making the electrical meter a two-way street.
Currently, 43 states and the District of Columbia have implemented net metering policies, some of which are more favorable than others.
Several states, such as Arizona, California, New Mexico, Idaho, Louisiana, Wisconsin, are discussing revisions to their net metering policies to include fixed monthly charges for residences and businesses that install solar to make it less competitive with conventional energy. The rationale, as given by utilities, is that they must build and maintain the electrical grid over which all power is transferred, so solar installations should be charged a fee to help pay for that.
Last year, for example, Arizona's largest power utility -- Arizona Public Service -- sought a monthly rate increase of $50 to $100 for solar-using customers. Arizona regulators settled on a roughly $5 per-month fee for those solar customers of Arizona Public Service.
"Fixed monthly charges would make solar less competitive if implemented," Shah stated.