The case for solar energy as a near term alternative to fossil energy hangs largely upon the view that the costs of solar energy have come down rapidly in recent years and will continue to do so in the coming years. But a close examination of where and why solar costs appear to be declining casts doubt on those claims. Solar module prices have dropped substantially in recent years. But much of the decline in recent years has been due to Chinese overproduction and dumping. Installed costs of solar systems have come down dramatically in Germany. But a significant portion of the cost declines experienced in Germany that the rest of the world hopes to emulate are from non-module “soft” costs. As Germany’s rooftop solar installation industry has scaled up, costs related to permitting, installation, and supply chains have declined, but these cost reductions have not proven transferable across national borders.
While low module costs may remain in place for some time due to the current glut of panels on the market, sustaining the pace of cost reductions in module prices that have been observed in recent years appears unlikely while the Chinese solar industry consolidates. It remains unclear if other countries will be able to achieve similarly low soft costs as Germany has absent similar levels of sustained and heavy subsidies. As such, optimistic forward projections of solar deployment based upon solar cost declines experienced recently in Germany appear unwarranted.
The Case For An Impending Solar Clean Break
Leading solar analysts project rapid growth of solar globally based upon extrapolations from the growth of solar over recent years. Energy analyst Gregor MacDonald looks at solar growth rates since 2008 and predicts rapid continuing growth:
Over the past 5 years, growth of power consumption from solar has run at a compound annual growth rate of 63.2%. Solar can easily maintain its current fast growth rate through the year 2020. Assuming this is the case, and also projecting strong annual growth in overall global power consumption at 3.4% per year, solar will be making a meaningful contribution to total global power supply by 2020.
Assuming (conservatively in MacDonald’s estimation) a 50% compound annual growth rate (CAGR) going forward to 2020, and 3.4% annual growth for total electricity, that implies solar generation will increase by a factor of 20 over the next 7 years, rising from 0.4% today to supply 8.1% of global electricity by 2020. That electricity would be generated from 2,400 gigawatts of solar capacity, compared with today’s 100 gigawatts. In Greentech Media, Chris Nelder, citing MacDonald, further projects that “solar will overtake nuclear generation globally by 2020.” Leading environmentalists like Bill McKibben and Robert Kennedy, Jr. have seized on these talking points.
Achieving these levels of solar deployment will require exponential growth in both demand for and production of solar panels. Global annual solar manufacturing capacity of 60 gigawatts today is twice that of demand for new installations, which in 2012, a banner year for solar, were 30 gigawatts. In order for solar to reach 8% of global electricity generation by 2020, global manufacturing capacity will need to triple over the next three years, rising from 60 gigawatts presently to over 170 gigawatts in 2016, and will need to expand by a factor of 14 over the next seven years, rising to over 850 gigawatts of PV panel manufacturing capacity in 2020 – this at a time when the global solar industry is experiencing a period of heavy consolidation, international trade wars, dwindling Chinese production subsidies, and declining solar deployment subsidies in the United States and much of Europe.
Where Nelder and MacDonald imply 170 gigawatts of solar capacity to be installed during 2016, GTM Research, a leading solar industry analyst, expects annual global solar installations to expand to only 50 gigawatts by 2016. And where Nelder and MacDonald predict 2,400 gigawatts of installed capacity to be in place globally by 2020, experts at Global Data expect total installed solar capacity in 2020 to reach 330 gigawatts, seven times less than MacDonald’s and Nelder’s projections.
Projections of continuing annual growth rates at 50% or higher in the coming years are based upon the assumption that recent, very high growth rates from a very small base can be sustained as that base grows. Growing at 50% from 2012’s global solar generation requires installing about 45 gigawatts of new solar capacity in 2013. Sustaining that growth at even modestly higher levels of solar penetration requires vastly higher levels of annual solar installations. Sustaining 50% growth from a generation benchmark of 3% of global electricity, for instance, would require installing over 350 gigawatts in a single year. For this reason, the rate at which solar generation is growing has been slowing over the last few years, even in Germany. Solarbuzz, for instance, expects global solar capacity growth to slow to 30% in 2013, less than half the compounded growth rate that MacDonald calculates over the last five years. Global Data expects solar capacity’s CAGR through 2020 to be about 16.5%.
Less Than Meets the Eye
Claims that solar will continue to see rapid global growth rates are largely predicated upon assumptions regarding sustained subsidies and cost declines. Feed-in tariff support in Germany has fallen from $0.50/kWh in 2000 to below $0.16/kWh in recent years. The installed cost of solar in Germany has fallen correspondingly, dropping from above $6500/kW in 2006 to approximately $2250/kW today.
