Solar photovoltaic prices have plummeted in recent years and this trend is likely to continue. What are the implications of solar becoming truly affordable without subsidies?

With our involvement in the National Solar in Schools Program (NSSP) over the last three years I’ve observed a near trebling of the size of the solar systems that schools can install with the $50,000 grant.  Where unsubsidised solar once had a 60 plus year payback, its now down to less than 20 years at residential tariffs, on the assumption that any energy exported is valued at the same price it is imported.  That’s without any small scale renewable energy certificates and with no feed in tariff over and above the normal retail charge. In fact without subsidies a 4 or 5 kW residential system in Victoria now has a payback of 15 years or less, assuming good solar orientation and a relatively straightforward installation.

Are the tremendous price decreases seen over the last three years likely to continue?

What is causing the drop in PV prices?

The key determinant of solar prices is global production volumes. The more solar capacity produced globally, the lower the price.

From 2000 to 2010 solar PV production grew at a rate of 40% per year. Global solar capacity in 2010 was around 40 gigawatts (GW).  To put this in context Australia had around 0.5 GW of installed solar capacity at the end of 2010.

The big emerging consumer of solar panels is China. At the end of 2010 China had just under 1 gigawatt  (GW) of solar capacity installed. Recently announced national targets show that China is aiming to have 10 GW of solar capacity installed by 2015.

The wholesale price of solar PV systems is said to decrease by around 20% for every doubling in annual production.

There are already some 75,000 people employed globally now in solar R&D. This growth in R&D has no doubt contributed to the price reductions and will continue to contribute to the price reductions.

The market driver for this growth in demand for solar systems has been government incentives and subsidies, whether in the form of subsidies to reduce the capital costs, or feed in tariffs. In Australia changes to feed in tariffs have been large and rapid, creating uncertainty for the industry.  Overseas the rate of change of subsidies is not necessarily the same as it is here, and there is likely to be continued growth in demand. In any case, electricity prices in many other countries are much higher than ours, making PV good value even with declining subsidies.

Costs that are likely to drop substantially are the cost of the PV module and inverter costs. Installation cost and the costs of other hardware, such as wires and circuit breakers, may not change much.

I don’t have the expertise to identify whether prices will change as much as they have in recent years. Online there are a wide range of opinions, some say it will take to 2020 to halve current prices (European Photovoltaic Industry Association, Sept 2011), others believe the price drops will be faster.
On the one hand very generous government subsidies may become a thing of the past as we possibly go into GFC2, which may slow price decline, but on the other hand the scale of the solar industry and amount of R&D could accelerate technological and price breakthroughs. For example, Australian researchers are working on using bank note printing techniques to print PV, and on PV paints.

If the trend of the past 10 years is any indicator, by 2015 prices could be less than half of what they are now, and by 2020 perhaps a quarter or less than current prices (as shown in the graph above).

The implications of plummeting PV prices

The implications of plummeting PV prices are substantial.

For many years I have advised people to focus on energy efficiency in preference to solar PV in existing buildings, as it has had a far better payback. It makes much more sense for a building owner to change their lights than to put solar PV on the roof.  But frankly I have been amazed at how rapidly PV prices have dropped.

Energy efficiency (EE) has a very important role to play in reducing carbon emissions, the subject for another article. What is apparent to me, however, is that whereas in the past EE was really the only cost effective way of reducing emissions in existing buildings, PV is now very rapidly getting to the point where it should also be considered by building owners.

If the trend of recent years continues, by 2020 for many buildings solar will be a no brainer. For buildings with relatively low energy use densities (ie low kWh/m2/year), such as schools, it will be economically possible for these buildings to be net generators of energy on the basis that electricity can be exported at or near retail tariffs.  It’s not inconceivable that, with the right regulatory framework, schools could use their roofs to generate income for the school, over and beyond their electricity consumption costs. And, with respect to electricity consumption, generate net greenhouse gas savings.

Then, as PV prices continue to drop further, in new developments where every building could conceivably have most of its roof a PV system built into it from the start, electrical grids may then have the opposite problem of today. Peak production, rather than peak demand, may stress these localised grids. Especially if PV can be easily integrated into roofing materials, with Australian company Dyesol being a pioneer in this area.

