July 21, 2014
How Fast Are The Costs Of Solar Really Coming Down?
Recent Gains Do Not Promise Sustained Growth
Despite the long-standing assertion by proponents that solar energy is nearing a breakthrough, the failure of solar energy to achieve significant market penetration despite heavy and sustained public subsidies over the last two decades is no mystery. The costs of scaling solar remain reliably higher than not only fossil energy but also other non-fossil alternatives, most notably nuclear.
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 ranged between $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 States International 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.
Even in the best case scenarios that advocates often cherry pick as evidence of solar’s competitiveness, installed solar costs still exceed the costs of new nuclear power, which itself remains significantly more expensive than coal and natural gas generation.
Using current FIT prices in Germany, rather than the average cost of the decade of heavy subsidies makes this comparison look more favorable for solar. But as noted above, the present day costs of installed solar in Germany are only as low as they are due to $130 billion in subsidies locked in over the last decade and haven’t resulted, for the most part, in lower soft costs elsewhere in the world. The German solar FIT currently ranges between $0.10-0.15/kWh. The United Kingdom recently announced new “strike prices,” similar to FITs, for zero-carbon electricity: solar’s strike price in 2019 will be over $0.165/kWh, while nuclear’s strike price is expected to be $0.150/kWh.
Further, while Germany will continue to subsidize expanded solar capacity in the coming years with declining FITs, those policies will soon hit a ceiling, wherein installed solar capacity approaches average electricity load. Without costly energy storage technologies that do not presently exist, Germany will not be able to generate much more than 10% of its total electricity from solar without curtailing or exporting not only its entire non-solar energy generation capacity, but also much of its solar generation capacity on sunny days. As such, the reductions in installed solar costs that Germany has been able to realize through subsidizing the development of a highly efficient domestic solar installation industry are already hitting a point of diminishing returns, where the potential for additional solar generation is likely to be significantly outstripped by the capability to install new capacity. Neighboring countries, including Poland and the Czech Republic, are already seeking to block transmission from the German grid, which is largely how Germany currently deals with excess generation.
Moreover, experts at the National Renewable Energy Laboratory and elsewhere have estimated that, due to the mounting challenges of managing intermittency, renewables pose increasing costs at higher penetration levels. With approximately 30 gigawatts of installed capacity, solar famously generated 50% of German electricity load for a few hours on a sunny Saturday last May, but only generated about 5% of total electricity over the whole year. Managing these wild variations will come at considerable cost. The surcharge on all electricity to fund the FIT rose nearly 50% this year, to $0.069/kWh, and is expected to increase again to $0.079 next year. The FIT, meanwhile, is now being reformed to accommodate this by establishing a curtailment tariff through which utilities will pay solar generators 95% of the full FIT not to generate electricity. So even as installed solar costs continue to decline in Germany, German ratepayers will need to begin paying solar operators not to generate power in order to continue expanding solar installations. Policymakers are also considering the introduction of capacity markets in Germany, which would provide a subsidy to conventional power plants to ensure profitability in the face of variable renewables generation.
In response to our recent estimate of the costs of scaling solar in Germany, Nelder points to declining solar costs in the United States as evidence that solar is competitive elsewhere. He cites the 50-megawatt Macho Springs solar power plant in New Mexico, which will sell power for $0.058/kWh to El Paso Electric, a power utility. But Nelder cites the cost at which Macho Springs has agreed to sell its power while excluding the heavy state and federal subsidies that the project developers receive from state and federal programs on top of the revenues they will receive from selling the electricity. GTM Research notes that Macho Springs developers will receive an additional production tax credit from the state of New Mexico, which if included increases the total cost to about $0.085/kWh. In addition the project receives a federal investment tax credit for renewable energy (ITC), which covers 30% of the financing costs for developing the project. Including all these subsidies pushes all-in costs for the Macho Springs project above $0.12/kWh. Renewable Energy World notes that the Macho Springs PPA is going for about a third of the average costs of similar PPAs, which Bloomberg New Energy Finance estimates at $0.163/kWh. Using a more representative figure for recent utility-scale power purchase agreements and accounting for federal subsidies yields an all-in cost of approximately $0.21/kWh for utility scale solar projects of this nature.
Solar advocates claim that nuclear generation carries heavy subsidies as well, including waste disposal costs, decommissioning costs, and liability limits on nuclear accidents, that result in nuclear costing substantially more than its sticker price. These claims are, however, either incorrect or exaggerated.
The NRC requires plant operators to accumulate decommissioning funds over the operating life of the plant. Some utilities collect the money for decommissioning through ratepayers, while others set aside a lump sum at the beginning of operation. All nuclear operators in the US are required to pay into a federal fund to handle spent nuclear fuel deposition, and most utilities pass this fee on directly to ratepayers. According to an MIT analysis, the all-in costs of decommissioning amount to just $0.001-0.003/kWh. Similar funds are required of nuclear operators elsewhere around the world. These costs are included in EIA and IEA estimates of the levelized cost of new nuclear power generation.
