Photovoltaic Solar Competitiveness
Despite this positive trend, the broad development of photovoltaic solar remained limited for years due to the high level of competition. The cost of solar is essentially based on the fixed initial costs. Operating and maintenance costs are very low and “fuel” is free. The cost of electricity production from solar is therefore made of the initial investment’s cost as well as of the cost of financing, which depends on the weighted average cost of capital (WACC). Figure 5.12 shows the impact of WACC on the levelized cost of electricity (LCOE) (© OECD/IEA, Solar 2014). LCOE is the required price of electricity for investment to be profitable. It is based on a number of assumptions related to the investment’s cost (electricity output of solar energy, cost of the system, etc.), but clearly reflects the importance of the cost of capital.
A typical WACC of 8% is considered in the solar business, and is at such considered in the International Energy Agency projections. Obviously WACC can vary, depending on the market situation and the specific context of the country where the solar business is being developed. It can be much lower; in countries like Germany, it is around 3-4% (Fraunhofer 2013).
One element which impacts the levelized cost of electricity is, of course, the amount of electricity that a solar system generates. For a given level of investment, increased performance of the solar system reduces the weight of the investment over the total cost (and consequently the weight of the cost of capital as well) (Fraunhofer 2013) (Fig. 5.13).
Another factor that contributes to build solar prices is the investment’s cost. It is made of two main components: the cost of photovoltaic modules, the key active components that turn solar radiation into electricity; and the cost of the balance of system (BOS), which turns DC current produced by the modules into grid output. Figure 5.14 shows the cost breakdown of solar systems for a typical investment (Irena 2012).
Fig. 5.12 Cost structure of photovoltaic solar (© OECD/IEA, Solar 2014)
Fig. 5.13 Variation of solar LCOE with sun irradiation (Fraunhofer 2013)
The cost of photovoltaic modules represents typically between 50 and 60% of the total installation costs. The rest of the cost is balanced among the variety of activities and equipment needed to produce grid output.
The cost of modules have considerably reduced over the last few years. They were divided by five, down to around 0.8 USD/W, in 2013. The larger scale of production as well as the strong development of the industry in China contributed notably to drop these costs. The production of solar modules has moved from 5000 panels to around 35,000 panels between 2008 and 2013. Most of this growth came from China, which represented in 2013 over two thirds of global production. Modules have also become more efficient. Traditional c-Si modules based on purified silicon have reached efficiencies above 20% (# OECD/IEA, Solar 2014); thin film modules are catching up. Finally, concentrated photovoltaic technologies (CPV) used for satellites are the subject of many innovations, with
Fig. 5.14 Cost of investment of photovoltaic solar (Irena 2012)
the ambition to reach levels of efficiency over 40% in the coming years (© OECD/ IEA, Solar 2014). The solar module market has thus become a global commodity market, with a permanent race to increase efficiency and price competitiveness. The International Energy Agency (2014) expects the cost of solar modules to further drop in the next 20 years, to range durably around 0.3-0.4 USD/W.
The other key element of cost for solar systems is that of the balance of system. Balance of system costs have also been divided by three in most mature markets. Systems’ costs may differ greatly depending on the size. Utility-scale systems’ costs are traditionally lower than those of individual house rooftop systems. The price variations essentially lie with the various business related costs, such as customer management, permits and grid connections. Total utility-scale systems’ costs (including solar modules) reached 2 USD/W in 2013, while rooftop systems’ costs ranged around 3-4 USD/W. These costs vary a lot, depending on the region. In Australia, rooftop systems’ costs went down to 1.8 USD/W and utility-scale systems’ costs were higher at 2 USD/W. In the United States, rooftop systems’ costs reached in 2013 4.9 USD/W and utility-scale systems cost 3.3 USD/W. Despite the differences, all systems’ costs went down everywhere by two-digit percentage drops. The International Energy Agency (2014) expects this trend to continue. Forecasts estimate that costs could go as low as 1 USD/W for rooftop systems and 0.7 USD/W for utility-scale systems in the coming 20 years. The simplification of grid connection procedures and business operations as well as the standardization of systems’ architectures will help push down the costs. These cost projections do not include the additional cost of energy storage, which is a strong enabler of proper solar interconnection into the grid (© OECD/IEA, Solar 2014) (Fig. 5.15).
With the sharp decrease of photovoltaic solar costs, the corresponding cost of electricity production from solar has become more competitive. The LCOE has already decreased significantly and shall continue to drop. In 2013, it averaged around 200 USD/MWh, with strong variations depending on the country, the type
Fig. 5.15 Photovoltaic solar costs evolution (Fraunhofer 2013; © OECD/IEA, Solar 2014; Irena 2012)
of system (utility-scale or rooftop) and the technology used. Middle Eastern and African countries are favored due to the level of sun irradiation, which increases the performance of photovoltaic farms. Germany is favored over Spain thanks to a lower cost of financing. Utility-scale systems are less expensive than rooftop systems overall. Finally, solar panels manufactured in China are less expensive than those from other regions (the United States, Europe), due to a variety of reasons, particularly scale of production. The International Energy Agency (2014) forecasts average LCOE to go down further to an average of 70-95 USD/MWh by 2035.
The LCOE for utility-scale systems has to be compared to that for conventional technologies as both compete in the wholesale market. Lazard (2014) studied how unsubsidized renewable energies in the United States compete with other conventional technologies. Clearly, utility-scale solar systems are now beginning to compete with traditional conventional fossil fuel-based systems. What 5 years ago would have appeared unthinkable is now becoming a reality. Within the next 20 years, the additional competitiveness of solar systems will lead to a further drop in LCOE and a progressive substitution of traditional conventional plants (Fig. 5.16).
The true revolution, though, will take place on the rooftops of houses equipped with solar systems. The LCOE for rooftop systems needs to be compared to retail prices. When solar prices become close to end-user retail price limits, it makes more sense for the consumer to produce his own electricity using solar energy. The massive deployment of rooftop solar systems becomes then possible. The graph below maps the different countries’ retail prices (© OECD/IEA, Electricity 2012) over a LCOE range for photovoltaic solar energy (WEC 2013). Solar levelized costs of electricity vary a lot depending on the year, the region, the technology installed and the cost of financing. The ranges below are a best approximation for 2013. The graph shows that solar competitiveness is already a reality in several
Fig. 5.16 Utility scale solar competitiveness (Lazard 2014)
Fig. 5.17 Rooftop solar competitiveness (© OECD/IEA, Electricity 2012; WEC 2013)
countries. Within the next few years, the additional competitiveness of solar systems will create an opportunity in almost all countries of the world (Fig. 5.17).
The massive deployment of rooftop solar systems will therefore become a sound strategy. The traditional paradigm of centralized power plants with massive power output generating on an extended network infrastructure will thus be questioned.