Re-considering the economics of photovoltaic power, a co-authored White Paper on PV economics

Executive Summary

The authors briefly consider the recent dramatic reductions in the underlying costs and market prices of solar photovoltaic (PV) systems, and their implications for decision-makers. In many cases, current PV costs and the associated market and technological shifts witnessed in the industry have not been fully noted by decision-makers. The perception persists that PV is prohibitively expensive, and still has not reached „competitiveness‟. The authors find that the commonly used analytical comparators for PV vis a vis other power generation options may add further confusion. In order to help dispel existing misconceptions, the authors provide some level of transparency on the assumptions, inputs and parameters in calculations relating to the economics of PV. The paper is aimed at informing policy makers, utility decision-makers, investors and advisory services, in particular in high-growth developing countries, as they weigh the suite of power generation options available to them.

Introduction

In this paper the authors seek to provide a measure of clarity and transparency to discussions regarding the present status and future potential of PV system economics. In particular, they review a broad and recent range of academic, government and industry literature in order to highlight the key drivers and uncertainties of future PV costs, prices and potential, and establish reasonable estimates of these for decision makers.

Whilst recent dramatic changes in the underlying costs, industry structure and market prices of solar PV technology are receiving growing attention amongst key stakeholders, it remains challenging to gain a coherent picture of the shifts occurring across the industry value chain around the world. Reasons include: the rapidity of cost and price changes, the complexity of the PV supply chain, which involves a large number of manufacturing processes, the balance of system (BOS) and installation costs associated with complete PV systems, the choice of different distribution channels, and differences between regional markets within which PV is being deployed. Adding to these complexities is the wide range of policy support mechanisms that have been utilised to facilitate PV deployment in different jurisdictions. In a number of countries these policies have become increasingly politically controversial within wider debates on public subsidies and climate change action. As such, the quality of reporting and information on the PV industry economics can vary widely.

PV power generation has long been acknowledged as a clean energy technology with vast potential, assuming its economics can be significantly improved. It draws upon the planet‟s most abundant and widely distributed renewable energy resource – the sun. The technology is inherently elegant – the direct conversion of sunlight to electricity without any moving parts or environmental emissions during operation. It is also well proven; PV systems have now been in use for some fifty years in specialised applications, and for grid connected systems for more than twenty years. Despite these highly attractive benefits and proven technical feasibility, the high costs of PV in comparison with other electricity generation options have until now prevented widespread commercial deployment. Much of the deployment to date has been driven by significant policy support such as through PV feed-in tariffs (FiTs), which have been available in around 50 countries over recent years (REN 21, 2011).

Historically, PV technologies were widely associated with a range of technical challenges including the performance limitations of BOS components (e.g., batteries, mounting structures, and inverters), lack of scale in manufacturing, perceived inadequate supply of raw materials, as well as economic barriers – in particular high upfront capital costs. While the industry was in its infancy – as recently as five years ago global cumulative installation was about 16 GW – this characterisation had merit (EPIA, 2011a). Now, with rapid cost reductions, a changing electricity industry context with regard to energy security and climate change concerns, increasing costs for some generation alternatives and a growing appreciation of the appropriate comparative metrics, PV‟s competitiveness is changing rapidly. As an example, large drops in solar module prices have helped spur record levels of deployment, which increased 54 percent over the previous year to 28.7 GW in 2011. This is ten times the new build level of 2007.

At least some of the confusion over the economics of PV has stemmed from the way PV costs (and prices) are generally analysed and presented. Primarily, this has been done using three related metrics, namely: the price-per-watt (peak) capital cost of PV modules (typically expressed as $1/W), the levelized cost of electricity (LCOE) (typically expressed as $/kWh), and the concept of „grid parity‟. Each of these metrics can be calculated in a number of ways and depend on a wide range of assumptions that span technical, economic, commercial and policy considerations. Transparency is often lacking in published data and methodologies. Importantly, the usefulness of these three metrics varies dramatically according to audience and purpose. As an example, the price-per-watt metric has the virtue of simplicity and availability of data, but has the disadvantages that module costs do not translate automatically into full installed system costs, different technologies have different relationships between average and peak daily yields, and there is always the question of whether costs quoted are manufacturers‟ underlying costs versus wholesale costs or retail price.

LCOE and “grid parity” are of special relevance to government stakeholders but require a wider set of assumptions. They vary widely based on geography and on the financial return requirements of investors, and do not allow for robust single-point estimates. Instead, sensitivities are normally required (yet rarely presented), as are explicit descriptions of system boundaries. The financial case for PV depends on the financing arrangements and terms available, as well as estimates of likely electricity prices over the system lifetime. And often the distinction between wholesale and retail prices is not made clearly. Further, the capabilities of key decision makers vary greatly in different PV market segments, spanning utility investors for large-scale PV farms to home owners contemplating whether to install roof-top PV systems. There is, thus, a clear requirement for greater transparency in presenting metrics so that they can be usefully compared or used in further analysis.

The aim of this paper is two-fold: first, the authors attempt to highlight some of the issues that are most critical for decision-makers using the common metrics. Second, they aim to inform policy and investment decision-makers about the best estimates of current costs of PV. This short paper does not address the more general power system issues which need to be dealt with in order to achieve significant PV deployment (e.g., integration, ancillary service provision, or power storage), or does it address the context or impetus behind the drive for increased renewable energy usage (e.g., climate change, or energy security).

Please download the full report for more detailed analysis.

Authors:

Morgan Baziliana (a,b), Ijeoma Onyejia (a), Michael Liebreich (c), Ian MacGill (d), Jennifer Chase (c), Jigar Shah (e), Dolf Gielen (f), Doug Arent (g), Doug Landfear (h), and Shi Zhengrong (i)

(a)United Nations Industrial Development Organization, Vienna, Austria
(b)International Institute for Applied Systems Analysis, Laxenburg, Austria
(c)Bloomberg New Energy Finance, London, United Kingdom
(d)University of New South Wales, Sydney, Australia
(e)KMR Infrastructure, Washington DC, USA
(f)International Renewable Energy Agency, IITC, Bonn, Germany
(g)Joint Institute for Strategic Energy Analysis, Colorado, USA
(h)AGL Energy Limited, Sydney, Australia
(i)Suntech Power Holdings, Wuxi, China

About BloombergNEF

BloombergNEF (BNEF), Bloomberg’s primary research service, covers clean energy, advanced transport, digital industry, innovative materials and commodities. We help corporate strategy, finance and policy professionals navigate change and generate opportunities.

Available online, on mobile and on the Terminal, BNEF is powered by Bloomberg’s global network of 19,000 employees in 176 locations, reporting 5,000 news stories a day.
 
Sign up for our free weekly newsletter →

Want to learn how we help our clients put it all together? Contact us