For proponents of clean energy technology, the holy grail is to reach price parity with conventional power sources such as coal. For photovoltaics, this tipping point is generally regarded as a dollar per watt ($1/Wp), a measure that indicates the generation capacity of a cell in peak sunlight.  At this point the stage will be set for a massive explosion in the number of solar panels being installed and sold – a situation eagerly anticipated by the PV industry and environmentalists alike.

While most agree that cost competitive solar panels would be a good development, there is a great deal of disagreement on how to reach this point. In this debate, two major schools of though have emerged. The first school recognizes that market externalities such as the cost of pollution must be internalized in order to allow the free market to allocate enough resources to renewable energy. Proponents of this view back programs such as carbon taxes and cap and trade.

The second school of thought acknowledges that market signals need to be corrected, but believes that the free market is not able to support the massive upfront costs required to advance renewable energy technology. This group maintains that the market is excellent for creating incremental advances and lowering costs for existing products, but it does not support the decades of investment required to develop a new technology before profit can be generated. In these cases, it is necessary for government entities to ensure that necessary advances occur despite the lack of a market.

After cap and trade legislation suffered a recent setback, the direct government intervention view has made some headway, winning the backing of the Presidential Council of Advisors on Science and Technology (PCAST) as well as a number of prominent think tanks and policymakers from both sides of the ideological spectrum. However, supporters continue to battle with the conservative proponents of neoclassical economics that believe that such intervention is a misuse of tax dollars and will cause negative disruptions to the market.

The biggest problem with this debate is that it is comparing apples and oranges, as these two policy approaches would have vastly different effects on the solar photovoltaic industry. High efficiency silicon cells will play a critical role in cutting emissions in the next 10 years, but no amount of tweaking will bring the existing technologies to a level where they can fulfill the needs of an industrialized economy. New technologies are required.  Dr. Sigurd Wagner, Princeton professor and founder of the photovoltaic laboratory of the National Renewable Energy Lab in Golden, Colorado, in a recent lecture, provided a concise, quantitative explanation of this problem.

The price of solar panels is closely correlated with the total generating capacity that has been produced. As more panels are sold, incremental technological advances make the panels more efficient and lower cost. It turns out that the correlation is strong enough that scientists such as Dr. Richard Swanson, founder of SunPower Corporation, have been able to accurately predict price drops as more capacity is built.

PV curveThis graph plots the aforementioned correlation. Look first at the green line, which indicates the trajectory of the first generation silicon solar cells that currently dominate the market. Using this graph, one can extrapolate that it would take the deployment of over 300,000 MWp to reach price parity. To put this in perspective, the cumulative production of solar panels through 2009 was less than 20,000 MWp. To look at it another way, the total US generating capacity is close to 1,000,000 MW. That means that companies will have to produce one third of the total US generating capacity or 15 times as many panels as have been produced to date, before price parity will be reached. For first generation PV’s the benefits of reaching price parity are years away and would likely require subsidies or market disrupting regulations anyway.

Cheap solar power, however, need not be so far away. New technologies offer lower cost solutions. The blue line represents the cost reduction curve of so called “second-generation” thin film solar cells, such as the cadmium telluride cells being produced by First Solar. Though the technology is much newer and much less capacity has been produced, it is already cost competitive with silicon cells. Extrapolating the existing data on thin film cells suggests that the technology could reach price parity with a cumulative capacity under 20,000 MWp. With this technology it will take drastically less time and money to create a panel that can truly rival conventional power generation. In fact, First Solar claims to have already reached a manufacturing cost of $1/Wp. Note that this is the company’s cost to produce cells, and so prices to consumers are still above the $1/W figure.

Market forces work well to improve on existing technologies, lowering the cost of producing energy. But the market buying silicon solar panels will not incentivize those companies to abandon silicon and invest in developing radically different technologies such as cadmium telluride. The development of cadmium telluride, admittedly, depended largely on the work of private companies such as General Electric and the predecessor companies of FirstSolar. But it has taken nearly 50 years of research to get it to where it is today. If the U.S. is looking to accelerate development of viable clean energy technologies, it needs to explore methods for supporting innovation directly rather than relying on the market to provide a solution.

On a final note, it would be a mistake to look at the price curve on cadmium telluride and conclude that such a technological breakthrough now only need market investment to bring down the price and therefore solve the clean energy challenge. Cadmium telluride is a somewhat problematic technology. One of the most important of these problems is the limited supply of necessary materials. Also, both Cd and Te are toxic – Cd was outlawed in the ‘70s from metallurgical applications.

