Austin Energy made waves after announcing 1.295GW of bids from its most recent RFP came in under 4 cents/kWh, even lower than their landmark deal last year with Recurrent Energy at <5 cents/kWh for 150MW. The industry cheered – who needs the ITC when solar pricing has hit rock bottom? If we’re at 4 cents now, just think where we’ll be in another year! Right? No, wrong.

Rather than think of this as an indicative trend for the solar industry at large, it’s important to view this Austin Energy deal as the exception rather than the rule. Why?

Utility-scale pricing does not reflect pricing of the industry at large. Just because utility-scale developers bid in at rock bottom rates, it does not mean that rates this low translate to other market segments.

Austin Energy’s push for 600MW by 2025 is a whole lotta solar, and with that scale comes efficiency and lower pricing than one would find in commercial deal that might be a bit less than 1/1000th the same size. Looking at even a 5MW deal in Texas in 2015, we estimate that pricing would have to be closer to 6 – 7 cents/kWh with a 2% escalator and $1.60/Watt build costs for deals to pencil.

Module companies are very eager to show 2017 deal flow. Among the people who do not seem to agree that an ITC cliff will be a good thing are module manufacturers and the Wall Street analysts who watch them.

It’s getting to be time for them to show 2017 bookings or get hammered, and they will likely bid in the neighborhood of marginal costs for shipments then. It is also possible that module manufacturers are willing to provide steep discounts to move this many modules off their balance sheets. Austin Energy mentions that they hope to procure all 600MW of their required solar by 2017, though technically they have until 2025 to meet that goal.

Conditions in Texas are not representative of the rest of the country. Projects in Texas benefit not only from this scale, but also to region-specific perks. Labor and land are cheap. Much of the land is flat, meaning that minimal site preparation is required prior to construction. Solar resource is rich.

Distribution and transmission capacity is abundant, and the infrastructure that has supported the state’s wind industry can also benefit solar. And lastly, permitting is less onerous leading to more predictable development.

Pricing from competitive bids may not be the same as pricing from built deals. In competitive solar solicitations everywhere, from the Connecticut ZREC program to competitive feed-in tariffs across the country, we see developers bidding in at the lowest possible pricing with a “win now, figure out the rest later” mentality. (Compare awards to built capacity under the Tennessee Valley Authority feed-in tariff programs.) Often, developers win bids without having the capacity to build at the prices where they bid, and programs must re-open bids to another solicitation much later.

In other words, just because so many bids came in at that price, it doesn’t mean all applicants would be able to ultimately make these deals work. It’s more likely that they saw no choice but to bid lower than Recurrent’s much-publicized 2014 deal to remain competitive.

Cost reductions will continue, as will improvements to system performance, and we’ve done the research as to where pricing will need to be for the market to be viable post 2016. In our recent analysis of the commercial market, we estimated that with a 30% ITC and assuming an 8% cost of capital, $1.20-$1.60/Watt is likely in Texas.

The likelihood that solar across the entire U.S. – and across all market segments – will come in at 4 cents/kWh in the foreseeable future is highly unlikely. Nor should they; the value of an electron delivered as and where it’s needed is significantly more than a pure wholesale injection.

Published with permission from the original publication on SOL SYSTEMS By Sara Rafalson.

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