So as the economics of PV improves there will be regulatory challenges and changes.

At present PV export to the grid is relatively insignificant and doesn’t really impact on operation of the electricity distribution network. But as PV systems become more and more widespread, distribution businesses will start to lose income unless regulations change. Distribution businesses, who will play a vital role in distributed generation, do need to maintain their assets and this income must come from somewhere. But at the same time, if they try to block adoption of solar, they may eventually find PV owners simply disconnecting from the grid when energy storage becomes more cost-effective.

At present in Victoria for example, PV systems in the size range of 5 to 100 kW can export power at the same retail rate at which they consume power. But this leaves no margin for the distribution business. As PV becomes more widespread this is likely to lead to regulatory changes that reduce the amount paid for electricity exported from a PV installation, reducing economic viability for sites that could be expected to be proportionally large net exporters, such as schools – but this will not be a problem if PV prices continue to decline and it still has a reasonable payback.

Those of us in the energy efficiency space have a lot of envy and jealousy for the PV industry, and rightly so. At present energy efficiency produces much more cost effective greenhouse gas abatement than solar PV. Yet government subsidies for PV have dwarfed any subsidies for energy efficiency. Without a shadow of a doubt the PV industry in Australia is now much larger and employs many more people than the energy efficiency industry, yet energy efficiency makes much more economic sense. To date it’s been an economically inefficient outcome, and of course efficiency engineers such as myself find this pretty galling.

Why PV needs continued support

However, PV has four key benefits that I believe warrant continued support.

Firstly, its visible and therefore sexy. A PV system on a roof provides instant green-cred: well insulated walls don’t. There is some anecdotal evidence that home owners who put on a PV system subsequently then also reduce their electricity consumption – presumably driven by the thought process “we look green, so we had now better waste less energy”. Energy conservation could also be driven by a greater awareness of just how much they’re using once the PV panels are installed.

Secondly, it’s simple. One energy efficiency engineer with 30 plus years experience put it this way “retrofitting a commercial building to be substantially more energy efficient is pretty similar to open heart surgery – you need a lot of expertise to get it right.” On the other hand, PV is relatively simply. Make sure the roof is strong enough, face the panels roughly in the direction north where there is no summer shading, and follow well established electrical wiring conventions.

Thirdly, solar doesn’t generally impact the existing operation and practices in a building, and its therefore fairly easy to get wide scale buy in for the installation of a solar system. The only concerns are generally structural (is the roof strong enough) and aesthetics.

Fourthly, and linked to its simplicity, PV is predictable. It doesn’t require much expertise to predict with a fair degree of accuracy the amount of energy a PV system will produce.

With these key benefits, and with increased use of PV further driving down prices, continued support for PV is warranted.

Support is also warranted for energy efficiency, which can contribute just as much as PV if not more to a low carbon economy, but this is the subject of a another article.

So if the future of PV looks so good, and if it has so many benefits, why should PV continue to be given support? There are two key reasons.

Firstly, PV should receive continued support in Australia to help ensure that the projected price drops actually occur. As stated at the beginning of this article the key determinant for the price of PV is cumulative global production. The more PV is produced, the lower the price gets. And Australia’s contribution to increased global production over recent years, whilst small, is not insignificant. The slower the rate at which global production grows, the slower the rate at which the price drops. By continuing to accelerate the uptake of PV in Australia we contribute to the future where PV no longer needs government support arriving sooner.

Secondly, the PV industry is now a substantial employer, and it makes sense to both provide job security and maintain healthy levels of competition that will continue to drive prices down.

An appropriate regulatory and subsidy framework would provide certainty, include a gradual phasing out of subsidies, address the eventual challenges to electrical distribution businesses, and aim to foster the most rapid uptake of PV possible whilst accounting for the ever improving economics of PV. PV does not need to be subsidised in any way where it can be cost-effectively financed via bank loans and such loans are readily available.

What support and regulation is needed?

