I just read a great analysis by Adam Browning on Greentech Media of how and why the price of solar is dropping, and what this means for a faster transition to a clean energy economy. I’m re-posting it below.
A Solar Renaissance
When solar gets cheap, fighting climate change gets a lot easier, says the Vote Solar Initiative’s Adam Browning.
Hear that sound? There it is again. That, my friends, is the sound of falling silicon prices. It might not sound like much, but frankly, in my opinion it’s the biggest environmental story of the year. It means that the era of cheap solar is – finally – at hand. And when solar gets cheap, fighting climate change gets a lot easier.
Why is this happening? A short history of solar pricing is in order. For the past several years, solar photovoltaic companies have made steady progress reducing the cost of manufacturing solar panels. And for the past several years, the price of solar panels – what customers have to pay – has trended up. That’s because the price of solar has nothing to do with the cost of manufacturing. The price of solar is what customers are willing to pay. And since 2004, the price of solar modules globally has been effectively set by the clearing price in the German market.
In 2004, Germany got serious about its feed-in tariff, offering 20-year contracts at a fixed rate 57 eurocents per kilowatt hour to buy electricity from anyone that wanted to install a solar system and sell wholesale electricity. With a guaranteed lucrative market, companies and investors flooded the space, and the program built the solar industry’s manufacturing base into a global powerhouse. The German program saved the world, as far as I am concerned, but there were some downsides. With fixed prices, module manufactures were able to reverse-engineer their prices to maximize their margin… and solar module prices rose. And then the silicon manufacturers did the same to the the module manufacturers. In fixed-price markets, every step in the value chain has visibility into their customers’ margin, and the player with the most scarcity has the most leverage. In this case, it was silicon. The price of silicon rose threefold for long-term contracts-and and as much as tenfold in the spot market.
In late 2008, global manufacturing capacity finally exceeded demand, and everything changed. With the reintroduction of competition, solar module prices have fallen 40 percent in the past six months alone.
Importantly, silicon contracts are being renegotiated (for example, see this recent news item about Suntech, one of the world’s largest manufacturers), which means the cost structure throughout the value chain is working out distortions. So, not only are prices going down but actual costs of production are too, which suggests that the recent price reductions are permanent and will continue. Prior to 2004, the price history of solar exhibited fairly consistent dynamics – for every doubling of demand, prices came down 20 percent, like clockwork. The fact that prices went up for the past four years means that there is latent capacity for significant price reductions – what we are seeing is readjustment back to the natural path.
What are the implications? First, the life of a residential solar installer just got a lot easier. The California Solar Initiative was set up with declining incentives – and those rising module costs came directly out of installer margins. If you check out the recent rebate applications, it’s apparent that the lower costs are being passed on to customers. After years of battling rising costs, these lower price points should mean a growing market.
Secondly, renewable portfolio standards are going to explode with wholesale photovoltaic contracts. California has already signed about 6 gigawatts of solar contracts – much of it with solar thermal electric technologies – for less than the market price of a combined cycle gas turbine (yep, less than brown power, you read correctly). Recently, utilities have started signing similar contracts for photovoltaic projects – check out this contract with NextLight for 230 megawatts of single-axis tracking PV, under 13 cents per kilowatt hour. I predict the response to the 2009 RPS Request for Offers in California will be flooded with similar PV applications. Since the Treasury Grant-in-lieu-of-ITC Program requires systems to break ground by 2010 in order to qualify, expect to see a lot of projects with quick on-line dates.
Thirdly, cheaper solar will throw the door wide open on new solar markets and new scales of volume. Ask any advocate who has spent time trying to convince policymakers to establish a new solar program, and they’ll tell you that the single most important barrier is price. Lower costs will make a state’s investment in solar much more appealing. And in the long term, approaching grid parity opens up markets without the need for incentive programs at all. That’s the holy grail, a self-sustaining solar market. For an in-depth view of what happens when solar gets within range of price-sensitive markets, check out Travis Bradford’s presentation.
Cheap solar means big solar. This, friends, is what we have been working for.
Adam Browning is co-founder and executive director of the Vote Solar Initiative, a non-profit organization focused on bringing solar energy into the mainstream. Since 2002, Adam has worked at the local, state and federal level to remove regulatory barriers and implement the key policies needed to bring solar to scale. He previously spent eight years with the U.S. Environmental Protection Agency where he ran an award-winning pollution prevention program.