Solar Power Is Finding Its Day in the Sun

The cost of electricity from large-scale solar installations now is comparable to and sometimes cheaper than natural gas-fired power, even without incentives aimed at promoting environmentally friendly power, according to industry players and outside cost studies.

Buoyed by appeals to self-reliance and environmental stewardship, as well as government subsidies, the early solar industry was dominated by rooftop panels that powered individual homes and businesses. But such small-scale installations are expensive, requiring hefty incentives to make them attractive to homeowners.

Today, large systems that sell directly to utilities dominate. They are expected to account for more than 70% of new solar added to the grid this year, according to industry research firm GTM Research.

The success of large-scale solar has raised questions about the wisdom of continuing incentives for rooftop installations, which remain far more expensive than most other forms of electricity.

Unsubsidized utility-scale solar power costs $50 to $70 per megawatt-hour (or 5 to 7 cents a kilowatt hour), compared with $52 to $78 for the most efficient type of gas plant, according to a 2015 study by investment bank Lazard.

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Generating power from residential rooftop panels is far more expensive, ranging from $184 to $300 a MWh before subsidies, the report said.

“If you take a solar panel from someone’s rooftop and put it in a field, the amount you would pay for that power drops precipitously,” said Matt Freedman, an attorney with California ratepayer advocate The Utility Reform Network. “What’s the magic of having it on the rooftop? It’s not clear.”

Going Big

Many trace the tipping point for utility-scale solar to a 2014 announcement by Austin Energy that it would buy power from a new 150 megawatt solar plant—enough to light and cool 30,000 homes—for 5 cents a kilowatt hour. At the time, it was a record low price for solar power. Since then, projects have brought the price below 4 cents a kWh.

The Austin Energy contract opened a market for big solar in sunny Southeastern states, Jim Hughes, chief executive of utility-scale solar developer First Solar told investors in April.

“The response has been, quite honestly, astonishing,” Hughes told them. “The utility world suddenly sat up and took notice and said, I had no idea that’s where the cost of solar stood.”

Large-scale solar is taking off even in states without policies promoting green power.

Georgia, for example, was the sixth-largest U.S. solar market last year with very little rooftop solar.

“We don’t need mandates,” said Lauren “Bubba” McDonald, a member of the Georgia Public Service Commission, who is widely credited with helping jumpstart the state’s solar industry.

Utilities in states like North Carolina, Texas, and Alabama also are building large-scale solar facilities because it makes financial sense.

“We are seeing large swaths of centralized utility-scale solar be procured primarily because of how cost competitive it is,” said Cory Honeyman, who follows the U.S. solar industry for market research firm GTM Research. “That’s a different kind of narrative.”

Subsidy Scrutiny

Rooftop installers like SolarCity (SCTY) enjoyed rapid growth thanks in part to a marketing message that peddles the romance and freedom of generating emissions-free power at home. And, for homeowners in states with favorable policies, rooftop panels can be a good investment, ultimately offering savings.

But the math only works in places with so-called “net metering” laws, which require utilities to buy the electricity rooftop panels generate at prices far above what they pay for centralized power.

To what extent governments and ratepayers should support rooftop solar is a matter of debate in several state legislatures and utility commissions.

Opponents argue that as more homeowners go solar, other ratepayers are left to shoulder the cost of maintaining the electrical grid, which solar owners still use when the sun isn’t shining.

Advocates counter that the higher the concentration of rooftop solar systems in a neighborhood, the less a utility has to spend on distribution to shore up grid reliability.

Last year, at least 24 states reviewed or made decisions to study the value of rooftop solar, according to the North Carolina Clean Energy Technology Center, which compiles a database of state renewable energy incentives. The studies aim to determine what benefits, if any, on-site solar delivers above the simple cost of power.

But there is little consensus. In Louisiana and California, for instance, studies commissioned by state regulators found that net metering policies resulted in higher costs for all ratepayers. Studies in Mississippi and Minnesota, on the other hand, found the policy provided a net benefit.

A major difference among the studies is whether they consider as part of the equation the environmental benefits of solar, which can be difficult to quantify.

“I’d put the value of solar in the eye of the beholder,” said Brian Lips, who manages the incentives database for the North Carolina Clean Energy Technology Center.

Rooftop solar’s dependence on incentives is a key reason investors have punished solar stocks in the last year.

Tesla Motors (TSLA) is seeking to take advantage of that weakness by buying rooftop installer SolarCity.

Elon Musk, Tesla’s founder and chief executive, also is the chairman of and largest shareholder in SolarCity. Musk has touted the benefits of bundling rooftop solar with home battery storage and electric cars in promoting the takeover.

But many of the electric vehicle maker’s shareholders are wary of a deal they see as risky.

And last year hedge fund manager David Tepper sought to block SunEdison (SUNE) and TerraForm Power’s acquisition of installer Vivint Solar on his assessment that rooftop assets were inferior to solar power plants, which have long-term contracts with utilities.

In a bid to stay relevant, some rooftop solar companies are expanding their repertoire. In May, for instance, SolarCity introduced a set of services for utilities, including development of solar power plants, battery storage, and other grid planning resources.

SunPower said in June it would it would offer solar systems with battery storage to 300 New York homeowners in what would serve as a “virtual power plant” to utility Con Edison.