Photovoltaic (PV) solar technology continues to grow at a significant pace, generating electricity at increasingly competitive costs compared with other sources of energy. Solar park developers compete aggressively on price when responding to calls for tender. This situation encourages the expansion of photovoltaic power, but could potentially threaten the long‑term profitability of projects.
The most tangible way to gauge the competitiveness of a powerIn physics, power is the amount of energy supplied by a system per unit time. In simpler terms, power can be viewed as energy output... source is to compare its cost per kilowatt-hour (kWh) to the price charged to end users, all sources combined. “Grid parity” exists when the two are equal, and varies by local conditions. Solar has achieved grid parity in around 15 countries and regions of the world, including Germany, Italy and California.
Falling Photovoltaic Panel Costs
The steady, worldwide drop in the cost of producing photovoltaic power has made this revolution possible in just a few years.
€0.40: Panel price for 1 watt of capacity (down spectacularly from €24 in 1980).
The main driver of the decline has been falling PV panel prices. A vital component of the upstream industry, photovoltaic panels are now an international commodity – a basic, standardized product with well-defined specifications, like the transistor used to be. Its price does, of course, vary by technology employed, but it is the same everywhere. The usual yardstick – the price of a conventional siliconSilicon crystals come from silica, the main compound in quartz and sand. Silicon is a semi-conducting material. panel – has fallen by levels rarely seen in the industry. It amounted to about €0.40 per wattThe watt (symbol W) is the derived unit of power (see definition) in the International System of Units (SI)... of installed capacityThe power generation capacity of a particular plant. It is usually expressed in megawatts (or sometimes even gigawatts)... on the global market in 2016, down spectacularly from €24 per watt in 1980.
Consequently, it accounts for just 10% to 30% of initial capital outlays and has an even smaller impact on end power prices.
Competition among global manufacturers and policies encouraging renewable energies are the reasons for this change (See Close-Up: The Growth of Photovoltaic Solar Around the World).
The Financing Speed Bump
However, other costs keep solar power expensive. Besides the cost of the panel, the full production cost, or levelized cost of electricityForm of energy resulting from the movement of charged particles (electrons) through a conductor... (LCOE) in industry jargon, consists of two main elements:
- The cost of the systems and their installation, whether for a solar farm or rooftop panels. This is referred to as balance of system, or BOS. It includes the cost of inverters, electrical systems, civil engineering in the case of farms and installation for home solar systems.
- Financing, marketing and administrative costs, referred to as soft costs.
Commercial scale-up of installation processes has brought the BOS for ground-based solar power plants in Europe and the United States down from €0.65/W in 2010 to €0.35/W at end‑2013. In some low-cost countries such as India, it has even dropped to €0.20/W. Further improvement still seems possible.
On the other hand, financing or soft costs, currently estimated at 15% to 20%, are a huge challenge. Although solar has quite low operating costs over the life of a system (usually more than 30 years), it requires a steep initial capital outlay and therefore financing. Depending on how high they are, different interest rates can have an enormous impact on the end cost. One financial argument in favor of solar is that it can guarantee power prices for 30 years, something power plants reliant on fossil fuels and which depend on global oil and gas prices cannot do.
The Cost of Externalities
That leaves the controversial issue of the “cost of externalities”: since solar energy is an intermittent source, it requires backup power from sources such as gas-fired power plants, which ensure continuity of service on cloudy days.
This expense depends on how utilities manage the integration of renewables into the power grid. In the future, decentralized power grid management, including the stepped-up use of smart grids and smart meters, would allow more demand response and leveraging of combined output (See Close-Up: Solar, a Boundless Unirversaly Accessible Energy Source).
Comparative Levelized Cost of Electricity
Taking all these factors into account, the cost per megawatt-hour (MWh) of solar power can vary greatly depending on the region and the prevailing economic conditions, in particular regarding financing costs. Costs are most transparent in calls for tender, when applicants commit to a specific price, which is how record-breaking pricing has come about.
In late 2016, a consortiumA consortium is an association of individuals, companies, organizations, governments ... of developers offered $23/MWh as part of a call for tender in Abu Dhabi. Such prices are made possible by the region’s intense sunlight and highly favorable financing conditions. A few months earlier, calls for tender in Dubai and Chile both attracted bids of under $30.
According to the International Renewable EnergyEnergy sources that are naturally replenished so quickly that they can be considered inexhaustible on a human time scale... Agency (IRENA), the global average was between $50 and $70 in early 2017. Research carried out by the French Environment and Energy Management Agency (ADEME)1 suggests that prices in France (stated in euros) are higher: between €74 and €135/MWh for ground-based solar power plants and between €181 and €326/MWh for home solar systems.
As is often the case in high-growth sectors, global competition for record prices has two downsides, which in early 2017 led to fears of a “bubble”2:
- The competition among developers leads to offers at very low prices that could threaten the long-term profitability of projects, which often depend on changeable public policies.
- The growth of photovoltaic solar power has encouraged PV panel manufacturers to invest in new production facilities, which, despite the strong level of demand, has created overcapacity in supply that could become an issue if demand were to drop off.
(1) See the ADEME website (in French only)
(2) See the article by French financial daily Les Echos (in French only)