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Recent trends in the economics of solar energy are striking. Global installations of solar photovoltaic (PV) technology, which converts sunlight directly to electricity, increased from 26 megawatts (MW) direct current (dc) in 2000 to an estimated 21,000 MW in 2011. This rapid increase in installations has been driven by steep declines in cost and by policies favoring renewable energy.Renewable energy costs have decreased significantly over the past several years as solar prices dropped dramatically.

These cost decreases and the resulting uptick in investment and acceptance are beginning to have a wide-ranging impact on electricity markets, utilities, and regulations.Despite these recent increases in solar resource deployment and industry prominence, solar energy still contributes a very small share of total electricity generation. In fact, it provides less than half a percent of the United States’ electricity.

The relatively high cost of solar technology has been a major impediment to further market penetration. The recent decline in installation costs notwithstanding, standard measures of the costs of solar energy production still exceed the costs of more conventional generation by a significant margin.

However, these standard measures fail to account for important public benefits such as reductions in greenhouse gas (GhG) emissions.Economic analyses of solar PV must take into account several features that distinguish solar PV from more conventional thermal generation.

First, the fuel (sunlight) is free. Consequently, variable costs associated with solar power generation are close to zero. Second, increasing the level of grid-connected solar capacity typically displaces fossil fuel generation and thereby reduces operating costs, GhG emissions, and other pollutants as well.

Cost – Photovoltaic systems use no fuel, and modules typically last 25 to 40 years. Thus, capital costs make up most of the cost of solar power. Operations and maintenance costs for new utility-scale solar plants in the US are estimated to be 9 percent of the cost of photovoltaic electricity, and 17 percent of the cost of solar thermal electricity.Governments have created various financial incentives to encourage the use of solar power, such as feed-in tariff programs.

Also, Renewable portfolio standards impose a government mandate that utilities generate or acquire a certain percentage of renewable power regardless of increased energy procurement costs. In most states, RPS goals can be achieved by any combination of solar, wind, biomass, landfill gas, ocean, geothermal, municipal solid waste, hydroelectric, hydrogen, or fuel cell technologies.

Solar energy costs have been declining steadily and meaningfully over the past 25 years.  But only recently has the cost reduction and competiveness with other energy sources had a more meaningful impact on planning, regulation, and investment.  As a starting point, the chart below shows the decline in solar photovoltaic module cost and the annual installations from 1976 to 2015.

• Levelized cost of electricity – The PV industry is beginning to adopt levelized cost of electricity (LCOE) as the unit of cost. The electrical energy generated is sold in units of kilowatt-hours (kWh). As a rule of thumb, and depending on the local insolation, 1 watt-peak of installed solar PV capacity generates about 1 to 2 kWh of electricity per year. This corresponds to a capacity factor of around 10–20%. The product of the local cost of electricity and the insolation determines the breakeven point for solar power.

Installation prices – The installed price of solar energy has declined significantly in recent years as policy and market forces have driven more and more solar installations.Now, the latest data show that the continued decrease in solar prices is unlikely to slow down anytime soon, with total installed prices dropping by 5 percent for rooftop residential systems, and 12 percent for larger utility-scale solar farms.

With solar already achieving record-low prices, the cost decline observed in 2015 indicates that the coming years will likely see utility-scale solar become cost competitive with conventional forms of electricity generation. A full analysis of the ongoing decline in solar prices can be found in two separate Lawrence Berkeley National Laboratory Reports: Tracking the Sun IX focuses on installed pricing trends in the distributed rooftop solar market while Utility-Scale Solar 2015 focuses on large-scale solar farms that sell bulk power to the grid.

Productivity by location – Different parts of the world experience different amounts of sunshine, depending on latitude and weather. Locations nearer the equator receive many more hours of sunshine than those further north or south, thus photovoltaic panels produce more kWhs per year, and so can be far more economically desirable in some places more than others.

Challenges and opportunities – The fall in solar costs and the resulting increase in deployment have been remarkable, but significant challenges exist in reaching the solar penetration levels needed to decarbonize our electricity grid.  The US Department of Energy estimates that solar’s unsubsidized levelized costs need to fall an additional 40%-50% to be competitive with current fossil fuel costs.

Anand Gupta Editor - EQ Int'l Media Network


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