Government should be taking a long term view of PV now, and introduce legislation with bi-partisan support (providing certainty) that on the one hand recognises the rapid improvement to the economics of PV that will decrease the need for subsidies, but on the other hand recognises the reality that right now the industry needs support. Very rapid changes in subsidies are bad for an industry that in the long term will play a key role in a low carbon Australia. We need well designed subsidies and regulation that can gradually adjust to the improving economics of PV over time, whilst accelerating the uptake of PV as fast as possible. And we need to help create financial services that make PV a genuine “no-brainer” once the costs are low enough.

This could possibly work as follows:[bulletlist]

• For micro systems (< 5 kW) operate a feed in bonus, over and above the standard retail rate that provides a payback of around five years, until such point that this payback can be achieved with no feed in bonus.
• Alternatives to a feed in bonus could be low interest finance, paid off energy bills over 10 years. Or the establishment of a “lien” system that transfers the capital cost of the system to the council rates for the building that it is put on , for example as is being done for energy efficiency upgrades under 1200 commercial buildings program by the City of Melbourne, and as has been done in the US. The point is that you can improve the economics by either subsidising the price, or making access to finance cheaper and easier.
• For small systems in the range of 5 to 100 kW, maintain the current arrangement of export being at retail prices, until such point that the payback is sufficiently fast that there is a spontaneous uptake of such systems. This could be when the payback is less than five years.
• Maintain the right for systems of up to 100kW to export without requiring a generator’s licence.  Possibly consider extending this to 200 kW for community facilities such as schools. Many large secondary schools have the roof space for 200kW systems.
• Once the total amount of PV export is say 2% or 3% of total generation, begin providing subsidies to distributors (and retailers) that allow for their recouping of lost revenue under an arrangement of export at retail prices. Or alternatively restructure the energy market regulations to decouple their revenue from sales or even give them incentives to help people cut demand for centralised energy  (as is done in California).
• Assuming no changes to the current market structure, once payback periods drop below say five years, drop the feed in rates to below the retail price, and begin to decrease the subsidies to distributors (and retailers). Keep dropping the feed in rate to maintain a payback of around say five years.
• Once the payback period is less than five years, with the feed in price at or slightly above the market generation price, drop all subsidies.
• Make a long term commitment to the subsidy/regulatory regime, so that banks and other investors are willing to provide PV financing, and possibly look at low cost regulatory incentives to stimulate the development of financing packages (eg tax breaks).
• Actively encourage (through RD&D funding and incentives) development of PV systems that integrate some energy storage, and that are oriented to provide more energy on summer afternoons, along with smart management systems so they can support the grid rather than cause problems.[/bulletlist]

Why has a five year payback been suggested? At face value this looks like a very attractive ROI of 20%. However solar is a non-liquid fixed asset, so the ROI needs to be relatively high to recoup the sunk capital. For example, assuming a five year simple payback, if I have $10,000 and I invest it in PV after 5 years I have my money back, and after 10 years I’d have $10,000 in the bank I didn’t have before. If instead I had invested the $10,000 in the bank after 12 years I’d roughly have doubled it (at 6% compound interest). If the PV system lasts for 25 years and then has zero value I’ll end up with $40,000 clear, roughly the same as if I’d left the money in a term deposit.  Five years provides roughly a break-even point compared with a term deposit over the lifetime of the system, assuming there is negligible improvement to the value of the property the PV system is installed on.

With a five year simple payback, if funds are borrowed to pay for the system, even including interest payments the payback will still be under seven years. Being an asset with a life of 25 years, this is both a good investment for me and the bank providing the finance.

Conclusion

In conclusion:[bulletlist]

• PV prices are dropping rapidly.
• Widescale PV can reduce carbon emissions significantly.
• Policy certainty that provides a reasonable return on investment (I suggest a five year simple payback) will help drive this low carbon future.
• The impacts on distributors (and retailers) should be considered and taken into account, and regulatory reform undertaken sooner rather than later
• Policy certainty will also enable the development of financing packages that could reasonably quickly displace the need for subsidies.[/bulletlist]

This article was written by Bruce Rowse – Director of CarbonetiX – with valuable input and additions provided by Alan Pears.