Cheaper solar, cleaner grid?

Abstract

Although wind capacity cost is not expected to experience large changes in the near future, solar capacity cost is projected to drop by 45% in roughly thirty years. Using an analytical model and a dynamic structural simulation model, we show that wind energy capacity investment first increases but then decreases under the projected solar cost decline. Results indicate that when solar cost drops from $880/kW to $700/kW, CO2 emissions increase by 12.9% due to the decline in wind energy investment, indicating that cheaper solar cost does not necessarily imply a cleaner grid without any carbon policy intervention. However, if the regulator requires a minimum of 36% renewable penetration rate, social welfare from renewable investment when solar cost arrives at $700/kW would increase by $0.74 billion/year. This study illustrates the importance of policies such as the renewable portfolio standards under future decline in solar capacity cost if a carbon tax is politically infeasible.