Solar power is becoming more competitive with electricity assolarprices fall and electricity prices rise, a Greentech Media analyst said at a conference Monday.

Electricity is most expensive when demand is highest, while the sun shines most during the afternoons, which is a time of peak demand.

So the first place that solar will be competitive is for peak power, said Daniel Englander, an analyst for Greentech Media, who added that solar is already competitive with the cost of some of that expensive power. 

For example, in the summer, when electricity demand regularly exceeds baseload capacity in the afternoon, it's cheaper – and requires fewer power-generating facilities – to mix photovoltaic power with natural gas to meet peak demand than to rely only on natural gas, he said.

And the cost of buying solar from a plant would be expected to stay the same, when a utility signs a power-purchase agreement with a solar provider, while the price of natural gas is expected to continue to increase.

Travis Bradford, president of the Prometheus Institute, a Greentech Media partner, also agreed that the true price of solar – including auxiliary costs, such as financing – are falling.

"Nearly every analysis overestimates the cost of solar energy," he said.

Englander expects solar costs to become competitive with the cost of producing traditional electricity by 2017.

Thin-film solar has been reducing costs more quickly than other forms of solar power, analysts said.

For example, the total cost of a system using First Solar (NSDQ: FSLR) panels comes out to 10 percent less per watt than comparable systems using traditional crystalline silicon, Bradford said.

"They can price it that low because their costs are that low," he said. "And the prices are dropping."

The company is aiming to manufacturing costs on the order of 70 cents per watt in 2012, he said.

Thin-film manufacturing capacity also could be cheaper than crystalline capacity to build and expand, he said.

Considering that polysilicon plants take three to five years to build, companies that make the stuff aren't able to rapidly react to changing markets. 

"I think through the years, [the time and cost] of polysilicon manufacturing is going to be harder to justify when the capital cycle might not last that long," he said.

Meanwhile, crystalline-silicon panels are unlikely to be able to quickly cut costs considering that even if silicon prices drop to nothing, silicon makes up only 19 percent of the price of a panel today.

"Even if polysilicon was free – which it's not ever going to be – there's still a lot of conversion cost," Bradford said.

About 32 percent of the price is profit, while 24 perc ent goes into making wafers, 11 percent goes into making the cells and 14 percent goes into making the panels, he said.

Overall, Bradford forecasts that costs will fall by at least a third in the next two years. That's more than the 10 percent price erosion that Canaccord Adams analyst Jed Dorsheimer said he expects in the next two years (see Analysts Say Solar Prices Beginning to Fall).

"The degree to which the market takes thin-film or crystalline modules will be determined by the degree to which the cost structures can be reduced," he said.

Solar companies are working to position themselves for a time of potential lower pricing, with some targeting higher efficiencies – which result in lower nonpanel costs - and others targeting lower costs with lower efficiencies, Bradford said.

He said either proposition could be successful.

"Both could be true, but I wouldn't want to be half of one and half of the other - I'm not the cheapest, nor am I the most efficient," he said. "Frankly, the worst place to be is in the middle. Middle-tier polysilicon players run out of profit first."

Thin-film solar is cheaper than solar-thermal and concentrating-photovoltaic power in some cases, Englander said.

In places with 5 kilowatt-hours of sunshine per square meter per day, such as in Chicago or New York City, cadmium-telluride firms – like those produced by First Solar, the No. 1 thin-film manufacturer – have the lowest levelized cost of electricity, which includes all costs, followed by crystalline panels. Solar-thermal and concentrating-photovoltaic power are more expensive, all costs considered.

In regions with more sunlight – say 8 kilowatt-hours per square meters per day, like in Phoenix – cadmium-telluride also is the lowest cost.

But solar-thermal power costs less than crystalline silicon. The Prometheus Institute and Greentech Media expect the cost of crystalline-silicon panels to fall below that of solar-thermal next year.