U.S. Department of Energy Energy Efficiency and Renewable Energy

Ask an Expert

September 04, 2012
Q.
  1. Why is Solar Energy expensive?
  2. Who manipulates the price/cost of solar energy?
  3. Do the oil companies have a hand in this manipulation?
    -Alberto Carlos
A.

Thanks for contacting the SunShot Solar Outreach Partnership with your question regarding the cost of solar energy. Because I have no knowledge of costs specific to the Philippines, the response below refers to the global solar market, unless otherwise noted.

The questions you’ve asked are short and easy to communicate; the answers to these questions, however, are not. Before answering your first question, “Why is solar energy expensive?”, I think it’s worth considering another question: “Where is solar energy expensive?”. The price of solar energy has been falling rapidly over the past several years, with the price of crystalline silicon photovoltaic modules (the technology that most people associate with solar – used in the rooftop systems with which most people are familiar) falling by about 50% in 2011 alone. Such price reductions have already made solar an economically sound investment providing an attractive return on investment in many countries, including Germany, Spain, and Italy. As you can see in this interactive graphic (entitled “Solar’s Golden Goal”) developed by Bloomberg New Energy Finance, expected continued cost reductions will see solar become a more attractive investment, even without subsidies, in the coming years.

The chart at the top of the previously linked page (“Solar’s ‘Learning Curve’”) forms the basis of the answer to your first question. As with other technologies, the price of solar energy decreases as the industry gains more experience with, and develops more efficient processes for, manufacturing this technology and as the efficiency with which solar technologies convert sunlight to electricity improves. For the solar industry, each doubling in installed solar capacity delivers a 24% decrease in module prices. Module prices also respond to fluctuations in the prices of the materials used to manufacture them – as the cost of materials falls, so too will the price of these modules. Finally, the price of these modules responds also to the push and pull of supply and demand. There is currently a global oversupply of cells and modules, which has been a strong driver of recent solar module price reductions. In April 2012, prices for solar modules ranged between $0.85 and $1.01 per watt.

Though the solar modules themselves are the single greatest contributor to the installed price of solar, they represent only 23-39% of these costs. Other “balance of system” equipment, including solar power inverters, mounting systems, and other system components, factor into the overall hardware costs of a solar energy system. Taken together, hardware costs account for approximately half of the total system price in the United States. The remainder of the system price comes from non-hardware costs, which include the cost of: system permits, inspections, and interconnection to the electric grid; installation labor; taxes; system financing; installer and manufacturer profits; acquiring customers, and; system design. However, these non-hardware costs vary widely between countries. In the United States, average installed costs were $4.44 per watt while in Germany, these prices were much lower – only $2.24 per watt. Because consumers in each country face the same hardware costs, this price discrepancy is seen as the result of differences in permitting, financing, and other non-hardware costs. 

This brings me to your questions regarding which entities influence the price of solar energy. Governments can help address the high up-front cost of solar by addressing the barriers posed by these non-hardware costs. By making it easier and cheaper for consumers to obtain approval to install a solar energy system, or to access the capital required to purchase and install these systems, for example, governments can help reduce the costs of “going solar”.

Even though hardware prices are expected to continue falling over the next several years, there are policies that governments can adopt to decrease these costs now. Many European countries have established “Feed In Tariffs”, a type of performance based incentive that pays system owners a premium price for the solar electricity their systems generate. The U.S. Department of Energy’s National Renewable Energy Laboratory has published a guide on feed-in tariff design that you may find useful in setting up a similar system in your own country. You can also read about the experiences of Germany and the United Kingdom with developing and implementing their own feed-in tariffs. Again, this policy is just one of many that have been used around the world to promote the adoption of solar. The Renewable Energy Policy Network for the 21st Century (REN 21) provides a look at other policies in these countries and others in their 2011 Global Status Report.

Again, it’s difficult to thoroughly evaluate your country’s options for confronting the high up-front cost of solar without a more in-depth understanding of its governmental structure and political and policy contexts. It is my hope, however, that you may draw some inspiration from the resources I’ve provided in this response.

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