One of solar power's sticking points is a relatively high price tag when compared to fuels like natural gas and coal. However, as solar costs head lower, that dynamic could be changing -- at least at the utility level.
The basics of solar are pretty simple: turn the sun's rays into electricity. There are, however, different methods for doing that. For example, some utility-scale solar systems reflect the sun's rays onto what amounts to a giant pot of water. When that water boils, it creates steam that is used to create energy. Photovoltaic systems, meanwhile, turn the sun's rays directly into electricity -- like a solar calculator, only much bigger.
And then there are variations on these themes. For example, the types of solar panels that giant rooftop solar installer SolarCity (NASDAQ:SCTY) installs sit on a customer's roof and don't move. That means they can only be put up where the sun shines and where rooftops are in a good location. Some utility scale systems, however, use arrays of solar panels that track the sun. The bases turn through the day and/or the solar panels tilt to get the best angle. That's high tech!
However, better technology costs more money. And the prices of more basic systems are coming down. As a case in point, SolarCity's installation costs have dropped nearly 30% in two years. And the company expects more savings to come. SunPower (NASDAQ:SPWR), which installs rooftop solar but works more at the utility level, noted that 2013 was the second consecutive year that it was able to reduce its solar panel manufacturing costs by 20%. And, like SolarCity, SunPower expects costs to come down even further as it builds more up-to-date manufacturing facilities.
And this is where things start to get interesting. Having the best solar technology may not make the most cost effective solar installation. SolarCity installs stationary solar systems because it wouldn't make financial sense to put rotating and tilting panels on someone's roof. Utilities are willing to pay the extra cost if it increases solar output or makes solar a more available resource -- during peak consumption times, for example.
But a recent round of bidding on solar projects for Xcel Energy (NASDAQ:XEL) suggests that may not be enough to overcome cheap panels anymore. Xcel, which has made a huge commitment to wind power, has an agreement with Geronimo Energy to build a $250 million solar project, called Aurora, that includes tilting arrays. Only now Xcel appears to be suggesting that it can get cheaper solar power without any bells and whistles.
According to the utility, more than a dozen solar projects from a recent request for proposals came in with power priced at $0.085 per kilowatt hour or less. That's pretty cheap. In fact, Xcel reportedly sent a letter to state regulators saying that these proposals are "significantly less expensive" than Geronimo Energy's Aurora proposal.
Xcel isn't allowed to say exactly what the Aurora project costs, but significantly less expensive pretty much spells it out. The company wants to ditch Aurora and go with the cheaper option. Needless to say, Geronimo isn't happy about this development.
Betsy Engelking, a vice president at Geronimo, recently told The StarTribune that "Xcel is trying to make comparisons between two different solar resources." Engelking pointed out the benefit of the tilting solar arrays it planned, and provided "a financial assurance to Xcel about delivering electricity when customer demand spikes." But if simple stationary solar costs so much less, Xcel could just put more of it up to compensate.
Xcel Energy is right in the thick of this cost/benefit analysis. And the math is only going to get more and more interesting as solar prices fall further. It's almost inevitable, since photovoltaic solar panels are essentially chips, which Moore's law suggests just keep getting cheaper. Then there's also the issue of scale and expertise. As more solar goes up, experience allows for increased efficiency and lower costs.
At some point, and that may be now, it doesn't make sense to bother with better but more expensive because cheap is, well, so cheap that better can't compete. It looks like now is the time to reexamine solar costs, and Xcel may be the litmus test.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. 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.