By Morgan Bazilian, Joint Institute for Strategic Energy Analysis, U.S. National Renewable Energy Laboratory
In an upcoming paper in the journal Renewable Energy, several colleagues and I take a close look at the rapidly changing market for photovoltaics.
Whilst recent dramatic changes in the underlying costs, industry structure, and market prices of solar PV technology are receiving growing attention amongst key stakeholders, it remains challenging to gain a coherent picture of the shifts occurring across the industry value chain around the world. Reasons include: the rapidity of cost and price changes, the complexity of the PV supply chain, which involves a large number of manufacturing processes, the installation costs associated with complete PV systems, the choice of different distribution channels, and differences between regional markets within which PV is being deployed. Adding to these complexities is the wide range of policy support mechanisms that have been utilised to facilitate PV deployment in different jurisdictions. In a number of countries these policies have become increasingly politically controversial within wider debates on public subsidies and climate change action. As such, the quality of reporting and information on the PV industry economics can vary widely.
PV power generation has long been acknowledged as a clean energy technology with vast potential, assuming its economics can be significantly improved. It draws upon the planet’s most abundant and widely distributed renewable energy resource – the sun. The technology is inherently elegant – the direct conversion of sunlight to electricity without any moving parts or environmental emissions during operation. It is also well proven; PV systems have now been in use for some fifty years in specialised applications, and for grid connected systems for more than twenty years. Despite these highly attractive benefits and proven technical feasibility, the high costs of PV in comparison with other electricity generation options have until now prevented widespread commercial deployment. Much of the deployment to date has been driven by significant policy support such as through PV feed-in tariffs (FITs), which have been available in around 50 countries over recent years.
Historically, PV technologies were widely associated with a range of technical challenges including the performance limitations of BOS components (e.g., batteries, mounting structures, and inverters), lack of scale in manufacturing, perceived inadequate supply of raw materials, as well as economic barriers - in particular high upfront capital costs. While the industry was in its infancy - as recently as five years ago global cumulative installation was about 16 GW - this characterisation had merit. Now, with rapid cost reductions, a changing electricity industry context with regard to energy security and climate change concerns, increasing costs for some generation alternatives and a growing appreciation of the appropriate comparative metrics, PV’s competitiveness is changing rapidly. As an example, large drops in solar module prices have helped spur record levels of deployment, which increased 54 percent over the previous year to 28.7 GW in 2011. This is ten times the new build level of 2007 – but still a very small percentage of overall power generation.
The PV industry has seen unprecedented declines in module prices since the second half of 2008. Yet, awareness of the current economics of solar power lags among many commentators, policymakers, energy users, and even utilities. The reasons are numerous and include: the very rapid pace of PV price reductions, the persistence of out-of-date data in information still being disseminated (occasionally by those with an interest in clouding the discussion), the misconceptions and ambiguity surrounding many of the metrics and concepts commonly used in the PV industry, and ambiguities regarding underlying PV costs due to the numerous policy support measures that have been put in place over the last decade.
Since 2004, regardless of module prices, system prices have fallen steadily as installers achieved lower installation and maintenance costs due to better racking systems, and falling BOS costs. In addition, financing costs have fallen, due, in part, to an improved understanding of, and comfort with, PV deployment risk. It is important to highlight the impacts of recent excess production capacity. In such situations, prices can fall to the level of marginal production costs, or even below - the Coalition for American Solar Manufacturing, claimed that, “Chinese manufacturers are illegally dumping crystalline silicon solar cells into the U.S. market and are receiving illegal subsidies” and brought a case resulting in US import tariffs being levelled on China modules in 2012. Regardless of the subsidy situation, there is at least 50 GW of cell and module capacity globally, and an estimated 26-35 GW of demand, for 2012. The implications for future PV pricing are potentially significant, as industry participants fail or consolidate. In Germany alone, two major solar companies have announced bankruptcy between December 2011 and end of April 2012 (Q-cells and Solon). US firm First Solar closed its European operations in April 2012, and the media has focused on the high profile US based thin film start-up Solyndra bankruptcy in August 2011.
For the first time, in late 2011, factory-gate prices for crystalline-silicon (c-Si) PV modules fell below the $1.00/W mark; moving towards the benchmark of $1.00/W installed cost for PV systems, which is often regarded in the PV industry as marking the achievement of grid parity for PV. These reductions have taken many stakeholders, including industry participants, by surprise. Some have argued that prices are currently below sustainable levels and might even have to rise slightly as the industry consolidates and seeks to return to profitability; however technological advancements, process improvements, and changes in the structure of the industry suggest that further price reductions are likely to occur in coming years.
At least some of the confusion over the economics of PV has stemmed from the way PV costs (and prices) are generally analysed and presented. Primarily, this has been done using three related metrics, namely: the price-per-watt (peak) capital cost of PV modules (typically expressed as $/W), the levelized cost of electricity (LCOE) (typically expressed as $/kWh), and the concept of ‘grid parity’. Each of these metrics can be calculated in a number of ways and depend on a wide range of assumptions that span technical, economic, commercial and policy considerations. Transparency is often lacking in published data and methodologies. Importantly, the usefulness of these three metrics varies dramatically according to audience and purpose. As an example, the price-per-watt metric has the virtue of simplicity and availability of data, but has the disadvantages that module costs do not translate automatically into full installed system costs, different technologies have different relationships between average and peak daily yields, and there is always the question of whether costs quoted are manufacturers’ underlying costs versus wholesale costs or retail price.
LCOE and ‘grid parity’ are of special relevance to government stakeholders but require a wider set of assumptions. They vary widely based on geography and on the financial return requirements of investors, and do not allow for robust single-point estimates. Instead, sensitivities are normally required (yet rarely presented), as are explicit descriptions of system boundaries. The financial case for PV depends on the financing arrangements and terms available, as well as estimates of likely electricity prices over the system lifetime. And often the distinction between wholesale and retail prices is not made clearly. Further, the capabilities of key decision makers vary greatly in different PV market segments, spanning utility investors for large-scale PV farms to home owners contemplating whether to install roof-top PV systems. There is, thus, a clear requirement for greater transparency in presenting metrics so that they can be usefully compared or used in further analysis.
Current PV module prices are considered by some to be below manufacturing cost, and consequently, as unsustainable, in large part because several leading non-Chinese firms in the industry have recently announced losses, cutbacks, or massive write-downs, or filed for bankruptcy. Ultimately, the shift in prices of solar technology carries major implications for decision makers and policy designers, especially for the design of tariff, fiscal, and other supporting policies. The challenge is to elegantly transition PV from a highly promising and previously expensive option, to a highly competitive player in electricity industries around the world.