The Breakthrough Institute, a Californian environment and energy research unit, has put out an eye-catching report about German solar subsidies. According to Breakthrough’s assessment, the feed-in tariffs paid since the start of the solar boom make PV four times as expensive as nuclear power, even using the inflated costs suggested by the construction of the reactor at Olkiluoto in Finland. Breakthrough should have made the point - but didn’t - that the initially generous feed-in tariff rates in Germany have been repeatedly cut. The correct analysis would have not have compared today’s nuclear costs with PV of a decade ago but the current costs of both technologies. At 2013 prices, solar PV in mid-latitude countries is now cheaper than new nuclear. Put in the UK context, the proposed EdF power station at Hinkley is now more expensive per unit of electricity generated than solar farms in the south of England. The implications of this need a great deal more consideration than they are getting.

By itself, the cost crossover doesn't mean that countries shouldn't invest in nuclear power. Nuclear delivers electricity reliably throughout the year. This baseload power is more valuable than PV’s high levels of output at midday in summer when demand levels are low in most of Europe. And nuclear power stations take up little space compared to the land needs for solar farms. Nevertheless nuclear proponents, such as Breakthrough, should recognise the truly staggering improvement in the economics of solar power around the world, mostly driven by the German government’s commitment to PV a decade ago. Costs have fallen by approximately 75%. By contrast, it probably doesn't need saying, nuclear has nearly doubled in price.

The analysis

The ‘cost’ of the many options for generating electricity is difficult to calculate. For both nuclear and for PV, the underlying expense of generating electricity is dominated by the required payment to the providers of the capital needed to build the plant. PV farms, for example, have operating costs close to zero and nuclear power operates at no more than £15 per megawatt hour. Whether nuclear electricity therefore ‘costs’ £80 or £100 per megawatt hour crucially depends on the rate of interest demanded by financiers on the huge amounts of money needed to construct new power stations. This is even truer for solar farms.

We do know what EdF, the owner of the Hinkley site, thinks it needs to pay its capital providers. Press reports, not denied by the company, suggest that it believes that it needs a minimum price of £97 per megawatt hour in order to achieve a required 10% return on the capital used to build the plant. Agreement has yet to be reached with the UK government that such a price will be written into law as the ‘strike price’ which EdF will be paid for the output from Hinkley. Nevertheless, £97 is consistent with the calculations of outsiders looking at the £14bn financing challenge faced by EdF for the two proposed Somerset reactors.

The question I therefore asked was this: would a ‘strike price’ of £97 per megawatt hour (just under 10p per kilowatt hour) be enough to incentivise developers to build PV farms in reasonable locations on flat land in southern England with nearby grid connections? My extremely simple modelling assumptions were as follows.

	Assumption	Notes
Capital cost	£800,000 per megawatt installed	In line with recent quotes from UK developers. This may rise as a consequence of the possible tariff wars between China and the rest of the world
Operating cost	1p per kilowatt hour produced	A large PV farm needs monitoring and some security provision
Inflation	0%	I understand that EdF’s requirement for £97 per MWh is index-linked. My assumption is therefore consistent for PV.
Life of the PV farm	30 years
Yearly loss of power producing capacity as a result of panel decay	0.3%
Output per kW installed	1000 kWh per year	This is achievable across Cornwall, south Devon, and some parts of the rest of the south coast and the Isle of Wight.

These rough calculations suggest that a ‘strike price’ of £97 for solar electricity would yield a return of 11.3% on the funds committed.[1] This is more than the 10% return achieved by EdF on its proposed investment at Hinkley. Electricity from solar PV is therefore cheaper – in good locations – than nuclear.

This can be put another way. Developers of solar farms should be willing to accept a strike price of less than £100 per megawatt hour, if their required return is similar to EdF. My approximate calculations suggest that a figure of £88, indexed to price inflation as with the nuclear company, will give returns of 10% on PV investments. Perhaps as importantly, the financial risk attached to a solar farm is tiny compared to the roll of the dice at Hinkley. Investors will actually need a much lower return on PV than nuclear.

Are these conclusions consistent with the evidence from sunny counties? Yes, they very definitely are. Applications to build large PV farms are flying in to planning authorities. And what is the current price achieved for solar PV? A developer of large farm will receive 1.6 ROCs (Renewable Energy Certificates) worth today around £65-£70. In addition, they will sell the electricity, perhaps for £40 per megawatt hour, meaning that their total income will be just over £100 per megawatt hour. In other words, developers are rushing to build solar farms today at prices only very slightly higher than demanded by EdF for nuclear.

These farms are not always even in particularly good locations, such as the one that the comedian Griff Rhys Jones is currently complaining about in Suffolk. The marketplace is therefore saying that solar power is now cost-competitive with nuclear. I’ll try to address what I think are the enormous implications of this for energy policy, here and around the world, in a note on this web site soon. As we’re coming to realise, the fact that PV is now cheaper than retail electricity (and therefore doesn't actually need any subsidy at all if the electricity is all used on site) has the potential to really upset many of the assumptions we've made about renewable energy. Electricity markets have yet to understand the disruption that is likely to be caused.

[1] This is the Internal Rate of Return of a solar PV projects selling their electricity for £100 a megawatt hour.