There is still a lot of radical technological innovation that needs to occur.  The extent to which breakthroughs are necessary is furthered by the fact that the $1/W target is slightly misrepresentative of the true cost of solar energy because it doesn’t include the storage technology required for PV to produce as consistent and reliable an output as conventional power plants.

A third generation of solar panels could further reduce costs and improve the technology, bringing the true cost of solar energy nearer to price parity. The lessons one can glean from this graph on solar panels can be generalized to other renewable technologies as well. Ensuring a market for existing technologies will continue to bring the cost of panels down, but the panels will only be of limited use without the development of complimentary technologies that require long term investment before the market can create a profit.


Tucker Willsie is a Contributor in AEL’s New Energy Leaders Project and his work will be regularly featured on the website. The views expressed are those of the author and do not necessarily reflect the position of AEL.

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5 Responses to “Will Fixing Market Externalities Speed Clean Energy Innovation?”

  1. [...] This post was mentioned on Twitter by Teryn Norris, Ronald Harral and others. Ronald Harral said: Why Addressing Market Externalities Will Not Speed Innovation: Cheap solar power, however, need not be so far aw… [...]

  2. [...] compete in a globalized economy without investing in a domestic clean energy economy, and that we can’t achieve a robust clean energy economy through pricing alone.  The other has been that the strategic and tactical security of the U.S., and [...]

  3. AndrewW says:

    Solar power (in various forms) is still about $4-6 Watt installed. While some manufacturing efficiencies have been discovered, Solar is far from being affordable. It is an expensive alternative until the “installed costs” approach $1/watt. I haven’t seen any information that even begins to suggest that we will ever install solar capacity at $1/watt.

    We need a breakthrough that produces clean, affordable electricity. Solar remains wishful and highly subsidized thinking. We would be better served by offering a significant prize for clean, affordable electricity. DOE invests billions in wind/solar development schemes that are NOT financially feasible.

    Everyone who wants to solve our energy challenges should be encouraging DOE and our Federal government to offer a $1 billion PRIZE for “clean, affordable electricity generation.”

  4. Eddie Burgess says:

    Great points about R&D. In fact, some economists think that markets tend to underinvest in R&D because there is a risk involved: R&D costs from a single firm can either produce nothing, or a breakthrough that provides benefits only temporarily. Perhaps we could incentivize companies to make these investments through a prize, as AndrewW suggests. But that type “all or nothing” approach doesn’t really do much to reduce the risk involved. And in reality there’s probably no magical threshold for “clean & affordable” (to which I would add “scalable”) that we can say has been reached to award the prize. Unlike rapid recent developments in software, energy requires physical capital so it will be a gradual ramp-up of multiple complementary technologies over time (including storage as the author mentions). Not necessarily a sudden “breakthrough.”

    Additionally, I don’t think Tucker necessarily meant it this way, but it may be a mistake to pose the energy challenge as an “either/or” choice of dealing with externalities or underinvestment in innovation. They’re not mutually exclusive problems and they address different types of market failures. Both should continue to be pursued simultaneously. The externality path (aka cap-&-trade) is seen a non-starter politically, but I’m not sure that increased spending will make much more headway given the recent attention to cutting government deficits/spending.

    Lastly, the Cd toxicity issue tends to be overinflated. From what I’ve heard there is more Cd in many rechargeable batteries than in CdTe panels.

  5. Tucker Willsie says:

    Thank you both for your comments. AndrewW, I have been quite interested in the ability of these cash prizes (such as the X prizes) to stimulate innovation and help reach technological goals. However I think Eddie may have a point that while such a prize may induce some ‘treasure hunter’ entrepreneurs to take the leap and attempt to compete, a cash prize is far too risky an incentive for most boards of directors. Also, the question of ‘total installed costs’ is a tricky issue. While pv will need costly storage technology to replace conventional energy, it can play an important role in reducing green house gas pollution even as an intermittent power source. One particularly interesting application is a combined solar/natural gas plant that can provide cost competitive base load power with much lower emissions. Eddie, I definitely agree that its not an either or issue, and both problems need to be addressed. I’m sure increased government spending will have political hurdles, but it has some advantages over cap and trade. Cap and trade adversely impacted businesses, which was also a hard sell during a recession and with increased pressure from countries like China. Additional investment will certainly have its critics but it doesn’t come across as anti-industry in the same way. Also, investment in research has tended to be a bipartisan issue and the fact that the COMPETES re-authorization act made it through Congress is a sign of a good degree of support for this new direction.

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