Quantifying Solar Value Deflation in California
Solar photovoltaics (PV) have been a remarkable clean energy success story, with prices falling by a factor of ten and world solar generation increasing 21-fold over the past decade. Solar serves as the best example we have for making clean energy cheap and represents the cheapest source of new electricity generation at the margin in much of the world today. Solar will be one of the largest drivers of decarbonization globally over the next decade and may prove to be the single largest source of new electricity generation over the course of the 21st century.
However, the fact that solar generation is concentrated in a relatively short period of the day means that it is particularly susceptible to a phenomenon known as value deflation. As more solar generation is installed, the average wholesale price of electricity decreases during mid-day hours. This reduces the value of both new and existing solar compared to other electricity sources that are a better match to net load or have a different generation profile.
As a result, we find that some degree of future subsidies — either in the form of current tax incentives or future nominally technologically-neutral mechanisms like carbon pricing or a clean energy standard — will likely be needed to sustain cost-effective deployment of the high levels of solar over the next three decades projected by the California Energy Commission. This is likely to be the case even if value deflation can be in part mitigated by the expansion of complementary technologies like long-distance transmission, storage, and demand response.
California is a world leader in solar generation, with around 20% of its electricity coming from solar — substantially higher than any other US state or country in the world. It is also a place where the effects of value deflation are being felt more acutely. In California, declining midday power prices have significantly reduced the value of solar — particularly in the Spring and Fall months when solar generation is high and system load is lower. By analyzing six years of hourly generation and price data from the California Independent System Operator (CAISO), we find that the value of solar has fallen by around 37% since 2014 relative to other sources of electricity generation.
Observed value deflation is even more pronounced — at around 50% — in the Spring months, where negative daytime electricity prices and high levels of solar curtailment are increasingly common. In the Summer months, by contrast, value deflation has been limited to around 20%, as periods of high solar generation tend to better coincide with periods of high overall load, given the high cooling demands in parts of the state.
Value deflation to date has been largely countered by the continued rapid decline of solar PV module costs. Between 2014 and 2020, subsidized solar power purchase agreement costs in California fell by around over 50%, while the unsubsidized levelized cost of energy of solar projects fell by around 65%. There is currently a race between value deflation and cost reductions in California, though which factor will win over the longer term remains an open question. The figure below shows changes in both average annual solar wholesale prices (hereafter referred to as value; red line) and solar system costs (teal line) in California relative to 2019 values, as well as future projections developed in this report for different potential learning rates and modeled value deflation in a scenario where California meets its SB100 goal of fully decarbonizing the power sector by 2045.
The value of utility-scale solar PV in California in 2020 was approximately $27 per megawatt-hour (MWh) sold, similar to the price paid to solar producers of $26 per MWh in power purchase agreements (PPAs). However, the actual levelized cost of energy (LCOE) generation from solar was around $45, which is around 40% higher than the PPA costs due to the combination of a 30% federal investment tax credit (ITC), various state-level incentives, and indirect investor subsidies.
California solar is currently subsidized by around $900 million per year, based on the difference between PPA and LCOA costs. While future solar costs are expected to reasonably keep pace with value deflation if the ratio of PPA to LCOE remains constant — e.g., if future subsidies remain at current levels — the same is not necessarily true for unsubsidized solar costs. That said, the overall cost of the continuation of solar subsidies would likely remain somewhere between current levels and twice current levels, as higher levels of solar installation will be counterbalanced by falling per-MWh subsidies due to declining solar system costs. We additionally find that an effective carbon price of around $30 per ton CO2 would be similar to the continuation of current solar subsidies in California.
Value deflation of solar can be at least partially mitigated by the deployment of complementary technologies: grid-scale storage, long-distance HVDC transmission, and load shifting through efficiency and demand response. The use of clean firm generation can also help reduce overall system costs at high levels of solar penetration, reducing the solar capacity required to meet demand year-round due to seasonal differences in output. Value deflation will likely prove more problematic in a first-mover like California than in other later solar adopters, given the already-high levels of solar penetration and ambitious near-term expansion plants.
This report provides a detailed analysis of both historical and projected future value deflation of utility-scale solar in California and is divided into four parts. The first looks at the expansion of solar in California over the past six years, daily and seasonal variation in generation, and how California’s generation mix changes with different levels of solar generation. The second part quantifies how the value of solar has changed in California, both across different hours and seasons of the year and over multiple years. The third part develops a statistical model to evaluate future seasonal and annual value deflation as the percent of solar generation increases. Finally, the fourth part looks at how subsidized and unsubsidized solar costs and values might change through 2045 in a world where California meets its SB100 goals and explores the role of complementary technologies in mitigating value deflation.