Germany today has the cheapest solar in the world, and the country’s FIT program has been instrumental in driving these cost declines. This, unfortunately, has limited impact to countries outside of Germany. That is because two-thirds or more of the installed cost of residential solar systems are soft costs, unrelated to the cost of the modules. Owing to costs related to permitting, installation, supply chains, mounts, inverters, and other non-module costs, solar PV systems cost as much as two to three times more in other countries than they do in Germany. In the United States, the installed costs of residential solar remain about $5000/kW, according to GTM Research and the Solar Energy Industry Association. According to the International Renewable Energy Association (IRENA), most major solar markets have installed costs for residential solar significantly higher than those in Germany. In short, German policies have made solar’s soft costs much cheaper in Germany, but they haven’t done so for the rest of the world.
To date, there is little evidence that it is possible to rapidly reduce domestic solar soft costs without spending a decade subsidizing production and installation as Germany has. Japan, for instance, recently established a solar PV feed-in tariff starting at $0.42/kWh on 10-20 year contracts. Despite Germany’s decade and $100 billion plus investment to make solar cheaper in Germany, it appears Japan will incur similar costs to reach similar scales.
Moreover, other efforts to use heavy public and ratepayer subsidies to drive down solar installation costs have not been nearly as successful as Germany’s. After years of operation Italian feed-in tariff rates currently range from about $0.15-0.36/kWh. Before the Spanish government suspended their national FIT in 2012, rates rangedbetween $0.163-0.378/kWh. Cost declines for rooftop solar in California also appear to have hit a wall. Severin Borenstein, an economist and energy expert at UC Berkeley, finds that installed costs in California remain stubbornly high, between $5000-7000/kW, despite substantial efforts to drive costs down.
Larger, utility scale solar projects (typically classified as 20 MW and above) have achieved significantly lower installed costs. The US Solar Energy Industry Association estimates that total installed costs for these projects can reach as low as $2000/kW, thanks to better economies of scale. However, these costs remain well above those necessary for solar to compete with conventional wholesale energy costs. The US Department of Energy SunShot program has set 2020 targets for solar to become cost competitive with conventional fossil-fueled electricity generation. Compared to current utility-scale installed costs of $2000-4000/kW, SunShot targets $1000/kW by 2020.
Nate Lewis, an energy expert at the California Institute of Technology, sets the bar even higher, suggesting that total installed costs of solar would actually need to fall closer to $100/kW to be competitive with fossil fuels worldwide. Lewis writes that solar needs to be between $10-100/m², which multiplied by 0.15kW/m² works out to $66-666/kW. Lewis: “The cost must be lowered dramatically, to a range within $10-100/m², probably closer $10/m², to provide cost effective energy, not just cost-effective peak energy.”
Current installed costs for rooftop solar in the United States range from approximately $3000-8000/kW, while SunShot targets suggest that costs need to reach below $1500/kW to be commercially competitive. Even Germany, with the lowest soft costs in the world, has only achieved average installed costs for rooftop solar as low as about $2250/kW, of which non-module costs exceed $1200/kW, according to researchers at Lawrence Berkeley National Laboratories. So even if the panels were free, rooftop solar would be too expensive in most of the world to displace significant amounts of conventional fossil energy without subsidies.
Unfortunately, the modules aren’t free. But unlike soft costs, declines in the cost of manufacturing modules redound to the benefit of all new solar installations. However, it is not clear how much of the recently observed declines in module costs are attributable to sustainable declines in production costs, rather than massive overcapacity driven by state subsidies to Chinese firms and dumping of solar commodities on global markets. The European Union alleges that Chinese dumping has resulted in module prices 88% lower than the cost of production, and has proposed border tariffs on Chinese solar products of 47.6%. The United StatesInternational Trade Commission and the Coalition for American Solar Manufacturing allege similar levels of below cost dumping in their complaint against China. As such, even the observed declines in module prices likely overstate the reductions in module production costs that have been achieved due to manufacturing efficiencies in response to the scale up of solar deployment in recent years.
Thanks to the glut of solar panels on the market today, solar module prices will likely stay low for some time — although European and Chinese trade negotiators are currently discussing a minimum price for modules, which could be higher than today’s prices and would obviously inhibit opportunities for sustained price declines. Meanwhile the flip side of these artificially low prices due to overproduction is that there is little need or demand for new production capacity. Declines in the real costs of producing modules are largely driven by investment in new, more efficient and productive manufacturing facilities as production scales up. As such, declines in module prices in recent years not only significantly overstate declines in real module production costs but are likely to significantly depress the pace of cost decline in coming years, as the industry consolidates and the manufacturers that survive are forced to clear existing inventories and max out current capacity before investing in new facilities.