Bloomberg New Energy Finance (BNEF) has just released an excellent paper illustrating how the economics of Solar PV have dramatically changed since 2008. The paper’s authors are drawn from a diverse group including BNEF, the University of NSW, the CEO of Suntech, the world renowned (at least amongst energy policy nerds) International Institute for Applied Systems Analysis in Austria, and even a staff member of Australian energy company AGL.
While the headline conclusion shouldn’t be news to readers of Climate Spectator (for example see Cut price solar, 13 April), what makes this report interesting is its effort to lift the hood on the engine behind solar’s cost reductions and its critical analysis of the concept of ‘grid parity’.
As you may be aware, and is illustrated below, the rapid price declines experienced by crystalline silicon solar modules largely halted from 2003 to 2008. But then experienced a dramatic drop in 2009, and largely resumed the trend of cost declines that had been seen prior to 2003.
Progress in solar PV module cost per watt ($US)
(Vertical axis-$US per watt; Horizontal axis-cumulative installed megawatts of global capacity)
What the paper explains is that price should not be confused with underlying cost structure. According to the authors, over this period of stagnation in price reductions, manufacturers continued to make improvements in technology and scale to reduce costs. But due to robust demand from generous feed-in tariffs in Germany and Spain, there was a lack of competitive pressure on suppliers.
Consequently, reductions in production costs were pocketed as higher profit margins rather than passed through in prices, with the largest solar companies followed by BNEF making average operating margins of 14.6 per cent-16.3 per cent from 2005 to 2008.
However this supply-demand balance shifted dramatically when the Spanish feed-in tariff incentive abruptly changed in September 2008, constraining growth in demand. At the same time expansions in supply capacity had already been locked-in, which led to a sudden need for companies across the PV supply chain to compete on price. As an illustration, the cost of the underpinning raw material for conventional solar cells, silicon, plummeted from US$300-$450 per kilogram down to less than US$27/kilogram currently.
Silicon price per kilogram ($US)
According to the authors, the ability of manufacturers to drop prices by 50 per cent and still make positive operating margins, was due to advances made over the previous four years driven by scale, advances in manufacturing processes, as well as improvements in the electrical conversion efficiency of solar cells.
We are now confronted with a completely opposite demand-supply situation. There is estimated to be 50GW of cell and module production capacity per annum, yet demand is only 26-35GW for 2012. This is leading to some bankruptcies and consolidation in the PV sector.
Some have argued that this signals solar PV prices are below sustainable levels and may have to rise to provide adequate profitability. Yet the paper argues this is wrong, stating that:
“Technological advances, process improvements and changes in the structure of the industry suggest that further price reductions are likely to occur in coming years.”
Their end conclusion is that solar PV is, or will shortly be able to supply electricity to residential households at costs below that from the grid across an incredible array of countries, which they illustrate in the graphic below based on an interest rate on finance of 6 per cent. The light blue line represents their estimate of the all-in cost of electricity from solar PV in 2012 and the purple line is for 2015.
Residential PV grid-price parity (size of bubble refers to market size)
Levelised cost of energy (LCOE) is based on 6% weighted cost of capital (interest rate on finance), fully installed system cost of $3.01/watt for 2012 and $2.00/watt for 2015, 0.7% per year module degradation, annual operations and maintenance cost equating to 1% of capex.
For the Australian context, where our interest rates are much higher than those in the rest of the developed world, a 6 per cent interest rate on finance may be a tad low. But overall this chart suggests that solar PV is poised for some impressive growth in spite of the current financial difficulties confronting the sector.