Solar energy has become a major part of the U.S. energy industry almost overnight. According to GTM Research, in the first half of 2014 53% of all new electricity generating capacity built in this country was solar, and installations are expected to grow 36% this year, reaching 6.5 GW. But solar power is having a different effect on electricity prices than you might think.
Given media reports about the high cost of solar and the fossil fuel industry's efforts to convince consumers that natural gas is the cheapest energy source, it may surprise you to find out that locations installing the most solar are actually seeing energy costs rise more slowly than they are in the rest of the country -- and California's electricity prices are actually cheaper than they were a year ago.
Solar energy's impact on the grid
There were two reports recently released that show the impact solar energy is having on the electric grid. The first is the second quarter U.S. Solar Market Insights report from GTM Research and the Solar Energy Industries Association, which said that solar installations in the first half of 2014 totaled 2,478 MW.
The vast majority of solar was installed in California, where 1,631 MW were completed in the state during the first half of the year. You may think the concentration of solar energy in one state would lead to higher energy prices, but exactly the opposite is true. According to a report from the U.S. Energy Information Administration, the Pacific Continuous region, which includes California, Oregon, and Washington, actually saw electricity prices fall 2.5% versus increases of as much as 11.8% in New England.
There's a lot that goes into the cost of electricity, and solar energy isn't the only reason costs fell, but there is good reason to think that solar contributed.
How solar energy can make your electricity cheaper
The reason solar energy can lead to lower costs is that electricity from the sun displaces mid-day peaking electricity plants, which can be the highest cost plants in the grid. For example, a residential solar system could turn a Southern California home with air conditioning from a high-demand point to an electricity supplier, having a huge impact on end market demand.
The impact on the grid can be seen by falling wholesale electricity prices at California's wholesale hubs. The NP-15 and SP-15_2 hubs in particular saw the highest wholesale prices in a decade last year. But this year costs have fallen, in part because of the addition of solar to the grid.
High electricity prices on the East Coast were driven by high wholesale electricity prices, something that may be ameliorated by solar energy in the future. New York and New Jersey in particular are expected to be big solar markets over the coming years, and may have a downward effect on electricity prices overall.
Solar energy will continue to put pressure on the grid
The fact is that solar energy is the only energy source that has seen costs consistently fall over the past decade. This dynamic will continue, and as residential and commercial solar grow it will continue to displace demand on the grid, putting pressure on wholesale electricity prices.
Solar energy may get a lot of negative headlines nationwide, but it may not have the impact on energy prices that you think. In fact, it could lower costs for you and your neighbors.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.