Limited liability, via the Price-Anderson Act, likewise can be considered a subsidy. However the value of the subsidy is extremely modest. Nuclear power operators are required to purchase private liability insurance, which covers $375 million for offsite damages. In addition, every reactor operator must pay into a second tier of insurance in the event of an accident up to $11.6 billion. Only after these insurance pools are depleted does Congress have the authority to allocate federal money to cover damages. It is this guarantee that some consider an implicit subsidy, which given a Fukushima-type accident, would infer a subsidy of about $2 million per reactor per year, or $0.0003/kWh.
Bottom line, even cherry-picking best case solar facilities, ignoring heavy subsidies, ignoring artificially low module prices, ignoring costs of backing up solar and balancing intermittency, and assuming the worst case for nuclear in terms of cost overruns, scaling solar still costs substantially more than scaling nuclear today. While nuclear has displayed negative learning rates in many countries, recent nuclear deployment efforts have achieved substantial reductions in upfront capital costs over time, including in South Korea and China. Moreover, due to the difficulty of exporting soft cost gains and to enduring austerity, solar cost declines experienced recently will likely prove difficult to sustain and replicate globally in the coming years.
Recent relative gains in solar costs and deployment provide a highly questionable basis for sustained progress over the coming decade. Costs remain high and are declining significantly more slowly than proponents suggest. Module costs will continue to decline over the long term, as solar efficiency improves and manufacturing efficiencies are realized. However real module costs have not come down as quickly as proponents claim. Nor do module costs represent the primary barrier to low costs.
Balance-of-system and other soft costs now represent the lion’s share of installed solar costs, particularly for rooftop solar, which cannot benefit from economies of scale, as large industrial solar installations can. Lacking some major breakthrough in solar installation technologies, solar deployment is likely to remain costly and labor intensive. Reductions in cost will come incrementally, in response to the scale up of domestic solar industries and will continue to require heavy, sustained subsidies in order to realize.
Despite the long-standing assertion by proponents that solar energy is nearing a breakthrough, the failure of solar energy to achieve significant market penetration despite heavy and sustained public subsidies over the last two decades is no mystery. The costs of scaling solar remain reliably higher than not only fossil energy but also other non-fossil alternatives, most notably nuclear. Continued growth of solar will require continued heavy subsidies for the foreseeable future.
Scaling solar without heavy subsidies will require bringing both module and installation costs down dramatically, significant breakthroughs in electricity transmission and storage, and perhaps greater pursuit of centralized solar plants that can benefit from economies of scale and superior citing. As a long-term strategy to develop better and cheaper technologies, continuing and even expanded solar subsidies may be justified. But heavily subsidized solar does not represent a serious short-term strategy to replace either fossil energy or nuclear.
Nuclear energy too, remains reliably more costly than fossil energy. But the difference in costs is lower and unlike solar and other intermittent, low-power-density renewable energy technologies, nuclear has demonstrated, across multiple decades and multiple locations, the ability to scale quickly, achieve high economy wide generation shares, and replace large amounts of fossil generation. But to displace fossil energy significantly beyond what has already been accomplished, nuclear too will require significant cost reductions. New reactors will need to demonstrate considerable reductions in upfront capital costs, improvements in efficiency, and standardization of design and components.
Despite its challenges, however, analysts at Global Data expect that more than 60 gigawatts of new nuclear will be added this decade, increasing total global nuclear generation from 2,386 TWh in 2012 to 3,078 TWh in 2020. This represents 30% more total generation in 2020 than even Nelder and MacDonald’s wildly unrealistic estimates of total solar generation and almost ten times the amount of generation expected from solar in 2020 by analysts at Global Data and GTM Research. While nuclear generation will grow by about 600 TWh by 2020, solar is expected to grow by about 220 TWh to ultimately supply about 1.0% of global electricity.
Nonetheless, global energy demand will grow even faster and will largely be met by neither nuclear nor renewables but coal, which in 2012 grew by a larger amount than any other energy supply technology — including in Germany. So long as economies around the world continue to prioritize economic and development concerns over climate concerns, neither nuclear or renewables are likely to challenge the dominant share of global electricity production that fossil energy currently provides unless they become much cheaper.
But were the world, today or in the near future, to decide that climate change represented a planetary emergency requiring a rapid deployment of zero carbon energy to reduce emissions as quickly as possible, the choice would be clear. Perhaps, as advocates claim, solar will ultimately become the zero-carbon energy technology of the future, able to scale quickly and cheaply while providing reliable power in place of coal. But at present, nuclear is the only zero carbon technology we have today that has proven capable of achieving rapid reductions in global emissions.